CFO, HPE Growth Capital
Much like domestic deal flow in the United States, European cross-border M&A continues to see heightened activity despite myriad challenges, including high levels of competition, elevated pricing and new regulations.
In the eurozone, fundraising and investment in the middle market has nearly returned to the previous highs of 2006-07. Median valuations reached 9.5 times EBITDA in the third quarter of 2017, driven up by newly raised private equity funds, larger fund sizes, and competition from family offices and Asian investors.
Strong economic conditions have created lucrative investment opportunities, but they’re tempered by a competitive landscape and regulatory risks, topics I’ll be addressing in Middle Market Growth in the lead-up to ACG’s EuroGrowth conference on June 19-20 in Amsterdam.
The Protectionist Question
In part to remain competitive in a crowded marketplace, European private equity firms are increasingly looking for opportunities outside their home countries. In the Netherlands, for example, many Dutch private equity firms are opening offices in Germany. Amsterdam-based HPE Growth Capital, where I serve as CFO, in September 2017 opened an office in San Francisco, our first U.S. location.
Yet as deal-making becomes increasingly global, domestic governments are scrutinizing transactions more closely—a factor private equity investors should consider as they look to sell portfolio holdings. The U.S. Congress, for example, has proposed new legislation that would broaden the scope of the Committee on Foreign Investment in the United States, which reviews prospective foreign acquisitions from a national security perspective. (Lawmakers are tempering the provisions of the proposed bills in response to objections from the U.S. business community.) Germany, too, is carefully reviewing bids from foreign buyers, particularly Chinese investors.
Britain’s retreat from the European Union continues to present challenges, including the flight of qualified tech workers. Amid uncertainty about the state of their visas, talented students are leaving the U.K. and technology-focused conferences have seen a steep decline in attendance. The talent drain is among the concerns of private equity firms evaluating prospective investments in the U.K.
International deal-makers are closely watching innovative new technologies, such as cryptocurrencies and the underlying blockchain technology, as potential market opportunities—while treading carefully amid volatility and regulatory uncertainty.
Weighing on deal-makers’ minds are a number of new laws and regulations that could impact private equity deal flow, along with back-office operations and reporting.
A set of rules known as MiFID II—the second phase of the Markets in Financial Instruments Directive—went into effect in January. Designed to increase transparency and reduce conflicts of interest, the rules will be felt across the financial community through new data collection and reporting requirements, changes to how investors pay for research, and more.
Strong economic conditions have created lucrative investment opportunities, but they’re tempered by a competitive landscape and regulatory risks.
Other regulations that will impact the European middle-market financial services sector include the General Data Protection Regulation, or GDPR, which governs data privacy, with implications for the marketing and communications of private equity firms and their portfolio companies. Another EU initiative, the Alternative Investment Fund Managers Directive, or AIFMD, has created a licensing regime for investors with assets under management of EUR 500 million or more—an ever-growing segment, as fund sizes increase. The AIFMD requires significant reporting and dictates roles within a fund, including that of chief compliance officer and chief risk officer.
Beyond directives from the EU, U.S. regulation and legislation will also impact cross-border deal flow in 2018. The Foreign Account Tax Compliance Act requires non-U.S. private equity firms to capture data on any American limited partners within their fund on an ongoing basis to accurately report it to the Internal Revenue Service. The law, passed in 2010, isn’t new, but its impact has grown as private equity becomes more international.
Meanwhile, the U.S. tax overhaul passed in December will change how non-U.S. revenue is taxed; it may also make U.S.-based targets more attractive now that their corporate tax rate has been reduced to 21 percent.
EuroGrowth 2018 will address these topics and more. To see the full schedule and to register, visit eurogrowth.org.