Paul HastingsTranslates Trends in Private Equity 2020

Trends in Private Equity 2020 | 1

Paul HastingsTranslates Trends in Private Equity 2020

2 | Paul Hastings Translates

IntroductionPrivate equity – key trendsThe big picture for private equity EuropeUK and IrelandContinental EuropeThe United StatesAsiaIndustry focus2020 and beyond

03040712141822263040

10

16172425

313638

What PE firms need to know about CFIUS Changes to the Enterprise ActLending into distressPublic to private deal volumesThe omnipresent trend: deals with global workforcesInvesting in technologyESG The private equity outlook: what’s next?• The impact of the debt market

• GP-led transactions - the new(ish)

alternative exit

Contents


IntroductionThe past five years have seen an unprecedented shake-up of the private equity industry.

On the one hand, record levels of deployable capital in excess of US$1.7 trillion currently, the plethora of saleable assets and the ready availability of third party debt have seen the industry enjoy unparalleled success, with more capital raised, deployed, realised and distributed back to investors than in any other period in the industry’s history.

On the other hand, the uncertain macro-economic and geopolitical climate, increased regulatory and political scrutiny, a more protectionist international environment, concerns regarding an imminent global recession, and heavy competition for assets have placed significant challenges on the industry. Private equity is poised at a critical juncture – GPs have to evolve new deployment strategies to compete effectively and to deliver public-market beating returns for their investors. They need to be agile and be prepared to ensure that they can take advantage of the opportunities which will present themselves in the coming years, and we expect PE firms to continue to innovate and evolve in the quest to find higher returns and more productive ways to invest capital at scale.

We have drawn together some of the best data and insights on private equity across continents. That includes the well-established bases in the US, London and elsewhere in Europe, but also in Asia, where China, India, Japan, and South Korea are all now serious players in the global investment scene.

We look at the trends shaping the private equity industry to provide an insight into the challenges and opportunities facing our clients. With lawyers around the world advising sponsors, portfolio companies and funds across all segments of the private equity industry, Paul Hastings has a truly global perspective on the market.

We hope you enjoy this report, and welcome your thoughts, so please join the conversation by messaging us at [email protected].

Anu Balasubramanian Vice Chair, Global Private Equity Practice


GeographyThe US has been, and will continue to be, the driver of the global private equity industry given the volume of private capital available in the US. However, we can expect significant growth in the Asian private equity market, as the industry there continues its development from passive investment in private equity, through to co-investment with global players and well established Asian private equity firms competing locally and on the global stage with US and European firms. In particular, political conditions in Japan have been more amenable to private equity investment, which has seen funds such as Bain Capital establish a presence there. In the UK and Europe, the market will remain extremely competitive as US-based managers continue to increase their European presence and activity in direct competition with the native UK and European managers. Aggressive deal processesThis increased competition to deploy equity, coupled with positive developments in the debt markets, are leading to extremely aggressive auction processes and high prices for attractive assets (especially, involving carve-outs from larger corporate groups). To succeed in these processes, bidders will not only need to offer an attractive price, but they will also need to understand the latest developments in deal execution techniques to ensure that any offer they make is as compelling as possible to the vendor. To increase the likelihood of success, even before any formal sale process has started, firms are identifying key targets and are spending more time building relationships with target management. This approach will enable them to demonstrate the value they will be able to bring to the continued development of the business in the hope of securing the holy grail of deal doing: an exclusive, bilateral process. We expect an increase in courtship levels and also in the number of pre-emptive bids made in an effort to win an auction process before it starts.

Currency impactWith the pound and euro weaker against the dollar than at any other time in nearly 35 years, we expect the trend of more US and Asian US private equity funds targeting European businesses to continue. Further, valuation multiples in public markets have begun to trend lower than their private market counterparts, making take-private transactions more attractive across Europe.

Regulatory frameworkA more protectionist and populist approach of many governments is being reflected in changes to the Committee on Foreign Investment in the United States (“CFIUS”) rules in the US and the proposed changes to the Enterprise Act in the UK and similar regimes across Europe (particularly in France and

Perspectives from Anu Balasubramanian, Vice Chair, Global Private Equity Practice and Garrett Hayes, Private Equity Partner at Paul Hastings London

Private Equity – Key Trends


Germany). Governments have significantly increased the scope of the transactions which may be reviewed on the grounds that they involve public interest concerns. We expect the level of regulatory scrutiny of deals to continue to increase. Investors, particularly those active in sensitive industries, will need to be more aware than ever of the evolving regulatory landscape to ensure that potential issues are identified early in the process to minimise the execution risk caused by increasing levels of governmental intervention.

SecondariesThe private equity industry’s ability to evolve and innovate is demonstrated by the increasing prevalence of GP-led secondaries, as highlighted later in the report by Secondaries Partner Ed Harris and Duncan Woollard, Funds Partner. Whereas historically this may have been a transaction type more commonly associated in a GP restructuring (e.g. “zombie funds”), GP-led transactions are now being executed by leading GPs and for top performing assets. We expect to see more GPs considering GP-led secondaries in their quest to drive value in their funds.

Sale of stakes in General Partners2019 saw a significant increase in the level of capital raised by funds seeking to make investments in GPs themselves. Frequently, such investments have appealed to GPs seeking to facilitate change in management and attract fresh talent, especially as their founders reach retirement age. Examples of such transactions in Europe include the 10-15% stake sold by BC Partners to Blackstone Alternative Asset Management for approximately €500m, in exchange for participation in the firm’s ongoing profits. The most prolific fund in this area is Dyal Capital Partners, which raised US$6 billion for its latest fund and has made several minority strategic investments in private equity firms, including Silver Lake. Investee firms have generally used the new capital to facilitate management changes and expand their investment offering into new areas. Accepting such investments provides an alternative liquidity strategy to seeking a listing, which was successfully pursued by EQT during 2019 and several other firms historically.

Co-investmentsSimilarly, as GPs seek to increase their firepower while at the same time rewarding loyal investors, who themselves, are seeking to deploy larger amounts of capital, we anticipate that co-investment arrangements will continue to increase in prevalence, with terms increasingly more favourable than are generally available through a blind pool fund (although some of the larger GPs are now looking to charge some level of fee). As it has become more competitive to source co-investment opportunities, LPs are now coming in at the outset of a transaction (and even participating in P2Ps) rather than just in the post-closing syndication process.

Innovative means of deploying capitalStiff competition for assets and growing concerns of an imminent global recession have also prompted GPs to devise new means of putting capital to work, including in the form of establishing long-hold funds, with investment horizons of 12-15 years, expanding into growth equity and taking minority investments in portfolio companies, either upfront, or following an exit. On the sell-side, both financial, as well as strategic investors, are divesting non-core assets in a bid to free up capital or to get their core assets ready for an exit process.

Data PrivacyOwnership and use of personal data worldwide will continue to be a driver of real value for private equity funds. This area is increasingly regulated, however, and can rapidly destroy value and cause significant reputational damage, if not appropriately managed. The levels of fines being imposed for breaches of...


data protection laws have increased exponentially in recent years and we expect this trend to continue. Data privacy due diligence will be critical to managing risk on the acquisition of data-rich companies and robust technology, and policies and procedures will need to be maintained post-acquisition to reduce the risk of value destruction within the portfolio.

ESGEnvironmental, social and governance considerations will continue to be a critical consideration for private equity firms. While historically it may have been possible to pay lip-service to ESG matters, this is no longer the case. Governments globally have increased their level of intervention in these matters, with the Modern Slavery Act in the UK and the UN’s Principles for Responsible Investing being prime examples of this. Government intervention will grow, particularly, if global businesses are seen to be not taking ESG matters seriously. In addition, investors are becoming more vocal about their requirement for PE firms to adhere to acceptable ESG standards, with many investors now declining to invest in any funds which do not achieve acceptable standards. One significant development in this arena is Impact Investing, which seeks to deliver a commercial return to investors, and a social return to society by advancing one or more of the UN Sustainable Development Goals. Impact Investing is one of the fastest-growing investment strategies, globally, with assets under management anticipated to be worth over US$1 trillion in 2020. We see this increasingly becoming a mainstream focus for the private equity industry.

