Von Burc Hesse
COVID-19 ist auch für die Private Equity Branche und deren Portfoliounternehmen ein Stresstest: Dennoch wird Private Equity nach der Krise stärker zurückkommen als zuvor und eine noch größere Bedeutung am deutschen M&A Markt spielen. Drei Faktoren, die diese Entwicklung beeinflussen werden:
Companies previously considered immune from activist campaigns have come under pressure, driving new public and private deal opportunities for private equity.
By Richard Butterwick, Christopher Drewry, Tom Evans, Harald Selzner, David Walker, Ben Coleman, and Catherine Campbell
US shareholder activists are an established presence in Europe. In 2018, activist campaigns targeted 160 European companies, according to Activist Insight. In the UK, 17 companies faced activist demands in the first quarter of 2019 alone. Activist funds have prompted public company boards to look more critically at their portfolio and product mixes, as well as their geographical footprints, either to avoid activist attention or to respond to activist activity.
M&A activist campaigns that advocate for breakup or take-private transactions create obvious opportunities for PE firms. However, deal teams should take note of both recent activist strategies in the US and developments in the broader activist landscape. In our view, such strategies and developments will likely spread to Europe and create new PE opportunities.
As litigation funders find new disputes markets, PE firms should consider litigation funding as a growth sector — and as a valuable tool for de-risking portfolio company claims.
By Stuart Alford, Dan Smith, David Walker, Tom Evans, and Catherine Campbell
Litigation funding, the third-party financing of legal costs in disputes, is increasingly common in the UK. As litigants have become comfortable with sophisticated litigation funders, these funders are responding to business needs, and finding new disputes markets. The UK litigation funding landscape has begun to resemble the US, where external parties commonly finance a wide range of claims in return for a share of any ultimate litigation win. In our view, PE firms should consider litigation funding as a growth sector — and as a valuable tool for de-risking portfolio company claims.
Litigation Funding: Drivers of a Growing Market
Litigation funding is finding new markets. Increased use of group redress and group litigation orders is creating demand for funding. Following trends visible in American class action litigation, European legal systems are developing new group redress claims procedures. Germany and the Netherlands have well-established systems, and other jurisdictions (including the UK) are heading in the same direction. In fact, 60% of shareholder group actions are now outside the US. Group litigation includes related claims, e.g., mass torts affecting a large number of defendants, or similar-fact claims such as device malfunctions, or the VW emissions scandal. Group litigation can also facilitate unified actions where individual claims are financially unviable, such as shareholder actions.
European regulators’ openness to PE investors is presenting attractive banking sector opportunities, but such opportunities require careful regulatory planning and local issue navigation.
By Carl Fernandes, Hans-Jürgen Luett, David Walker, Tom Evans, and Catherine Campbell
Ten years ago, a PE investment in a European bank would have been a rare occurrence. However, more recently, PE firms have deployed capital in the banking sector, encouraged by changing regulatory perceptions of PE bidders. Apollo, together with parallel investors, acquired the former German subsidiary of KBC Bank NV, which since then has completed several add-on acquisitions, kicking off a series of German bank deals. PE firms including Cerberus, JC Flowers, and Blackstone have also completed bank buyouts, as European regulators become more open to financial sponsors — a trend we see continuing in 2019.
What Is Driving European Bank Transactions?
Disposal requests from the European Commission — as a consequence of breaching subsidy regulations — and regulatory reform have produced deal opportunities. The emergence of new growth markets has drawn the interest of PE, underlined by Blackstone’s €1 billion deal for Baltic lender Luminor. New technology and digital products have also attracted interest, as demonstrated by Cerberus’ acquisition of French consumer business GE Money Bank. Further, control of non-performing loans has meant less unpredictable downside risk for acquirers, but potential upside through enhanced operational efficiency (e.g., adopting FinTech) and exploiting scalability (e.g., through consolidation). As ever, distressed situations also present opportunities.
We examine: increasing focus on non-controlling stakes, burdensome document production requests, heightened enforcement of gun jumping rules, examination of vertical deal overlaps, and ongoing political developments.
By John Colahan, Peter Citron, Calum Warren, David Walker, Tom Evans, and Catherine Campbell
In a continually evolving antitrust landscape, we consider five key trends that PE deal teams should be aware of.
Focus on Non-Controlling Stakes in Competing Companies
Antitrust authorities are paying closer attention to “common ownership”, the simultaneous ownership of non-controlling stakes in competing companies, with the EU’s Competition Commissioner, Margrethe Vestager, publicly stating that the European Commission is looking “carefully” into the issue. While public companies were the initial focus, we expect that private companies will face a similar level of scrutiny. As co-investment deals and non-controlling acquisitions become more common, deal teams should not assume that acquiring a minority position will mean that antitrust issues cannot arise.
Increasingly Burdensome Document Production Requests
Burdensome document requests from the European Commission and the UK’s Competition and Markets Authority (CMA) have become more frequent – both regulators are now adopting a more fulsome US-style approach to document production. PE firms need to consider communications made in preparation for and during a deal, and how these may be viewed by competition authorities. Requests for third-party reports, sale documents, and even emails between buyers, sellers, shareholders, and customers are not uncommon. When faced with document requests, firms need to engage in early coordination to handle authorities’ information requests, manage carefully the search and production of discovery materials, and address attorney-client privilege protections and data privacy safeguards. Even if transactions ultimately do not raise substantive concerns, fines can be imposed and delays to transaction timetables can occur as a result of non-compliance.
Regulatory guidance on cryptoassets and digital currency companies may lead to a legitimisation of crypto-businesses as an investable asset class.
By Stuart Davis, Sam Maxson, David Walker, Tom Evans, and Catherine Campbell
Recent and upcoming regulatory guidance on cryptoassets and the regulation of companies engaged in digital currency, such as issuers, crypto-exchanges, crypto-custodians, crypto-brokers, and other service providers, could help facilitate private equity investment in this space. While there has been some institutional investment in crypto-businesses — such as Goldman Sachs’ investment in Circle (owners of the Poloniex crypto-currency exchange) and Tiger Global’s investment in Coinbase — this has been a relatively nascent market with most money coming in the form of early-stage and venture investing.
Drivers of Volatility in Cryptoassets Values
Regulatory uncertainty has been a key driver in dampening the market value of cryptoassets. Regulators around the globe have issued warnings that cryptoassets may be regulated financial instruments, and issuers and intermediaries may require licences. Further, the application of AML/KYC rules to cryptoassets has been unclear.
By Drew Levin. Maarten Overmars, Richard Butterwick, Terry Charalambous, and Catherine Campbell
Warranty and indemnity insurance (W&I) has become a common feature of European transactions in recent years, amid a strong sellers’ market that has enabled vendors to offload risk to buyers. According to the most recent edition of the Latham & Watkins Private M&A Market Study, which examined transactions between July 2016 and June 2018, the proportion of transactions employing W&I has continued to increase — from 8%, 13%, and 22% of deals in the previous three editions of the survey, to 32% for the latest period surveyed. We believe M&A deal teams should be aware of changes and enhancements to W&I that will bring insurance coverage closer in line with the US market. In our view, the developments are positive for M&A bidders.