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With the explosion of AI applications, private equity houses and their portfolio companies must understand where key opportunities lie.

By Tom Evans, Kem Ihenacho, David Walker, Laura Holden, Hector Sants, Claudia Sousa, Catherine Campbell, and Patricia Kelly

Click for larger image.

Artificial intelligence (AI) developments provide increasing opportunities for private equity, including deal sourcing and portfolio company analysis/enhancement, particularly in businesses that can adopt a customer subscription model or leverage big data opportunities. However, the adoption of AI technologies, and investments in new AI businesses, pose significant challenges. To ensure that time and capital are deployed productively, firms must understand the market space and usage for these tools, and the workings and accuracy of any underlying technology. How technology models and algorithms work, where underlying IP resides, and where data is stored are key. Whilst the use of AI is often discussed, it is much less often understood; we are seeing an explosion of AI applications and PE houses and their portfolio companies need to understand where the opportunities are for them to exploit.

A Tool to Secure Deal Opportunities and Drive Portfolio Company Growth 

According to a survey conducted by Intertrust, 90% of private equity firms expect AI to have a transformative impact on the industry. AI-backed data analytics are playing a growing role in analysing and identifying deals. QuantCube Technology, for example, provides in-depth data analysis, drawing on customer reviews and social media posts to develop predictive indicators of events, such as economic growth or price changes. There are now companies offering AI-driven technologies that claim to help source PE deals. While this presents a potentially compelling use of AI for investors, it remains to be seen whether these technologies will deliver results. 

From August 2019, certain existing FCA rules and guidance will extend to payment service providers and e-money issuers in a signal that the FCA wants a consistent approach to consumer protection.

By Rob Moulton, Brett Carr, and Frida Montenius

The FCA has published a Policy Statement extending certain rules and guidance to the payment services and e-money sectors, following a Consultation Paper published in August 2018. The extensions concern the FCA’s Principles for Businesses (Principles) and the Banking Conduct of Business Sourcebook (BCOBS), along with new guidance concerning the communication and marketing of currency transfer services. The FCA has made these changes, aimed at payment institutions (PIs), electronic money institutions (EMIs), and registered account information service providers (RAISPs), with a hope to protect consumers by providing a clear and consistent set of rules that firms must abide by.

Background

The motivation behind the extensions is to standardise the current regulatory approach in order to better align customer expectations of firm behaviour and customer treatment, with the aim of protecting the interests of consumers. The FCA has noted that some firms have been guilty of bad practices, and the extension of rules is a step to foster an environment that prevents consumer harm. With consistent standards that apply equally to all firms — notably including a fast-evolving, ever-changing payments landscape — the new extensions are intended to enhance competition by allowing consumers to make more informed choices while ensuring that consumers are adequately protected by clamping down on misleading communications and other harmful practices.

The PSR will not review the fees and rules set by Visa and Mastercard, but will look at the practice of bundling, and will examine effects on innovation in card-acquiring services.

By Brett Carr, Stuart Davis, and Christian McDermott

Following the publication of its Draft Terms of Reference in July 2018, the PSR has now listened to market feedback and has issued its Final Terms of Reference, marking the launch of its review into whether competition in the supply of card-acquiring services is working well for merchants and consumers.

Card-acquiring services allow merchants to accept payment for goods and services via debit, credit, charge, and prepaid cards. In order to benefit from card-acquiring services, merchants must enter contracts with so-called “merchant acquirers”. Card-acquiring services are often bundled with other services, referred to by the PSR as “card acceptance products” — these include physical card readers (also known as point-of-sale (POS) terminals) and payment gateways (the e-commerce equivalent of POS terminals).

The Final Terms of Reference follow a consultation period on the Draft Terms of Reference, the details of which are covered in Latham’s previous blog post.

Buyers of businesses that produce military or dual-use goods, certain aspects of computing hardware, or quantum technology for supply in the UK should carefully assess the risk of governmental intervention if their targets fall within the scope of the new regime.

By Jonathan D. Parker and Calum M. Warren

On 11 June 2018, the UK government will gain new powers to review transactions raising potential national security issues if the target business is active in the production of military or dual-use goods, computing hardware, or quantum technology for supply in the UK. The government may intervene if the target business’ UK turnover is as low as £1 million, or if the target business has a share of supply of goods or services within the relevant areas of at least 25%. While these powers will apply to only a limited subset of transactions and do not give rise to mandatory notification requirements, the application of the new powers will require careful scrutiny during the due diligence phase of transactions that are potentially within scope. The new thresholds are the result of the government’s ongoing review of its foreign investment review powers, which may result in a further expansion of governmental powers in the longer-term.

England may become an increasingly attractive forum for follow on damages claims, particularly those involving indirect cartelised product purchases initially acquired outside EEA the in wake of iiyama decisions.

By Oliver E. Browne and Hayley M. Pizzey

Summary

The English Court of Appeal has held iiyama’s two claims against cathode ray tube (CRT) cartelists and liquid crystal display (LCD) cartelists, may proceed to trial. iiyama is involved in the manufacture, distribution, and sale of electronic goods including televisions and computer monitors which originally contained CRTs and now contain LCDs.

This decision has overturned two High Court findings that indirect purchases of cartelised products outside of the European Economic Area (EEA) do not fall within the territorial scope of EU antitrust law.

The final outcome of these two claims will be of great interest to both claimants and defendants.

By Andrew Moyle and Stuart Davis

The UK government’s 2017 Autumn Budget included some measures of particular interest for fintech firms, demonstrating the government’s continued commitment to making the UK a world-leading fintech hub.

The government has provided only scant detail on these measures at present, but no doubt firms will be watching closely to see how they are developed, and what benefits they can bring for the fintech sector.

Pioneer Fund

First, the government is planning a “Regulators’ Pioneer Fund” — a £10 million fund to help unlock the potential of emerging technologies. The aim is to help regulators develop innovative approaches aimed at getting new products and services to market.

By Andrew Moyle and Stuart Davis

The Project Stella report, a European Central Bank (ECB) and Bank of Japan (BOJ) joint venture, details the applicability of distributed ledger technology for financial market infrastructure. During a one-month research project, the central banks tested whether distributed ledger technology (DLT) could sustain the liquidity saving mechanisms — a system introduced in 2013 to ensure the liquidity of banking institutions — in their current real-time gross settlement systems (RTGS).

Published in September 2017, the report concluded that DLT solutions have the potential to increase the resilience and reliability of financial transactions and are scalable to meet the needs of large value payment systems, but they have not yet reached the level of maturity needed to replace the RTGS that the ECB and BOJ currently use. The findings on the scalability of DLT are important, because regulators such as ESMA and FCA have previously questioned whether DLT could be scalable enough to meet the needs of the financial market infrastructure.

By Deborah KirkKnow Your Code graphic PE Views

Buyout firms spent more than $39.38bn acquiring technology businesses in H1 2016, accounting for 28% of all global deal value and making technology the preferred sector for investment during the period. With investment flooding into tech, private equity is facing competition and increasingly high deal valuations. Tech companies pose unique diligence issues and failure to fully understand and price risks leaves buyout firms at risk of overpaying.

Investing in technology carries specific risks relating to the creation and ownership of intangible rights that cannot always be registered. Understanding these risks requires a combined legal and technical approach when conducting diligence. In the world of intellectual property, brand is about goodwill, recognition, avoiding dilution and ensuring registration: pharma is the world of patents and generic manoeuvring, but in the world of software, who created your code, where, and using what, are fundamental questions of value.