Parent LiabilityExisting private equity structures assume that the parent fund entities will not have liability for their subsidiary (and, specifically, portfolio entities). All relevant legal systems have historically respected the separation of liability vis-à-vis corporate entities. However, there have been developments in the UK and the US, which indicate that funds should be cautious about taking this for granted. A decision of the Court of Appeal in the UK held that a parent could assume liability for its subsidiary in very specific circumstances. There is an increasing amount of regulation which could potentially pick up the GP and the fund rather than just the portfolio companies. In the US, Elizabeth Warren has proposed the Stop Wall Street Looting Act which, amongst other things, would seek to make private equity firms liable for investments which turn sour. While such developments have not yet significantly altered the landscape, firms should monitor them closely.


1,400

0

200

400

Dry Pow

der ($bn)

600

800

1,000

1,200

Dec-09 Dec-10

Buy Out Venture Capital Growth Other Private Equity*

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Mar-19

There was a slight downturn in activity in 2019 for private equity, yet the year ended on a high. Private equity funds raised $595bn worldwide in 2019, surpassing the $0.5 trillion mark for the fourth year in a row.1 That said, 2018 was a hard act to follow. Despite challenges, on some measures, 2018 saw the strongest year for private equity activity since the financial crisis, with record levels of deals announced during the year.2 By value, buyout deals (which account for the lion’s share) saw two of the three best ever quarters.3 While deal making remained strong in 2019, buyout deals were $100 billion down on the year before, according to the latest figures.4

The year 2018 was fuelled by record levels of capital. By year-end, private equity dry powder had reached $1.2 trillion.5 Dry powder for private capital globally (of which private equity accounts for the majority) topped $2 trillion.6 The amount of dry powder increased again through 2019, reaching $1.7 trillion.7

The big picture for private equity

Private equity dry powder by fund type - Source: Preqin Pro

1. 2019 Private Equity & Venture Capital Fundraising & Deals Update2. Preqin Quarterly Update: Private Equity & Venture Capital, Q1 20193. ibid4. 2019 Private Equity & Venture Capital Fundraising & Deals Update5. Private Capital Performance Update: Q4 2018 6. Private Capital Dry Powder Reaches $2tn7. Mergermarket 2020 Global Private Equity Outlook8. 2018 Private Capital Fundraising Update, Preqin9. 2019 Private Equity & Venture Capital Fundraising & Deals Update

The sector has not been entirely immune to the political and economic uncertainty across many territories. Most obviously, 2018 saw a decline in fundraising and a further concentration in bigger funds: 1,175 private equity (PE) funds raised a total of $426 billion in 2018, against $552 billion across 1,639 funds the previous year.8 Having said that, 2017 was a record year for fundraising, and while 2018 levels were down the previous two years, they were still higher than 2015 and prior to that.

The slowdown has continued further in 2019, but this doesn’t look set to continue. While the concentration in bigger funds is still apparent – 1,316 PE funds closed by the end of 2019 – 2020 is already off to a good start. According to the latest figures, the highest number of funds in the past decade are rising (3,524) and are targeting almost a billion dollars ($926 billion) of aggregate capital.9


By region: A dominant player

The Americas, and the US, specifically, remain the key player in global PE. In 2018, this region accounted for more than half the worldwide fundraising total, according to Preqin’s figures. Nevertheless, Asia and Europe together accounted for more than a third.10

No. of Funds C

loses

Aggregate Capital R

aised ($bn)

No. of Funds Closed Aggregate Capital Raised ($bn)

800

0

200

100

300

400

500

600

700

300

0

50

100

150

200

250

2014 2015 2016 2017 2018 2019

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

700639

240

196

250

9080

16

90

0

100

200

300

400

500

600

North America


Europe Asia Rest of World

Global quarterly private equity fundraising, Q1 2014 – Q3 2019 - Source: Preqin Pro

Private equity fundraising in 2018 by primary geographic focus - Source: Preqin Pro

10. 2018 Private Capital Fundraising Update, Preqin, ibid


Figures for dry powder reserves show a similar pattern. Activity in Asia and Europe remains strong, showcasing the growing importance of markets outside of the US. While the Americas account for the majority of private equity dry powder, their dominance has perhaps declined slightly from a decade ago. In any case, Europe consistently accounts for about a quarter of dry powder, and in the last decade, Asia’s proportion of dry powder worldwide has doubled.

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Jun-

18

North America Europe Asia Rest of World

62%

9%

25% 25% 25%

60% 59% 59% 58% 58% 58%56% 55%55%55% 55% 55%

23%

18%18%14%14%12%10% 11% 11% 13%13%15%15%

9% 4%4%5%7%6%6% 6% 5% 5%6%6%6%

23%24%24%24%24%24% 24% 24% 26%

Private capital dry powder by geographic focus - Source: Preqin Pro

When you consider the impact of CFIUS on global investment, particularly investment into Europe, there are two things to be aware of:

Perspective from Scott Flicker, Chair of the Washington DC officeat Paul Hastings

What do PE firms need to know about CFIUS?

This has resulted in movement of capital flows to other markets. One of the impacts that European funds are seeing is an increase in Chinese M&A into their own markets, as a reaction to some of the restrictions being imposed by the US, most notably in Broadcom’s failed takeover bid for Qualcom.

Transactions that might be between two non-US parties, including a non-US target, can still on occasion trigger CFIUS’ jurisdiction. This happens if a target has a subsidiary or other activity in the United States sufficient to comprise a ‘business’, and can include a collection of assets. Even a deal that isn’t US focused can have a CFIUS aspect.

01

02

The US continues to ratchet up its scrutiny of deals, especially involving China

The US takes a broad view of its jurisdiction, so CFIUS needs to be considered for most transactions


The impact of the Foreign Investment Risk Review Modernization Act (FIRRMA)While FIRRMA expands CFIUS’s jurisdiction and reach in important ways, there is an opportunity under FIRRMA for acquiring parties in certain jurisdictions to be exempted from the CFIUS process. One of the factors that CFIUS will be considering before essentially ‘whitelisting’ a particular country or government is whether that jurisdiction itself is doing an adequate job of regulating the impact on national security from foreign investment. Another consideration is the degree to which the United States regards the country as aligned with its interests on matters of national security and technology transfers, particularly to China and other nations that pose a strategic threat to US military and technology leadership.

The “funds exception”Within FIRRMA, there is also an opportunity for foreign investment not to trigger CFIUS’ jurisdiction, if it comes in the form of a fund structure. If there is a US GP, and any foreign LPs involved in the fund: a) have a restricted role in its management, b) can’t dictate how the fund’s investments are directed, and c) do not have access to certain categories of sensitive information, then that foreign LP participation might not trigger CFIUS’s jurisdiction. A non-US fund can employ similar structures to “ringfence” potentially sensitive foreign LP participation. While doing so would not necessarily divest CFIUS of jurisdiction over US investments undertaken by the fund, it could go a long way to mitigate the threats, and thus, the CFIUS risk, otherwise posed by that participation.

Targeting certain types of investmentCFIUS has increasingly started to triangulate on certain categories of US industries and targets, and it is communicating, more than ever before, where it is considering foreign investment to be ‘sensitive’. Three areas that have garnered increased CFIUS focus include:

• Businesses that handle sensitive personal data of US citizens, e.g. financial credit, health data or genetic information

• Critical infrastructure, e.g. oil and gas pipelines, telecommunications facilities, infrastructure handling financial transactions, airports and seaports

• So-called “merging and foundational technologies,” e.g. artificial intelligence, autonomous vehicles and geolocation technology

Expect to see foreign investment in these sectors to continue to draw significant CFIUS scrutiny going forward.



