Masters of adaptation? How private equity navigates through turbulent times

Wednesday 31 January 2024

Benjamin Leisinger
Homburger, Zurich

Cintia Martins Costa
Elvinger Hoss, Luxembourg

Cecil Quillen 
Linklaters, London

Report on joint session of the Securities Law Committee and the Corporate and M&A Law Committee at the IBA Annual Conference in Paris

Wednesday 1 November 2023

Session Chairs

Rodrigo Ferreira Figueiredo Mattos Filho, London; Webinar Officer, Corporate and M&A Law Committee
Isabella Ramsay Mannheimer Swartling, Stockholm; Vice Chair, Private Equity Subcommittee

Stéphane Barret Crédit Agricole CIB, Montrouge
Nanette Heide Duane Morris, New York; Chair, Corporate Governance and Activism Subcommittee
Christian Hoedl Uria Menendez, Madrid; Member, Corporate and M&A Law Committee Advisory Board
Ka-Mun Tao KKR, London

The session was organised by the Corporate and M&A Law Committee (lead) and the Securities Law Committee.

During this session, experienced legal and business experts in the industry discussed the latest trends in private equity (PE)-driven M&A. They considered the challenges that deal makers face in today’s unpredictable markets. These challenges include limited partners (LPs) expecting returns to be realised and new capital to be deployed while PE funds are struggling with limited and expensive sources of debt financing and gaps in expected valuations. The session discussed certain innovative deal and financing structures that have been invented to bridge these gaps and to ensure continued deal making.

Isabella Ramsay started with an overview on trends, or ‘mega trends’ in PE transactions. She discussed the impact of the current environment on the M&A process, regulatory considerations and alternative transaction structures to bridge the valuation gap.

Stéphane Barret provided an overview of recent market trends. He, amongst others, covered topics including the trend from facilities to funds, the impact of Covid-19, 2021 as one of the best PE years ever, the effect of the war in Ukraine (in terms of the hit on industry sectors, frozen debt market, etc), and the rise in interest rates and effects thereof. His expectation was that 2024 could be a strong year for PE, with a limited number of high-quality deals.

Christian Hoedl went on to mention that there is significant pressure on existing opportunities, but he is mildly confident that there will be new ones.

Ka-Mun Tao mentioned that infrastructure, etc, is now more resilient to the current market environment. There is private credit available as a good opportunity/strategy and an increase in activity on the public side (taking private transactions).

Barret agreed that it is often not worth being listed with less than US$10bn due to reduced share liquidity and other factors. He mentioned ‘continuation funds’ as one option to address current market issues.

Nanette Heide explained the potential conflict of interest with respect to ‘continuation funds’. These aspects include issues related to the sale of assets from one fund to another fund with the same general partner (GP), including the take-out of the carry, reset of targets, etc. The recommendations included a full process and due diligence on the assets.

The panel continued to discuss current M&A processes. They covered everything from auction processes to parallel bilateral processes, which are quicker and require less coordination. They also delved into important topics in the due diligence process, such as environmental, social and governance (ESG) factors and cybersecurity, in addition to the standard antitrust and anti-corruption issues.

Regarding regulatory aspects, the panel discussed the topics of invalid non-compete clauses, foreign direct investment (FDI) restrictions and increased uncertainty between signing and closing due to indirect restrictions, including by the Biden administration in the United States.

As alternative transaction structures to bridge the gap, the panel discussed earn-outs, vendor loans, high coupons on debt, debt funds in the market (including for preferred shares that count as debt for some funds) and perpetual/hybrid instruments that count as equity for (certain) rating purposes.