Private Equity Outlook for 2019

Happy new year everyone and fingers crossed for a vintage 2019.

It's always hard to predict what any year will look like, but our current expectation is that globally we will continue to see a very active private equity market in 2019, driven by a continuing low interest rate environment and widespread availability of credit, and sponsors sitting on large piles of unspent capital. We also expect to see more secondary deals and a continued healthy environment for new funds being raised.

With Brexit (whatever that looks like) looming closer, it will be interesting to see how that impacts sponsors investing into the UK market and UK businesses investing into the EU – given all the uncertainty, will there be a hiatus on such investments until April or conversely a rush to do deals ahead of Brexit? The Brexit question, along with the impact of technology, is bound to feature as part of any sponsor investment committee process where there is a UK/EU investment being considered. As regards the impact of technology, is the target business future-proof and can it still offer a viable business model in 10 years’ time? Or can a target business be revolutionised by the sponsor deploying technology that delivers operational efficiencies, so as to increase investor returns?

In 2018, the deal statistics showed that there was a trend towards fewer cross-border deals and a larger share of domestic deals, which may have been caused by the increased protectionism at national levels that we are seeing in the market. It will be interesting to see if this trend becomes even more pronounced in 2019 as national and international regulators/trading blocs closely scrutinise acquisitions involving foreign investors.

Where foreign investment approvals are required, we expect to see increased deal complexity on cross border deals, and the need for sponsors to factor in additional costs and to assess how to structure deals (including deal financing) so to limit the cost of potential delays due to the time needed for the regulatory approval process to be completed.

In addition, we are seeing and will continue to see investors and sponsors rightly wanting to avoid exposure to enforcement action and reputational damage when they look to acquire new businesses. Economic and trade sanctions is one such key area, where risk arises both in relation to the past conduct of the target, but also where new sanctions regimes (especially US sanctions) become applicable in light of the identity of the investors/sponsor. The current mismatch between the US and the rest of the world on Iranian and Cuban sanctions (in particular) exacerbates this risk further; and care is needed to navigate these areas, since the UK, EU, Canada and other countries have adopted blocking legislation preventing compliance with/recognition of such US sanctions, some of which carry criminal penalties.

Similarly bribery and corruption risk is a key area for scrutiny, given the risks of criminal sanctions, substantial financial penalties, adverse publicity and taint of being associated with a corrupt business, and the possibility of being debarred from tendering for public contracts.

The use of warranty and indemnity insurance policies to backstop warranties and tax indemnities should continue unabated on deals, and help to get deals over the line where there would otherwise be minimal coverage being provided by the incumbent management team. Sponsors should ensure that the terms of such policies are properly negotiated to get the best possible coverage, despite deal timetable pressures.

As ever, tax and tax structuring will be an important consideration as part of any investment, with a backdrop of governments looking at new ways to raise money from businesses. In addition to reducing the tax deductibility of interest on leverage, we have seen governments impose taxes on tech companies, which will also potentially impact sponsors where they hold such tech investments within the new tax ambit.

In summary, 2019 will provide its fair share of challenges, which I would expect private equity sponsors to navigate these with their usual level of sophistication, and have another good year. Let's see how it plays out….

Share Back to main blog

Related blog posts

Loading data