private equity

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By Suneel Basson-Bhatoa, Alex McCarney, and Catherine Campbell

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Consortium (or “club”) deals involving PE firms have become a common feature of the deal market throughout 2018, with sponsors teaming up with each other or with strategic partners to buy large-cap assets. To the start of November 2018, 20 consortium transactions worth more than US$1 billion were announced, compared to 17 transactions during 2017. Notable recent deals include a Blackstone-led consortium’s US$17 billion deal to acquire a majority stake in Thomson Reuters’ financial and risk business, and CVC and Blackstone’s US$3 billion deal to buy Paysafe. In our view, political and economic uncertainty in Europe, growing confidence in consortium deals worldwide, and the need to put significant amounts of money to work, could prompt international sponsors to target large public and private European companies previously out of reach.

Consortium deals are effective in pursuing these large transactions, however in our view, consortium deals can present challenges.

By Nicola Higgs, Fiona MacLean, Brett Carr, and Catherine Campbell

Technology outsourcing by financial institutions (FIs) has increased in recent years as FIs look to the latest innovations to improve their day-to-day business processes and to reduce costs. FIs outsource key functions to a host of regulated and unregulated third-party service providers, and the sector is poised for continued growth. According to research conducted by business outsourcing provider Arvato and analyst firm NelsonHall, outsourcing agreements worth £6.74 billion were agreed in the UK last year across all industries (a 9% increase on the prior year), and financial services firms signed £3.26 billion of them. With this continued growth, the outsourcing sector is increasingly likely to be a hotbed of PE deal activity; and, as regulators place a greater focus on outsource providers, deal teams should monitor regulatory engagement and policy developments.

Outsourcing Companies Evolve

IT and business process outsourcing are converging, meaning outsourcing deals are now different to the traditional, bespoke, dedicated service arrangements firms have entered into in the past. Modern-day outsource providers who have grown exclusively as tech companies are looking to meet the demand for processing and administration solutions for financial products and services in a heavily regulated environment. Notably, the Financial Conduct Authority’s (FCA’s) recent Investment Platforms Market Study identified that most investment platforms purchase their technology from third-party providers, and more than half of the platforms the study considered are in the process of re-platforming to a new provider. Less than a third of firms in the study rely on proprietary technology. Areas such as cybersecurity and data analytics have also become increasingly important for the sector, driving demand for specialist third-party providers with robust processes.

Pressure to put dry powder to work will likely lead to bigger and bolder PE transactions in the year to come.

By Manuel Deó

Spanish private equity (PE) houses are sitting on large piles of dry powder as they scour the Spanish market for investment opportunities, as is the case in much of Europe. According to Pitchbook, total deal value has decreased by 15.3% compared to the same period in 2017.

This dry powder will not simply disappear. The pressure to put that money to work will likely lead to bigger and bolder PE transactions in the year to come, as PE firms take on more ambitious targets across the country. PE firms will need to source more off-market deals and corporate carve-outs in 2019. These transactions will likely be more common in the next few months as PE firms continue to operate in a competitive sellers’ market.

Limited partners will put more pressure on PE firms to generate returns, inevitably leading to more headline-grabbing buyout attempts. The greater capital needs of larger deal sizes likely will fuel a revival of consortium deals, in which two or more sponsors pool their resources as co-investors. An uptick in consortium-led deals can be positive for corporate boards and senior management, because such deals widen the range of possible investor structures, and deepen the pool of accessible capital and expertise to enhance shareholder value.

Latham & Watkins’ 2018 survey of European private M&A transactions analyses the acquisition and equity documentation for more than 210 European deals signing or closing between July 2016 and June 2018. Key highlights include:

  • The use of the locked box on UK deals has reduced slightly, although it continues to be the norm on deals with PE Sellers.
  • Warranty & Indemnity (W&I) Insurance continues to increase in popularity, particularly in deals involving PE Sellers, and increasingly tax indemnities have been

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By Simeon Rudin and Beatrice Lo

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Recent private equity investments in high-profile deals, such as Bain Capital’s acquisition of esure and Apollo’s acquisition of Aspen Insurance, have brought European insurance sector deal values to record highs. Regulatory changes and regulators’ changing perceptions of PE firms have contributed to increased M&A activity, bringing new opportunities for insurance business investments from buyout firms and increasing competition for insurance assets. In our view, with more PE firms and other new entrants in the market for insurance sector targets, there will be a strategic advantage for firms that are well-prepared and familiar with industry-specific issues, which require navigation to achieve a successful deal.

Drivers of Insurance M&A

The implementation of the European Solvency II Directive (Solvency II) in 2016 introduced major changes to solvency and supervisory regulation for the insurance industry. As the industry has adapted to Solvency II requirements, the process of achieving capital compliance has required that European insurance groups examine their businesses. Such examination has resulted in these groups frequently identifying assets and businesses suitable for divestment. Brexit may lead to further review of assets and capital requirements, which in turn may create sale opportunities — for example, disposals by UK insurers of marginal EU businesses. This shuffling of assets (by sale of companies, transfers, or reinsurance, depending on the circumstances) has created opportunities for private equity to access insurance investments.