Regional BreakdownEurope The Eurozone and EU overall grew just 1.2% in the euro area and 1.4% in the EU2811 respectively, in Q3 2019, compared to Q3 the year before. Growth in the UK, the key private equity market in Europe, was at its lowest level since the financial crisis, with annual growth in 2018 levelling out at just 1.5%12 However, private equity in Europe flourished that year in spite of (and perhaps in some cases because of) significant economic and political uncertainty – most obviously, due to Brexit.

In Europe, the annual number of deals hit an all-time high in 2018, as did values for private equity buy-outs, which represent the bulk of activity. They jumped more than a fifth to €120 billion across 1,901 deals.13 Assets under management (AUM) and dry powder also reached record highs during the year.14

No. of Deals Aggregate Deal Value (€bn)

1,200

59

1,223

1,3811,510

1,636

1,8021,901

389

2012

2013

2014

2015

2016

2017

2018

Q1

2019

65

84

105

87

97

120

18

Dry Powder (€bn) Unrealised Value (€bn)

0

200

100

300

400

500

600

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Dec

16

Dec

17

Dec

18

Private equity-backed buyouts in Europe - Source: Preqin Pro

Europe-based private equity & venture capital assets under management (€bn) - Source: Preqin Pro

11. https://ec.europa.eu › eurostat › documents › 2-14022019-AP-EN.pdf12. https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/august201913. 2019 Preqin Markets in Focus: Alternative Assets in Europe 14. ibid


As Preqin’s CEO Mark O’Hare puts it: “[It is] important to remind ourselves that economic growth is not the same thing as activity and opportunities in alternative assets. Europe’s alternative assets industry is in rude health.”15

Nonetheless, going forward, the industry faces a more challenging time. There was a substantial tail-off in activity in the last quarter of 2018, and after a brief recovery at the start of 2019, the number of deals in the second three months was at its lowest for over two years.16 Almost half of PE professionals surveyed by Roland Berger in 2019 expected the number of transactions to fall.17

In addition to Brexit, the private equity market faces significant regulatory challenges. The Alternative Investment Fund Managers Directive (AIFMD) continues to make its presence felt across the industry, adding another layer of complexity to its operations, while the Markets in Financial Instruments Directive II (MiFID II) affects firms structured as advisers in the EU, as well as those engaging a placement agent or third party regulated by the directive.

EU firms active in the US may also come up against the new Committee on Foreign Investment in the United States (CFIUS), charged with examining the security implications of foreign investments in US companies or operations. There are also similar developments in the UK, through changes made to the Enterprise Act. Indeed, according to those running the funds, regulation is the key challenge they face.18

1

3

2

Scarcity of investment opportunities

Increasing regulation Increasing competition between funds

Pressure for lower fees

Changes in taxation on carried interest

44% 23% 16% 11% 6%

19% 15% 11% 37% 18%

15% 26% 17% 22% 20%

Europe-based private equity & venture capital assets under management (€ billion) - PWC.de

15. 2019 Preqin Markets in Focus: Alternative Assets in Europe16. Private equity Barometer Q1 2019, Aberdeen Standard Investments17. https://www.rolandberger.com/ru/Publications/European-Private-Equity-Outlook-2019-PE-industry-less-optimistic-now.html18. https://www.pwc.de/de/finanzinvestoren/private-equity-trend-report-2018.pdf


The UK and IrelandMuch of both the strength and subsequent fragility of European PE activity comes down to the UK. Just as the US dominates activity globally, the UK, with Ireland, remains by far one of the key players in Europe.

As of 2019, UK private equity had the lion’s share of fund managers, investors, and deals. In fact, the aggregate value of buyout deals from the start of 2018 to the end of Q1 2019 was €49.5 billion – the same amount as in the rest of Western Europe combined.

Similarly, in the last three years, UK PE deals have accounted for more than a quarter of the continent’s total (and, other than in 2018, more than a quarter of the value).19 The dominance is even clearer when it comes to fundraising. Between 2013 and 2017, the UK and Ireland often accounted for more than half the funds raised across Europe, peaking at €47 billion in 2016. In that year, and in 2017, France and Benelux – the closest to the UK – raised less than half the amount.20

UK PE activity has proved remarkably resilient, probably in part because of the currency depreciation, since the Brexit referendum (creating opportunities for foreign buyers) and subsequent political and economic uncertainty; the latter brings opportunities, as well as risks. Consultant EY’s latest Global Capital Confidence Barometer recently showed the UK as the most attractive M&A destination among global executives for the first time in a decade, while UK executives have their highest transaction appetite in the survey’s history.21

Nevertheless, Brexit has not been without negative effects, even before the most recent bout of turmoil and the UK general election. Looking at buyouts, for example, between 2012 and 2015, the UK and Ireland accounted for 25% of European buyout volume and 32% of its value; by 2016-2017, this had dropped to 22% and 29%, respectively, according to PwC.22

€12.2bn

€2.4bn

€49.5bn

€9.1bn €3.8bn

€0.6bn€49.5bn

€12.2bn

€22.3bn

€1.4bn

No. of Fund Managers

No. of Investors

Aggregate Value of BuyoutDeals in 2018-Q1 2018

Aggregate Value of VentureCapital Deals in 2018-Q1 2018

948

416

440

250

1,43

980

7

405

48

385

213

UK

SouthernEurope

WesternEurope

Nordic

Central &Eastern Europe

Private equity & venture capital in Europe - Source: Preqin Pro

19. https://www.ey.com/en_gl/private-equity/how-uncertainty-is-impacting-pe-deals-in-the-uk 20. Slide 114 https://www.investeurope.eu/media/711867/invest-europe-2017-european-private-equity-activity.pdf 21. https://www.ey.com/en_bg/private-equity/how-uncertainty-is-impacting-pe-deals-in-the-uk22. Fig 4: https://www.pwc.de/de/finanzinvestoren/private-equity-trend-report-2018.pdf


Perspective from Roger Barron,M&A Partner at Paul Hastings London

The fluctuation of the pound after the Brexit referendum has caused a number of firms to weigh up advantageous foreign exchange as a factor to focus on UK targets. That said, it is only one factor that is considered and is unlikely to be the only one. Factors such as the potential deal making sense strategically, the underlying business being robust – or there being a plan to turn it around – as well as the underlying costs of doing the deal, are often issues that affect the process of a proposed deal more than currency fluctuations.

The Enterprise Act 2002 was introduced nearly 20 years ago and, among other things, provided a new merger regime in the UK. This included a test to consider whether any merger activity resulted in a substantial lessening of competition, and went much further than the previous public interest test in the Fair Trading Act 1973.

Under the 2002 regime, the Competition and Markets Authority (CMA) could review a takeover, if the target business had an annual turnover in the UK exceeding £70 million, or, if the share of UK supply increases to 25% or over, as a result of the transaction.

Historically, the UK has been rather hands-off in overseeing and regulating public takeovers, and largely agnostic as to who the buyer was. Since the negative public sentiment here in the UK about Kraft’s takeover of Cadbury, arguably one of the UK’s ‘national treasure’ businesses, there has been a shift and a clamour for the UK government to intervene in deals that may be considered outside of the national interest.

In its Green Paper in October 2017, the Department for Business, Energy & Industrial Strategy (BEIS) concluded that these jurisdictional thresholds were no longer working effectively enough for intervention on the grounds of national security.

From 11 June 2018, changes to the Enterprise Act 2002 were introduced, covering two main areas:

• The target UK turnover threshold was lowered from £70 million to £1 million per annum• The current requirement for the transaction to create an increase of UK supply share was

removed; the test will be satisfied by acquiring an existing share of supply of 25%

These changes extend the reach of the UK merger control system to cover deals of a much smaller value than were previously within the CMA’s scope.

Perspective from Matthew Poxon, M&A Partnerat Paul Hastings London

Changes to the Enterprise Act – what do firms need to do about doing deals with UK targets?


These changes will only apply to transactions involving a target in the following sectors:

• Military and dual-use item technologies • Quantum technology• Multi-purpose computing hardware

Whilst the transactions covered under the national interest do go much broader than defence, these were most recently invoked in the Cobham deal in September 2019, when the Business Secretary invoked this new power to allow a review of the deal to consider whether it is in the national interest to proceed. Such intervention occurs after the shareholder vote has taken place, to ensure that it is not taken as a ‘put-off’ to shareholders.

