Private Equity
March 2021

Private equity investment continues at a blistering pace, fuelled by the availability of significant equity and debt capital to deploy and optimism about the recovery. The number of buyout deals globally in the first two months of the year increased to 331, ahead of the same period of 2020, according to Dealogic data. And while the overall value of those deals fell to $82.5 billion from $108.5 billion{{1}}{{{Private equity closes more but smaller deals so far this year</br>Source: Private Equity News}}} – in large part due to the timing of mega-deals which boosted early 2020 data, such as the €17 billion investment in Thyssenkrupp elevators division in February last year – large buyouts played an important part of the scene.

European investment has been particularly strong with multi-billion euro deals for sandal-maker Birkenstock, aviation services group Signature Aviation PLC, and more recently power generation equipment rental firm Aggreko. VC investment has also started the year strongly, with $8 billion invested in UK start-ups by mid-March – the best-ever start to the year and a further sign that the UK VC market remains robust and has the capacity to outperform, despite challenges such as Brexit{{2}}{{{UK start-ups attract record $8bn in dash for growth</br>Source: Financial Times}}}.

More Competition, More Preparation Needed

Buyer demand continues to fuel intense competition in busy auctions. As a result, terms are increasingly favourable to sellers. There are more instances of “seller drafts” in an auction process being accepted by buyers with little or even no amendment, less recourse to sellers and increased reliance on warranty and indemnity insurance. There are also fewer examples of earn-outs or similar structures designed to mitigate against downside risk for buyers.

While the environment is certainly heated, a shift in tactics still provides plenty of scope for buyers to get comfortable with transactions. Engaging early in processes is key for a private equity buyer that wants to understand all the risks, but also remain competitive. Most risks, including potential anti-trust hurdles, can be navigated when buyers have time to analyse and evaluate. With sufficient time, buyers can also secure warranty and indemnity insurance on favourable terms – engaging with brokers early and receiving indications of willingness to provide cover (“NBIs”) carries no cost, and can help to lay the groundwork for swift policy inception. From a lawyer’s perspective on the buy-side, a pragmatic approach to risk analysis and quantification is needed, as “off-the-shelf” mark-ups of transaction documents risk early derailment of the process for the buyer.

Sellers’ Market Looks Set to Stay, For Now

There are few immediate concerns that the window for exits will close soon. Interest rates are unlikely to rise in the near term, dry powder levels remain high, and the vaccine rollout is increasing optimism about the prospects for European and global economies. In the UK, some divestments earlier in the year were expedited by concerns about increasing taxes, in particular the predicted roll-back of capital gains tax (CGT) relief, to help plug the deficit caused by the pandemic{{3}}{{{Private Equity Firms Push Deals Through to Beat U.K. Taxman</br>Source: Bloomberg News}}}.

However, while the UK’s Office of Tax Simplification had been asked to review the CGT regime, no increase was flagged in the Chancellor’s Budget in early March.

Despite this, with European governments still debating how to fix punctured economies, and reminders that the possibility of COVID resurgence (possibly in a more vaccine-resistant form) remains a risk, some sellers may be incentivised to get companies to market more quickly than planned, in case the pendulum starts to swing.

Fintech in Focus

With venture capital enjoying a strong period for investment – as well as exits – fintech has emerged as a core sector. The UK unveiled the findings of the government commissioned Kalifa Review into fintech at the end of February, as part of its ambition to increase competitiveness in the space. UK fintech investment was $4.1 billion in 2020, according to the review, more than the next five European countries combined.

Nevertheless, activity elsewhere has stolen the headlines. Swedish fintech firm Klarna was valued at $31 billion in its latest funding round at the start of March, tripling its valuation since September. However, U.S.-based Stripe’s recent valuation at $95 billion shows that Silicon Valley retains pre-eminence, even for companies founded by European entrepreneurs – in Stripe’s case two brothers from Ireland.

Infrastructure Horizon Continues to Broaden

Infrastructure investment continues to evolve from traditional large income-generating assets, such as toll roads and energy networks, to encompass a broader group of assets that can also generate higher returns through growth. Blackstone, GIP and Cascade’s £3.5 billion take-private of Signature Aviation PLC is an example of an asset that hits multiple investment themes, including the recovery in travel post-COVID, the demand for private air travel as a means to stay mobile more safely during pandemic conditions, and the opportunities to make more efficient use of physical infrastructure at airports (such as terminals, aircraft hangars and ground handling equipment) by providing additional value-add services.

Investment in infrastructure related to agricultural production is another interesting, and growing, theme. Technology is playing an important role here, in the drive to increase efficiency and localise food production. Vertical farming, which allows certain crops to be produced in urban environments such as warehouses, office buildings or even underground – is a one sector to watch.

The combination of infrastructure with the green agenda is also driving new fund creation and making those funds more marketable and attractive to investors. Macquarie raised €1.6 billion for its first dedicated renewables fund in February, well ahead of its €1bn target{{4}}{{{Macquarie closes first dedicated renewables fund on €1.6bn</br>Source: Infrastructure Investor}}}. Smaller funds are also attracting strong backing with Spanish group Arcano Capital citing favourable market timing as it beat targets to raise €292 million late last year for its inaugural sustainable fund of funds investing in Europe and North America{{5}}{{{Arcano's inaugural Sustainable Infrastructure Fund closes at almost EUR330m</br>Source: Institutional Asset Manager}}}.

Michael J. Preston

T: +44 20 7614 2255

Gabriele Antonazzo

T: +44 20 7614 2353

Michael James

T: +44 20 7614 2219