Covid-19: GPs face heightened EU scrutiny on healthcare assets

Foreign PE firms looking to acquire healthcare-related companies in Europe can expect another three months of FDI review added to the deal process.

Foreign private equity firms eyeing European healthcare assets can expect another layer of regulatory scrutiny as the coronavirus makes painfully clear the connection between public health and national security.

In the EU Commission’s guidance to member states on 25 March concerning foreign direct investment, it called on governments to either adopt or vigorously enforce investment screening mechanisms to protect sensitive assets – particularly healthcare companies and research establishments – during the crisis. It also urged member states to be vigilant to avoid a situation where the health crisis does results in a sell-off of Europe’s business and industrial actors, including SMEs.

“It’s a continued expansion of what national security means in the current context,” Timothy McIver, a London-based partner at law firm Debevoise & Plimpton, told Private Equity International. “Six months ago, healthcare would not have been top of mind as a national security issue. With coronavirus, suddenly healthcare is the national security issue.”

For foreign PE firms looking to acquire healthcare companies in Europe, this could mean another three months of foreign investment review added to the transaction process.

“Five years ago, the main gating item to closing a transaction would likely be the merger control approval, which might average two to three months maximum for a PE sponsor in a European transaction without any issues,” McIver said. Foreign financial sponsors looking at healthcare assets in the UK, Germany, France or other countries should expect at least a six-month review, he added.

The issue of foreign acquisitions of healthcare companies has been thrust into the spotlight in certain countries. German ministers in March condemned the US takeover of CureVac, a biopharmaceutical company headquartered in Tübingen in the south-west of the country. Local media reported the US government was offering the company €1 billion for exclusive rights to the company’s coronavirus vaccine, which it was developing together with a publicly funded German institute. CureVac denied rumours of an acquisition.

In fact, capital raising by life sciences and healthcare-focused firms globally more than doubled in the past five years, to $17.6 billion last year from $8.3 billion in 2015, according to PEI data. GPs that have closed Europe-focused healthcare funds this year include Dutch firm Life Sciences Partners, which gathered $600 million in March for its latest vehicle, and Gilde Healthcare Partners, which raised $450 million for its fifth venture and growth capital fund.

The EU Commission’s latest policy paper underscores the trend of increasing scrutiny on foreign investments in Europe. According to McIver, in the past, the idea of supporting “national champions” has always been discouraged by the Commission. That attitude has been changing over the past three to four years as political pressure has grown to protect certain industries.

“You see that in the way the categories of what classes as critical infrastructure has been expanded by the German and French regulatory authorities to artificial intelligence and certain industries like telecoms, water, energy and even food supply. With the health crisis now, that also includes healthcare.”

To date, 14 of the 28 member states have adopted mechanisms to scrutinise foreign direct investment. Spain, one of the countries worst hit by the pandemic, suspended last month its regime on the deregulation of foreign investment to prevent companies from non-EU countries from taking control of strategic Spanish companies. In France, foreign investment scrutiny will be extended to include food security, print and online publishing, energy storage and quantum technology, beginning this month.

The result of such moves would mean more commitments from PE firms. In fact, McIver noted PE deals are not typically blocked or prohibited.

“You are not going to see a US PE investor not being allowed to acquire companies. But what you will see more now are governments increasingly getting PE firms’ commitments under conditions for acquisition – whether that’s commitment to maintaining certain business lines or maintaining manufacturing plants. It’s about doing something at a national level to get approval for the deal.”

As Ursula von der Leyen, the president of the European Commission, said in a statement accompanying the policy paper, “the EU is and will remain an open market for foreign direct investment. But this openness is not unconditional”.