In addition, the UK government published the National Security and Investment White Paper in July 2018, which sets out how the government will upgrade its powers to scrutinise investments and address the risks that can arise from hostile parties acquiring ownership of, or control over, businesses, or other entities and assets that have national security implications.

Any private equity funds – particularly those based outside of the UK – considering a takeover of targets in any of these sectors, must be wary that they will likely face increased scrutiny under these national interest rules.


Continental EuropeThe UK’s leadership in private equity should not distract from what is going on elsewhere in Europe, however. There is significant activity across a range of its major economies:

France has the most developed alternative assets market in mainland Europe, according to Preqin.23

French PE houses raised a record-breaking €18.7 billion in 2018, according to France Invest’s report, with almost half this amount originating from foreign investors.24 Buyout deals in the country amounted to €10.1 billion across 305 deals from 2018 to Q1 2019, and French-based AUM for private equity and venture capital (VC) funds was €67.8 billion as of the end of June 2018. Since 2015, the country has seen 17 deals completed for more than €1 billion.

Germany is a not-so-close close second, with €23.4 billion in PE and VC AUM. While there is a lack of VC financing in the region, it is now second only to the UK in Europe when it comes to deals. Technology-focused unicorns, ie firms valued at over €1 billion, have been a significant contributor to this. Buyout deals in 2018 to Q1 2019 period amounted to €15.1 billion over 386 transactions.25

Italy is another big economy with a growing private equity sector in the recent year. It recorded over €12 billion of private equity-backed buyout and venture capital deals in 2018 – a record for the country.26 Although, less attractive than Germany for PE investors, 16% of respondents in a survey for consultants PwC last year said they would consider investing in the country.

The Netherlands punches well above its weight for a small country with €21.9 in PE and VC assets as of June 2018, and 146 buyout deals worth €4.9 billion in the period from 2018 to Q1 2019.28

Sweden is another smaller country with a significant PE industry, clocking up 103 deals worth €6.2 billion over the same period. It has €42 billion in PE and VC assets under management.29

23. 2019 Preqin Markets in Focus: Alternative Assets in Europe24. https://www.privateequityinternational.com/french-private-equity-fundraising-and-deal-making-has-record-year/ [1]25. ibid26. ibid27. Fig.77 https://www.pwc.de/de/finanzinvestoren/private-equity-trend-report-2018.pdf 28. ibid29. ibid


Perspective from Christopher Wolff,M&A Partner at Paul Hastings Frankfurt

As already discussed with respect to the “Changes to the Enterprise Act for the UK” – very similar changes were introduced in the last two years in Germany, as the German Government has come under increasing pressure to intervene in transactions that could jeopardise (or be perceived to jeopardise) national security or critical infrastructure. The implicit target of this pressure was China, following a series of Chinese investments in German companies that led to heightened levels of public scepticism about the motives of sometimes less transparent buyers (especially see the Kuka takeover – a German robot producer focused on the automotive industry). For the first time ever, the German Government blocked the takeover of the German machine tool manufacturer Leifeld and high-voltage energy network operator 50Hertz by Chinese investment companies.

The new regime makes it possible for the German Government to intervene on any takeover from an investor from outside of the European Union to acquire a “direct or indirect” holding of 10% (prior to the change 25%) in a German company with such a special sector focus. Very similar to other regions, PE is becoming more and more active in public to private transactions – starting in 2015 with multi-billion Euro takeover offer from CVC and Advent for listed retailer Douglas, followed by Bain and Cinven in 2017 in their combined offer for Stada Arzneimittel (Pharmaceuticals) and 2019 with takeover offer by Bain and Carlyle for Osram Lightning (which finally was acquired by AMS, an Austrian company).


Perspective from David Ereira, Restructuring Partnerat Paul Hastings London

Lending intodistress

One trend of the last year or more is that private equity funds, unable to always find sufficient opportunities to deploy capital, are increasingly looking at other opportunities. In particular, there’s significant interest in providing liquidity – mainly debt of one form or another – into stressed or distressed documents. A significant number of funds now seek to lend into distress.

Typically, the asset classes and sectors that private equity firms look at in the distressed world are heavy industry hard asset businesses, requiring significant capital expenditure, time and effort to turn the business around. It’s a marathon to achieve a return, not a sprint. With investors currently re-fuelling it is a good time to ask how best to deploy their capital here.


Covenant-light challengesAmong the challenges for distressed investors is that many of the businesses will already have been private equity targets. As such, their capital structures are already highly-leveraged and complex. Usually, this points to most documents and financial arrangements being covenant-light, or high yield in disguise. In granting the existing sponsor a covenant-light structure to acquire such businesses, there is a price to pay: the distressed debt lender gets less warning that the investment is under stress.

Equally, as capital structures become more complicated, the risk of more activist or contentious restructurings and increased litigation is heightened. We’ve seen deals where there is US-style litigation – ie a “litigate first” mindset – applied in both the US and the UK courts. This makes it harder for private equity investors to find a path to deploy their capital.

Global challengesMost distressed investors take a lot of comfort from the predictability and stability of the legal regime they’re operating in. They’re comfortable with investments in the UK, and probably Germany and France to some extent. Once you get beyond that, however, it becomes quite challenging. Unless they can see the paths to an outcome with reasonable clarity, it’s difficult to evaluate the return on investment and weigh risk factors appropriately.

This explains why despite a lot of distressed opportunities in markets, such as Turkish financial services, external investors aren’t entering on any significant scale; nobody knows when you could exit. Similarly, Paul Hastings has been involved in the restructuring of an Indian company, which was highly unpredictable with very uncertain outcomes, despite optimism about the application of the new Indian Insolvency Code.

In fact, the further east you go, the more difficult the stressed market becomes.

A sector outlookParticular sectors pose challenges, too, that includes anything that is consumer-facing, whether it’s retail or discretionary spending, like tourism. There’s also concern in a number of cyclical industries – chemicals and the offshore industry, for example – where the capacity cycle hasn’t worked its way through. That’s partly a function of the availability of liquidity. One of the issues with quantitative easing is that anybody can borrow money, so companies that probably should have shut down and taken their capacity out of the market haven’t. Perhaps the next sector to see this is airlines, because there now may well be more seats than there are passengers.

That this is a challenging investment, should be no surprise, however. By definition, these deals don’t tick the usual boxes private equity insists on. The industry is looking for good businesses with bad balance sheets, as opposed to so-called “zombie companies” – bad businesses with even worse balance sheets. In those cases, the challenge may be too significant for anyone to turn around.



The United StatesThe US remains the largest PE market by some margin. Its dominance grew further in the first two quarters of 2019, with fundraising for North American focused funds of $63.3 billion in the first quarter (out of a global total of $100.2 billion) and $68 billion (of $107.8) in the second, representing 63% of the total in both cases. This continued on from the 2018 trend – private equity fundraising for North American focused funds was, as ever, substantially more than the rest of the world combined: $240 billion aggregate against $186 billion – 56% of the total.30

Dominance is explained, at least in part, by investor appetite. Institutional investors in the US have both much higher than average current and target asset allocations to private equity – 6.1% and 10%, respectively. The same figures for Western Europe (excluding the UK) are 3% and 4%.31

Likewise, in terms of both number and value of buyout deals, the region consistently accounts for more than half the worldwide total.32 In fact, private equity saw the most leveraged buyout activity by value in over a decade, with 1,330 deals worth $224.9 billion in 2019, despite seeing a significant decline in the number of deals taking place (1,445 buyouts worth $215.8 billion in 2018).33

160

140

0

20

40

60

80

100

120

North America



133

63.3

46

21.628

13.9 12

1.4

160

140

0

20

40

60

80

100

120

North America



139

68

43

21

45

15 17

3.8

Private equity fundraising in Q1 (left) and Q2 (right) by primary geographic focus - Source: Preqin Pro

