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Private equity funders to focus on more resilient IT and Infrastructure sectors

Posted: 15th June 2020

Strong assets in right sectors will attract hungry bidders says Pinsent Masons report

Private equity funders are likely to focus their investments in infrastructure and technology companies in the short-term until the economic uncertainty caused by coronavirus dissipates, according to a new report.

Further opportunities for private equity investment could materialise later this year with strong assets in the right sectors attracting “the attention of hungry private equity and trade bidders”.

These findings are part of Pinsent Masons’ annual review into deal terms and trends in the Merger & Acquisitions (M&A) and private equity markets. The report provides insights gleaned from 190 UK-led transactions that Pinsent Masons, Howden M&A and Arrowpoint Advisory advised on in 2019, which together were worth a total of £12.5 billion.

The report states the advent of the Covid-19 virus and what looks like a potentially difficult post-Brexit trade negotiation with the EU, means buyers and sellers will continue to face significant uncertainty and deal volumes are likely to be suppressed.

Barry McCaig, Pinsent Masons’ Head of Corporate in Scotland, said: “We are in uncharted economic waters – since the outbreak of Covid-19 global financial markets have been extremely volatile and central banks and governments across the world have had to intervene to provide some liquidity and stability. At the same time, reports suggest the global private equity industry started the year with dry powder of in excess of $1.5 trillion.

“In the short term, private equity funders are focussing their attentions on managing their existing portfolio companies particularly as they navigate their way out of lockdown, but later this year we anticipate private equity will look to take advantage of pricing adjustments borne out of the current economic crisis by targeting both Public-to-Private transactions and private company acquisitions.

“Where activity is currently continuing, this is typically in what are perceived to be more robust/less impacted sectors such as IT and infrastructure where companies are more resilient to the impact of the Covid-19 crisis.”

The PE M&A Report 2020 found that primary buyouts in 2019 were at their highest level, as a proportion of deals surveyed, for five years – demonstrating that deal origination activities remain strong and a growing range of businesses are getting access to private equity firepower and expertise.

It also identified a decline in the popularity of ‘material adverse change’ (MAC) clauses in sale agreements. MAC clauses commonly provide leeway to buyers to reduce the amount they must pay to acquire target companies where events come to light that negatively impact on the target company’s financial position or prospects.

Mr McCaig added: “MAC clauses present significant transaction uncertainty and where there is any degree of competitive tension in a sale negotiation, the sellers have typically managed to resist them. As debt lenders re-assess their approach to equivalent clauses in their lending agreements in light of Covid-19, it will be interesting to see whether they also become prominent in sale transactions during the course of 2020.

“Our experiences in 2019 indicate that a strong asset in the right sector will attract the attention of hungry private equity and trade bidders. Private equity bidders in particular showed a strong appetite to compete, and pay full prices, for the right assets, demonstrating that they are willing to take a strategic and longer term view on asset selection.

“We anticipate that, once we are through the current deal-making hiatus, these trends will continue during 2020, though clearly we may also see a number of supressed valuations which could attract distressed and special situations funds. Later this year we anticipate private equity will look to take advantage of pricing adjustments borne out of the current economic crisis.”

Business Comment

Business Comment is the Edinburgh Chamber of Commerce’s bi-monthly magazine. It provides insight on Edinburgh’s vibrant business community, with features on the city’s key sectors, interviews with leading figures and news on new business developments in the capital.
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