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Commercial awareness series: private equity trends

Commercial awareness series: private equity trends

Riki Story

09/08/2021

Private equity (PE) has been under the limelight during the pandemic and here are some emerging trends that all aspiring lawyers should be aware of. 

UK becoming the new PE hotspot 

According to Refinitiv, PE firms made more deals in quantity and volume in the first half of 2021 than in the same period of any year. While the number of EU buyouts has increased by 14%, UK buyouts are up almost 60%. 

There are several factors that contribute to this proliferation. First, it is driven by low interest rates. Borrowing is central to PE, and with lower interest rates and lower borrowing costs, the buyout industries are pressured to capitalise on such opportunities. This is extremely beneficial as low interest rates offer PE firms access to easy funds and transactions, which reduces the periodic outflow, increases the internal rate of return (IRR) and increases the return on investment (ROI). Accordingly, PE firms have taken full advantage, as it has led to institutional investors allocating money to buyout firms, such as KKR, Blackstone and Carlyle which all offer generous ROI. 

Second, on the topic of the UK being a cheap place to buy and reshape companies compared to other foreign markets, the relative cheapness of equities in the UK contributed to the increased demands. As £29 billion in UK equity income funds have been pulled from investors following the Brexit referendum in 2016, the cheap UK stock market is attractive to large US buyout firms. 

Lastly, the UK is fundamentally a buyout friendly country, which has also contributed to the increase. Compared to countries like France or Germany with strict labour laws, the UK holds a liberal position making it relatively easier to buy and reshape companies. The boosted business confidence via rapid vaccine rollouts has also worked in tandem with the dramatic shift in PE.  

Change in SPAC momentum 

Special Purpose Acquisition Companies (SPAC) are formed by sponsors and investors to raise money to buy other companies and are formed to raise money through an initial public offering to acquire and buy other companies. With the SPAC deals offering top tier fees for services from law firms and banks, SPACs became the driving force in capital markets. 

The demand for SPAC deals stemmed from business owners being supported by experienced partners to accelerate their process of going public. Moreover, for companies that are pre-commercialised or are in a pre-revenue position, going public through SPACs allows them to make bold sales forecasts, in tandem with increased projections to entice investors. 

Accordingly, the SPAC boom did not just attract new investors and sponsors. SPACs also attracted the attention of the regulators and watchdogs. The aforementioned fast pace of SPAC creation means that they are subject to less due diligence for the sponsors – considering that they are driven to strike a deal prior to the two-year deadline. 

SPACs are now facing more shareholder lawsuits on the basis of directors breaching their fiduciary duty, typically because of inadequate disclosures in the transaction. Further, fraud claims have also risen on the grounds that sponsors are acting as shareholders themselves, thus having the incentive to finish an acquisition prior to the capital being returned and SPAC expiration.

Thus, with the corresponding increase in regulation and scrutiny with the SPAC boom, the SPAC market is slowing down – two-thirds of the blank cheque companies that were attracting investors when SPACs were traded at a premium are now trading under $10.