30. Q4 2018 Private Capital Fundraising Update31. 2019 Preqin Global Private Equity & Venture Capital Report32. Preqin Quarterly Update: Private Equity & Venture Capital, Q1 201933. Mergermarket 2019 Global M&A Report with financial league tables


1,600

1,400

0

200

400

No. of D

eals

Aggregate Deal Value ($bn)

600

800

1,000

1,200

160

140

0

20

40

60

80

100

120

North America Europe Asia Rest of the World Aggregate Deal Value ($bn)

2014 2015 2016 2017 2018 2019

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Private equity-backed buyout deals by region, Q1 2014 - Q1 2019 - Source: Preqin Pro

34. Q4 2018 Private Capital Fundraising Update35. P32 https://docs.preqin.com/reports/Bain-and-Company-Global-Private-Equity-Report-2018.pdf36. https://www.bain.com/insights/topics/global-private-equity-report/

A number of large deals, including Blackstone’s $17 billion takeover of Thomson Reuters’ Financial & Risk unit, helped boost deal value in North America by 22% in 2018,34 to reach $239 billion. Figures have been boosted by a number of trends, too. Among them is the growing number of consumer health buyouts, which grew 34% annually from 2012 to 2017.35 Also notable, is the impact on aggregate values of public to private deals, such as KKR’s $9.6 billion buyout of Envision Healthcare in June 2018.36

0

20

40Aggregate D

eal Value ($bn)

60

80

100

120

North America Europe Asia Rest of the World

2014 2015 2016 2017 2018 2019

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Private equity-backed buyout deals by region, Q1 2014 - Q1 2019 - Source: Preqin Pro

There is an increasing appetite by US private equity funds to undertake public to private (P2P) transactions of UK-listed targets, and also in certain areas of Europe, such as the Nordics. Successful transactions in this area include bids for Inmarsat plc, Cobham plc and Merlin Entertainments plc by private equity institutions.

This is especially being driven by growing familiarity with the European-wide takeover regime, and the UK Takeover Code in particular. Economically, even when you factor in the ‘take private premium’, the multiples on ‘take privates’ are often lower than private-to-private or private equity-to-private equity transactions, which is also leading to increased interest in ‘take privates’ by private equity funds and financial acquirers, rather than ‘strategics’.

How long that strength can last is open to question. The second quarter of 2019 saw aggregate deal value in North America fall to its lowest total in over two years, to $38 billion from $68 billion in the first three months, before rebounding slightly in Q3 2019 (deal values in Asia and Europe actually grew steadily throughout the year).37 Others have noted that US private equity deal flow was at its quietest in at least five years in the first half of 2019.38 Nevertheless, to date, the region has had a good run – representing the strongest five-year stretch in history, as far as deal values are concerned.39

37. Preqin Quarterly Update: Private Equity & Venture Capital, Q2 201938. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/5262644039. https://www.bain.com/insights/topics/global-private-equity-report/


Perspective from Matthew Poxon, M&A Partnerat Paul Hastings London

Public to private deal volumes

With global investments comes the risks and liabilities of inheriting a global workforce, whether the focus is retention of talent, transitioning sufficient staff on a carve-out or implementing synergies. Successfully navigating the complex and dynamic international employment landscape is more challenging than ever in today’s global marketplace as employment laws are constantly changing, buffeted by the latest developments in culture, social norms and political agendas. From our annual survey, ‘Mapping the Trends: The Global Employer Update’, we identify updates on the major employment law developments across 68 jurisdictions. 2019’s top three trends will continue well into 2020 and beyond:

#Me Too MovementUS buyers are now asking for representations that sellers have carried out full and complete investigations into all allegations of sexual harassment. Other clients identify a #MeToo investigation in the C-suite as a deal stopper. The consequence of the same is now manifesting itself in the emerging trend of companies’ taking action for conduct outside of the workplace.

Digital Transformation: The Future of WorkThe megatrend of digitalisation has caused a transformation in various jurisdictions as the ‘gig economy’, the ‘on-demand economy’ and the casualisation of the workforce as the traditional definitions of employees blur. With this comes risks of misclassification, co-employment and employee leasing.

Privacy and Data ProtectionAside from GDPR, a number of non-EU jurisdictions also have significant data protection measures that impact employee transitions at close. Coupled with the new development of data leak employee class actions, this is an issue that now impacts brand and the bottom line.

01

02

03


Perspective from Suzanne Horne, Employment Law Partner at Paul Hastings London

The omnipresent trend: deals with global workforces


AsiaIn an increasingly crowded market, there are signs that some fund managers are struggling with the intense competition. The first quarter of 2019 saw 28 Asia-focused funds secure just $14 billion – a fifth consecutive quarterly decline in the number of funds closed, and the second-lowest quarterly capital total in the past five years.40 The region has since bounced back, however, securing $40 billion in funds in Q3 – surpassing the total investment for H1.41

However, with $80 billion in fundraising in 2018, Asia increasingly rivals Europe when it comes to its private equity industry.42 Private capital dry powder has grown from 11% to 18% of the global total in the last decade, not far behind Europe (23%).43

When it comes to the number of funds actively fundraising, Asia actually rivals North America, with more than 1,500 funds on the road targeting each region, against fewer than 500 Europe-focused funds in market.44

While the industry is quite mature in key centres such as the UK, there is sizeable scope for growth in Asia. Across the region, institutional investors currently allocate just 3.1% to PE, but are targeting an allocation more than double that at 8%. The equivalent figures for the UK are 4.1% and 5%.45 In China, the biggest economy, and where the bulk of those investors are found, just 2.5% is allocated to PE, but investors are targeting a massive 20% allocation, and the country has more PE fund managers than the rest of the continent put together, as well as over a third of the number of investors.46

Fund Managers Investors

258

116

Rest of Asia

394

103

India

247

90

Singapore

3,17

343

0

China*

277

242

Japan

192

133

South Korea

226

102

Hong Kong

Asia-based PE & VC fund managers and institutional investors - Source: Preqin Pro

40. Preqin Quarterly Update: Private Equity & Venture Capital, Q2 201941. https://docs.preqin.com/quarterly/pe/Preqin-Quarterly-Update-Private-Equity-and-Venture-Capital-Q3-2019.pdf42. 2018 Private Capital Fundraising Update, Preqin, ibid43. Private Capital Dry Powder Reaches $2tn44. Preqin Quarterly Update: Private Equity & Venture Capital, Q2 201945. 2019 Preqin Global Private Equity & Venture Capital Report ibid46. Preqin Markets in Focus: Private Equity & Venture Capital in India, March 2019


When it comes to buyouts, the mainstay of the PE market elsewhere, activity in Asia is still relatively low, with both the number of deals and values significantly trailing the US and Europe. Latest estimates for the APAC region as a whole showed a 23.6% year-on-year decline in value for 2019, with PE buyout deals reaching a value of $98.8 billion that year.47

The region is a much more significant player in venture capital, where Greater China alone has seen more deals than North America in recent years, and, despite a more recent slowdown, continues to be more active than the whole of Europe.

Overall, it’s a strongly positive picture. After setting records in 2017, 2018 saw continued growth: “Deal value peaked, exit values hit an all-time high and returns were strong,” as one analyst puts it.48 Dry powder in the Asia-Pacific region reached a record breaking $317 billion in 2018. As elsewhere, technology is a key sector for PE in Asia. Data from Bain & Company suggests that internet and technology companies accounted for half the total deal count in 2018.49

0

200

400

No. of D

eals


600

800

1,400

1,200

1,000

1,600 160

140

0

20

40

60

80

100

120

North America Europe Asia Rest of the World Aggregate Deal Value ($bn)

2014 2015 2016 2017 2018 2019

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q1

Q2

Q4

2014 2015 2016 2017 2018 2019

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q1

Q2

Q40

20

40


60

80

100

140

120

North America Europe Asia Rest of the World

Private equity-backed buyout deals by region - Source: Preqin Pro

Private equity-backed buyout deals by aggregate value in $bn - Source: Preqin Pro

47. Mergermarket 2019 Global M&A Report with financial league tables48. https://www.bain.com/insights/asia-pacific-private-equity-report-2019/49. ibid


Perspective from David Wang,Corporate Partner at Paul Hastings Shanghai and Beijing

Although the recently announced phase one trade agreement between the US and China sheds a positive light on this prolonged game of tug-of-war, long term trade stability between the US and China remains an enigma. While China’s commitment to make substantial purchases of US goods and services in the coming years seemingly appeased US hardliners and temporarily halted tariff expansions, it is difficult to foresee that the US will revoke trade restrictions imposed on China by the CFIUS review process and regulations such as FIRRMA in key financial and technology sectors. In addition to these external influences, China’s domestic market transitions, implemented in response to these external challenges and an observable economic slowdown, remain ongoing.