Deal making is likely to surge as companies seek funding and private equity firms scour the market for buyout opportunities.

By Andrea Novarese and Cataldo Piccarreta

Italy is poised to help steer automotive deal activity in the final weeks of what has been another bumper year for the industry. According to PwC, global automotive deals reached US$59.3 billion in the first three quarters of 2018 — marking the highest year-to-date value in a decade. As the end of 2018 approaches, automotive deal value is on course to race past previous years at a promising time for sector consolidation and innovation. In particular, private equity firms are on track to play a crucial role in driving deals in the country as Italian businesses seek external investment.

A combination of factors is causing Italy’s automotive companies to increasingly turn to PE funding. For starters, Italy’s autonomous driving development is moving at the wrong speed. According to Roland Berger in Automotive Disruption Radar #4 (2018), Italy ranks 13th among European countries for electric vehicle public charging infrastructure.

In addition, Italy’s automotive industry is highly fragmented and mostly family-owned, which will likely lead to increased demand for investment from financial sponsors. The Italian auto market is currently dominated by small and medium-sized enterprises (SMEs), many of which will require significant additional capital to develop next-generation products. An increase in deal making is probable as companies seek funding and PE firms scour the market for buyout opportunities.

By Paul Davies and Catherine Campbell

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In recent years, China has taken significant steps in developing its environmental policy. In 2014 China’s Premier Li Keqiang declared a “war on pollution”, which began in earnest in 2017. Since then, regulators have been more proactive in enforcing environmental regulations. Factory closures have become a key part of this strategy, causing significant disruption to the global supply chain this year.

In our view, dealmakers should carefully consider environmental and supply chain due diligence in China, as companies work out how to navigate the factory shutdown process. PE firms should review whether portfolio investments and target companies are likely to be affected in the event that critical supply chains are broken. Engagement with environmental agencies in China is useful, but environmental policy and consistent regulatory enforcement are still maturing. The appropriate level of due diligence could prove to be critical to a portfolio company’s ongoing operations.

By Ben Coleman and Catherine Campbell

Public to private deals (P2Ps) have remained a strong feature of the UK private equity deal market in 2018, with five take-private bids reaching an enterprise value of more than £1 billion already this year. Large P2Ps have already surpassed 2017 totals, which saw just one PE bid for a public company above the £1 billion mark. The increase in P2P deal values has also been coupled with greater P2P activity generally over the past couple of years. There were 18 P2Ps in 2016 and 14 in 2017, compared to just four P2Ps in 2013 and nine in 2014. Club deals have also become more common, demonstrated by Blackstone and CVC’s acquisition of payments company Paysafe last year.

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Will the trend continue?

We believe that the steady flow of P2P transactions is likely to continue, driven in part by a scarcity of high-quality private assets for sale in the UK market. PE deal teams are seeking opportunities in public markets and are increasingly scouring these markets for value. Companies under siege from short sellers, or undervalued by shareholders, can result in under valuations, offering PE firms opportunities and offsetting the significant bid premium required on a public takeover deal.

By Jonathan Parker, Calum Warren, and Catherine Campbell

The UK government has assumed an increasingly interventionist approach to foreign takeovers in recent years. In June 2018, the UK adopted new powers to review deals on national security grounds, extending the scope and breadth of its control regime. In July, the UK went a step further and published a White Paper on a new and significantly extended foreign investment notification regime, which likely will lead to wider and closer scrutiny of many transactions, including private equity deals.

The government’s jurisdiction over transactions is expanding with most areas of the economy within scope, new information-gathering powers, longer review periods, and stricter penalties for noncompliance. Changes could come into effect as early as next year, and deal teams must assess the implications for private equity deals.

National security review anticipated to catch more deals than current merger control regime

The new regime is intentionally broad and has the potential to catch almost all deals. Indeed, the government has made it clear that no sector is off limits. Energy, communications, transport, and nuclear likely will receive the most focus; however, national security concerns can arise in any deal.

By Jonathan Parker and Greg Bonné

As the UK Competition and Markets Authority (CMA) prepares to assume sole jurisdiction for UK competition reviews post-Brexit, private equity deal teams must evaluate the competitive consequences of deals bridging the Brexit period and update their competition strategy accordingly.

What is Changing?

The European Commission (EC) currently acts as a one-stop-shop supranational authority for large transactions that meet Europe-wide competition turnover thresholds, obviating the need for competition filings in individual Member States. However, post-Brexit, transactions impacting competition in the UK and the EU will become concurrently reviewable, i.e., the CMA will review UK aspects and the EC will review European aspects. A significant increase in the number of UK merger reviews carried out by the CMA is likely — the CMA believes that Brexit could result in a further 50 notifications per year, nearly doubling its current workload.

Why Does it Matter?

Timing for the establishment of the CMA’s separate jurisdiction is uncertain. At the earliest, jurisdiction could be effective immediately after the UK leaves the EU  on 29 March 2019. A two-year stay is also possible, depending on the terms of separation. The period building up to the CMA’s separate jurisdiction is likely to be the trickiest for deal teams to navigate. PE firms may not be able to implement the same merger control strategies as in the past.

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