Perspective from Sarah Pearce, Privacy and Cybersecurity Partner at Paul Hastings London

There is a lot of technology, particularly artificial intelligence, coming out of China. As a result, various international investors, including private equity houses, are looking to join in and take a piece of the pie.

When you look at Japan, it’s not the same dynamic in terms of foreign investor appetite, but it does throw up fewer issues in terms of data. Japan has been granted an ‘adequacy decision’ by the EU, which means that data can flow freely from the EEA to Japan. The only issue here is about cross-border transfers out of Japan after that, so what happens then is yet to be determined.

As far as Korea is concerned, there are a lot of Korean companies investing in other data-rich tech companies. Countries outside of Asia are looking towards Korea as a potentially less-controversial tech hub to invest in outside of China, particularly for US investors.


50. https://www.bloomberg.com/news/articles/2019-05-09/whole-rally-at-risk-in-worst-case-wall-street-trade-war-mock-ups51. Preqin Markets in Focus: Private Equity & Venture Capital in India, March 201952. PwC Deals in India: Annual Review and Outlook for 202053. https://www.preqin.com/insights/blogs/indias-biggest-adventure-yet/258254. https://www.preqin.com/insights/blogs/land-of-the-rising-asset-class-private-equity-in-japan/26015 55. Preqin Investor Outlook: Alternatives in Japan56. Preqin Markets In Focus: Alternative Assets In South Korea

Outside ChinaThe most significant risk to private equity in Asia is probably the trade war between the United States and China, which last year saw the US more than doubling tariffs on $200 billion (£153.7 billion) worth of Chinese products.50

Importantly, though, Asian PE activity is not simply reliant on China. There are a number of strong PE markets across the continent:

India, the other regional superpower, has seen over $150 billion invested by the PE and VC industry in the past 15 years, and as of June 2018, the industry had $28 billion in AUM.51 In 2019, buyout activity broke all previous records and was 30% higher than the previous year.52 The industry benefits from strong government support, particularly on the VC side. According to research from Preqin, two-thirds of India-based equity funds raised in 2018, were VC vehicles backed by Government-led programmes like Startup India and Make In India.53

Japan is looking at setting a potential fundraising record in 2019, with Japan-based private equity funds having raised JPY 221 billion ($2.2 billion) in the first quarter of 2019, close to four times the amount raised in the same period last year.54 More than half (58%) of the country’s institutional investors have allocations to private equity.55

Korea saw 259 private equity-backed buyout deals in the decade from 2008 to November 2018, with an aggregate value of $55 billion, approximately 15% of the Asia-Pacific total. Strong sectors across entertainment, e-commerce and cosmetics, as well as non-core asset sales by the large conglomerates have been a major driver of deals.56

Singapore has managers with $19.2 billion in AUM, and it accounts for the bulk of PE and VC assets in South Asia. It also accounts for the majority of buyout deals in the South Asia region – just $3.6 billion in 2018, but $13.6 billion in 2017.57

Industry focusTechnologyTechnology has long been a favourite for private equity funds, but, even so, in 2019 Vista Equity Partners raised the largest ever tech fund at $16bn in Q3.58 2018 overall was a bumper year, with well over 1,000 tech-focused buyout deals.59 In fact, though, activity has increased year on year for almost a decade.

Tech-focused private equity AUM, meanwhile, has doubled in five years to reach a new record of $569bn March 2018, while dry powder stood at a record $190bn.60

No. of D

eals


No. of Deals Aggregate Deal Value ($bn)

1,200

0

400

200

600

800

1,000

200

0

50

100

150

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Dry Powder (€bn) Unrealised Value (€bn)

0

200

100

300

400

500

600

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Dec

16

Dec

17

Mar

18

Assets Under M

anagement ($bn)

Global tech buyout deal activity, 2008 – March 2018 - Source: Preqin Pro

Tech-focused private equity AUM, 2000 - 2018- Source: Preqin Pro

58. https://www.pwc.com/us/en/industries/private-equity/library/quarterly-deals-insights.html59. https://www.preqin.com/insights/blogs/private-equity-sinks-its-teeth-into-tech/2461260. ibid


There is undeniably an appetite for investing in technology-led businesses at the moment. The market is hot, and everyone, including private equity firms, is looking to join in. Technology and data go hand in hand: the tech market revolves hugely around data and its usage, and in today’s regulatory landscape, certain key points need to be kept front of mind.

Brexit Post-Brexit, the UK will be considered a ‘third party’ when it comes to the application of the EU-wide data privacy regulation, the General Data Protection Regulation (GDPR). As such, cross-border transfers outside of the EEA will require a further mechanism to be in place in order to satisfy GDPR requirements and allow data flows between the UK and other countries, and the UK will effectively be treated as a third country like the US or China.

Due diligence Whatever corporate transaction you’re scoping out, whether that’s an acquisition, investment, or something else, data, often personal data, will be involved. Looking back at recent fines, and intentions to fine from the Information Commissioner’s Office (ICO), it is clear that enforcement action could well have been avoided had more thorough data privacy compliance due diligence been carried out and key issues identified. Data privacy due diligence has historically taken a back seat to other areas, but should now be a staple part of any due diligence to avoid any claims and liabilities in the future.

Data breaches When we talk about data breaches, this is not just leaks or theft of personal data; it can be breaches of data protection regulation, too. Data protection regulation is increasing globally, so firms need to be aware of any regulatory changes on the horizon and prepare accordingly.

Perspective from Sarah Pearce, Privacy and Cybersecurity Partnerat Paul Hastings London

Investing in technology


EnergyIn the PE space, the energy sector accounts for a relatively small number of buyout deals each year, just 3% of the total in 2018, for example, but they tend to be big, making an outsized contribution to overall values (7% in the same year).61

In addition to the PE firms, unlisted natural resources funds do brisk business in this space. They raised a record $93 billion in 2018, according to Preqin – and almost all of it for energy-focused funds. The majority are North America-focused, too – 51 of them raising $58 billion in total, with most of the rest Europe-focused (25 funds raising $28 billion). As of June 2018, unlisted natural resources dry powder stood at a record high of $238 billion.62

0%

5%

10%

15%

20%

25%

Industrials

No. of Deals Aggregate Deal Value

Information

Technology

Business

Services

Healthcare

Consum

erD

iscretionary

Food andAgriculture

Telecoms, M

edia& C

omm

unications

Energy &U

tilities

Cleantech

Other

22%

14%

21%

15%14%

12% 13% 13% 12%

8%6% 7%

5%

12%

3%

7%

2%

6%

3%

6%

Private equity-backed buyout deals by industry in 2018 - Source: Preqin Pro

Fundraising has grown consistently in recent years, with investors attracted by the level of returns, and the diversification it offers; 29% of investors surveyed by Preqin plan to commit more capital to natural resources in the long term, compared to just 12% planning to decrease allocations.63

180

160

140

0

20

40

60

80

100

120

2012

No. of Funds Closed Aggregate Capital raised ($bn)

2013 2014 2015 2016 2017 2018

125

60

156

73

150

71

143

86

157

83

145

9191 93

100

80

0

20

40

60

Energy

Agriculture/Farm

ing

Metals &

Mining

Timberland

Water

86%

27% 25%20% 17%

Proportion of Total

Annual global unlisted natural resources fundraisingSource: Preqin Pro

Investor views on strategies presenting the best opportunities in natural resources - Source: Preqin Pro

61. https://docs.preqin.com › press › Buyouts-201862. Preqin 2018 Fundraising Update63. Preqin Investor Outlook: Alternative Assets H1 2019


There are categories of private equity that focus on energy assets, particularly, where we see funds taking on some degree of demand risk. Those in the infra-light space are focusing on companies that have real assets but have a degree of demand risk over a trading cycle. For example, in the midstream oil and gas market, private equity funds are now entering into areas like storage assets, because of the potential upside of fuel trading and distribution and marketing operations.

One area where private equity is particularly active in European energy is the upstream oil and gas space. Over the past four or five years, a number of private equity funds have been busy buying up North Sea upstream assets, particularly, in mature fields owned by some of the major incumbent oil and gas companies. These major players have been exiting the North Sea, because their target returns aren’t being met, and, they’re deploying their cash into operations with lower production costs.

The view of private equity here is that they can reach target return levels, because they’re prepared to take some risk in terms of new exploration and production opportunities, so there is potential value upside. They also have appetite for technological innovation – not only can this enhance their ability to find new reserves, it will also allow them to take hydrocarbons out of the ground more affordably, which lowers the production costs and enhances returns.

Another recent feature in the power sector has been private equity taking a counter cyclical approach with coal and gas fired generation. This has been encouraged by anticipated merchant demand for base load, due to broader market moves to clean energy on where there is contracted demand.

Perspective from Steven Bryan, Energy M&A Partner at Paul Hastings London


FintechWhile technology generally has long been a favourite of PE, the financial technology (fintech) sector has seen particular strength in recent years. Numbers of buyouts by PE and VC funds have almost doubled in the last five years, and aggregate values are up by a factor of eight or nine times.59

Though North America has historically dominated the fintech investment sphere, China is a growing presence in the sector. Its share of the number of VC fintech investments increased from 7% to 26% in the five years to the end of 2018, while its share of their aggregate value rose from 7% to 78%. Over the same period, North America’s share fell from 60% to 32% in numbers and from 59% to 14% by value.60

Overall, private equity was responsible for half of the largest financial technology deals in 2018, according to S&P Global Intelligence.61 Despite a slower start to deals in 2019 globally, fintech investment in key markets continued to be strong, nearly doubling in the UK, for example, to approximately US$2.6 billion, according to consultants Accenture.62

No. of D

eals


No. of Deals Aggregate Deal Value ($bn)

1,000

0

400

200

600

800

70

0

40

30

20

10

50

60

2009

2010

2011

2012

2014

2015

2016

2017

2018

2019

YTD

Global private equity-backed buyout and venture capital deals in the fintech industry - Source: Preqin Pro

59. https://www.preqin.com/insights/blogs/will-2019-be-another-milestone-year-for-fintech-companies/2601760. ibid61. https://www.spglobal.com/marketintelligence/en/news-insights/trending/3_i38ZZCMMB-LrFmjHeQZw262. https://www.preqin.com/insights/blogs/will-2019-be-another-milestone-year-for-fintech-companies/26017


Perspective from Arun Srivastava,Fintech and Regulation Partner at Paul Hastings London

The UK Government and Regulators have supported the growth of the Fintech industry through initiatives like the FCA’s “regulatory sandbox”. This makes the UK an attractive market for investors in the industry. Competition law and regulatory changes have also acted as a catalyst.

The UK has been a leader in the development of open banking with the Competition and Markets Authority requiring incumbent banking groups to develop APIs to facilitate the sharing of customer data. The EU’s Second Payment Services Directive (PSD2) has also been instrumental in putting in place a regulatory framework to foster the growth of the fintech industry. The UK has seen the rise of a number of well-known challenger banks. Many view this part of the market as being ready for consolidation. This will allow new entrants to develop balance sheets and provide real competition to the existing Big Four Banking Groups.

More generally, the market is maturing. Fintechs who have relied on rounds of VC funding are now at the stage of engaging with the incumbents and entering into partnerships with them. Co-operation together with the development of competitive products and services will help the market grow further.


Social and corporate governance is becoming a core component of businesses in any sector, and private equity is no exception. There is continued pressure, not just on governments, but on firms, to take sustainability and climate change more seriously.

But environmental issues are just the tip of the iceberg, when it comes to responsible investment. Legislative measures such as the Modern Slavery Act and initiatives from the United Nations, such as the Principles for Responsible Investment, mean that private equity funds must acknowledge the desire for transparency and disclosure among wider stakeholders, as well as looking more closely at how their own portfolio companies are managing these issues.

According to recent interviews conducted by Preqin, almost half (48%) of private equity investors either already have an environmental, social and governance (ESG) policy in place for their portfolios, or are planning to in the near future.68

TrendsEnvironmental, Social and Governance (ESG)

Perspective from Diala Minott, Structured Finance Partner at Paul Hastings London

The vocabulary in this sector can be nebulous, but—whether it’s called environmental, social and governance (ESG) investing; socially responsible investing; responsible investing; sustainable investing; or impact investing—investing with a purpose continues to attract attention and create significant opportunity. The Global Impact Investing Network (GIIN) recently reported the size of this market at US$ 502 billion, with over 1,340 active impact investing organisations,69 and according to recent interviews conducted by Preqin, 48% of private equity investors either already have an ESG policy in place for their portfolios, or are planning to in the near future.70 As a result, investment managers around the globe are looking to satisfy investor appetite for these types of investment strategies, which are becoming more complex, multifaceted and mainstream.

68. https://docs.preqin.com/quarterly/pe/Preqin-Quarterly-Update-Private-Equity-and-Venture-Capital-Q3-2019.pdf69. https://thegiin.org/research/publication/impinv-market-size70. https://docs.preqin.com/reports/Preqin-Investor-Update-Alternative-Assets-H2-2019.pdf


In support of this growth trajectory, we continue to see two areas sparking significant dialogue throughout the impact investing community.

First, there is no standard way to measure impact. The metrics currently in use are bespoke and material to each specific investment opportunity. According to the GIIN Impact Investor Survey 2019, 66% of investors use qualitative information and 63% use proprietary metrics that are not aligned to any external impact frameworks or methodologies. While it is easy to measure financials, it is hard to measure value-based impact, which can be much more intangible. Evaluating whether a company helps address one of the UN Sustainable Development Goals is a start; we see numerous investment managers seeking to identify and allocate resources consistent with those goals. Many in the investment community, however, have expressed a need for more guidance on investments that satisfy SDG criteria and standards to support accountability and transparency. In addition, the OECD produced a report in January 2019 calling for global standards and better measurement for impact investment.71 The report noted that impact investment could be more effective if it were more clearly defined internationally.

Second, with the rapid growth in impact investment, the regulators are having to play catch up — and what, if any, regulation there is varies depending on which jurisdiction a private equity manager is looking to serve. While Europe is somewhat further along in developing a regulatory framework for impact investing, in the US there is very little specific regulation; however, there has been an uptick in various groups urging regulators to take action on ESG reporting. For instance, in October 2018 there was a petition to the SEC for a rulemaking on ESG disclosure;72 and in August 2019, the Business Roundtable chaired by Jamie Dimon of JPMorgan put out a statement noting that business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities.73

Further developments in both of these areas will be top of mind for our clients in this space in the year ahead.

The impact investing industry is a relatively recent phenomenon, and we have yet to see how impact investments perform in a more volatile market. However, given the scale of global challenges these investments are seeking to address, it seems unlikely that the industry will be a short-lived phenomenon. Rather, what the market currently calls “impact investments” are likely to become an increasingly natural part of all investment analysis, with the entire investment community considering “impact” as a critical lens for all verticals across asset classes.

71. https://read.oecd-ilibrary.org/development/social-impact-investment-2019_9789264311299-en#page172. https://www.sec.gov/rules/petitions/2018/petn4-730.pdf73. https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans


The impact of the debt market Some market participants are now talking about when the current credit cycle may turn, and what the implications – and the opportunities – could be in any downturn for the financing of private equity-backed deals.

History might suggest a downturn is inevitable - but, so far, there hasn’t been much evidence of a downturn in the credit cycle, and history may not actually be the best barometer of what is going to happen here. What we are seeing, and all evidence suggests that, governments will continue printing money and central banks will focus on keeping interest rates low, which is something we haven’t historically seen before - perhaps what we really have is a ‘new normal’ in the global macroeconomic environment.

Uncertain timesThe debt market is a market like any other. There’s currently a huge amount of political and economic uncertainty - particularly in the UK, as a result of Brexit, and in the US with the upcoming election cycle. Wherever there is uncertainty, some people at least are going to defer and delay their bigger investment decisions. We’ve been seeing for years that private equity sponsors have a huge amount of dry powder, and it’s exactly the same in the debt market. If, and when, we get some clarity on the things that are causing uncertainty, all those funds have to be put to work – so far from being the end of the credit cycle, we could actually be feeling the opposite.

But there are also opportunities to exploit in all this uncertainty. For example, since the Brexit vote, there has been an undeniable weakening of the pound that makes UK assets cheaper and more attractive to foreign investors. If the currency stays depressed, there may be a boom coming in the UK market.

The trend in the debt markets is much the same: it’s affected by the global picture, but there’s a lot of funds available, and with global interest rates so low, people are desperate to put it to work. Credit funds are still raising more and more, and will continue to do so – and that money has to find a home somewhere – the investors providing the funds are expecting returns on their capital.

That continuous search for yield in a historically low interest rate environment drives and underpins a lot of the increased activity we are seeing in the debt markets.

The private equity outlook: what’s next?

Perspectives from Richard Kitchen, Partner and Amin Doulai, Senior Associate in the European Leveraged Finance Practice at Paul Hastings London


Are equity markets over-valued?For the last 18 months, at least, we’ve heard that public equities look overvalued, particularly in the US, and that would seem to be true against historical benchmarks. This is all fuelled by low interest rates, quantitative easing, and inflated asset prices. When the public equity markets are perceived to be over-priced, the money goes into the debt markets, which are in turn used to fuel private equity.

The interesting thing we’re seeing is a significant uptake in take-private transactions. Private equity sponsors are actually taking the opposite view of the public markets being overvalued – rather, they are seeing the value in them, and wanting to take them private. When private equity sponsors’ valuation of businesses crosses over with the public market, we get public takeovers and take-private transactions.

What’s the relationship with credit funds?The competition within credit funds to win mandates and be the debt provider is extremely strong, which creates a positive environment for private equity sponsors from a financing perspective. Well-advised sponsors are using that to their advantage, and are pushing on an open door, both in a pricing and a documentary sense. It’s often a race to the bottom between credit funds to provide the money, and we’re even seeing some mid-market deals done without financial maintenance covenants, which would have been unheard of a few years ago. It’s a very good environment for private equity sponsors who want to borrow money to leverage their investments and reduce their returns.

Perspectives from Ed Harris, Secondaries Partner and Duncan Woollard, Funds Partner at Paul Hastings London

GP-led transaction- the new(ish) alternative exitIn previous investment cycles, when GPs reviewed alternatives to a sale process they may have considered an IPO or a dividend recap - perhaps even running a sale and IPO dual track process. The new(ish) alternative exit that many GPs of PE funds and Infra funds are actively considering is a GP-led transaction. Whereas historically this may have been a transaction type more commonly associated in a GP restructuring (e.g. “zombie funds”), GP-led transactions are now being executed by leading GPs and for top performing assets. As such, we have seen a sharp increase in the number of GP led transactions, accounting for 33% of secondary market volume shares in 2018, up from 8% in 2013.74

If a fund has a well performing asset, with further organic growth or add-on opportunities (perhaps with execution risks for a traditional sale process such as anti-trust, regulatory or change of control risks) it may review the advantages and disadvantages of retaining the asset in a new fund with a mix of existing and new LPs, with the pricing determined through an auction process (and perhaps supported by a fairness opinion). Whilst GP-led processes bring their own risks, the volume and size of these transactions show that these risks are being regularly and successfully managed. Will the dual track process now be a sale and GP-led process?

74. Lazards Estimates: https://www.preqin.com/insights/special-reports-and-factsheets/preqin-secondary-market-update-h1-2019/26060


The future of the industry The uncertain macroeconomic environment has had a great impact on the industry in recent years, and with Brexit turmoil impacting Europe, especially the UK, this will continue throughout 2020; 2019’s general election has at least shone some light on what investors can expect for the first half of 2020, bringing much sought-after political certainty, and proving that the UK is still a viable place to make deals happen.

Whilst investment in fintech and technology may have slowed at the beginning of 2019, we see no sign of these sectors losing their appeal anytime soon, especially, given the ever-increasing value of personal data; however, investors must continue to be watchful of the regulatory scrutiny surrounding the use of personal data, and due diligence becoming a more present part of the deal making process. Similarly, the growing public awareness of ESG investments, and the rise of activist investors, will push more and more PE funds to consider their investment strategies – and focus on the ethical impact of their choices.

Whilst the US stronghold on the PE market isn’t set to loosen in the next few years, we expect to see more funds turn towards emerging economies, especially, given the increasing levels of dry powder and the need to deploy capital. More so than ever before, private equity needs to remain agile to ensure it succeeds in what is continuing to be a competitive and challenging marketplace.

2020 and beyond

Perspective from Anu Balasubramanian, Vice Chair, Global Private Equity Practice at Paul Hastings London


More so than ever before, private equity needs to remain agile to ensure it succeeds in what is continuing to be a competitive and challenging marketplace.



About Paul Hastings Private Equity PracticePaul Hastings has the necessary combination of transactional experience, specialist skills and geographical reach to deliver to our sponsor clients a top tier, fully integrated private equity practice. Our team delivers bespoke, tailored advice covering all aspects of private equity transactions from tax structuring, fund compliance, M&A, take-privates, financing structures and arrangements, management incentive plans, portfolio engagements and dispositions. We aim to be trusted advisors to our clients across all stages of their investment cycle. To deliver this level of service we offer:

Market Leading Expertise: We have a dedicated sponsor-side transactional private equity practice comprising lawyers across multiple specialist groups in Europe, the US and Asia. We regularly work together to support sponsor clients across the full spectrum of their legal requirements.

Fully Integrated Team: Our Global Private Equity team is fully integrated and is designed to provide seamless legal advice across jurisdictions, disciplines and sectors. This allows us to:

• offer a truly consistent, joined up service in a way that only constant collaboration can achieve;

• present commercially viable solutions to challenges faced by our clients – the chances are that we have seen and done it before;

• pass on the efficiencies and savings generated by our collective experience – no learning on the job, no re-inventing the wheel.

Commercially Tailored Service: We seek to understand the investment approach and strategic direction of our sponsor clients, thereby allowing us to offer clients bespoke, tailored advice on pan-European transactions.

Dedicated Deal Team: We aim to build meaningful relationships with our clients, which is dependent on fielding a common deal team on every transaction for that client, so that our lawyers can provide a service which is focused, partner-led, efficient and more responsive, more thoughtful and more dynamic than our competitors.

Contact us at [email protected].


Paul Hastings LLP | www.paulhastings.com

This report and its content is copyright of Paul Hastings (Europe) LLP. All rights reserved. Any redistribution or reproduction of part or all of the contents in any form is prohibited other than the following:

• you may print or download to a local hard disk extracts for your personal and non-commercial use only• you may copy the content to individual third parties for their personal use, but only if you acknowledge the website as the source of the material

You may not, except with our express written permission, distribute or commercially exploit the content. Nor may you transmit it or store it in any other website or other form of electronic retrieval system.

Paul HastingsTranslates Trends in Private Equity 2020

Documents

Transcript of Paul HastingsTranslates Trends in Private Equity 2020