Private equity-backed cross-border deals are expected to gather pace this year as economies rebound from the pandemic, with Europe seen as the most attractive region among Western geographies, a study has found.
Europe was the most-favoured market among GPs for cross-border deals (92 percent), followed by the UK (85 percent) and North America (76 percent), according to a report from Inflexion-backed corporate services provider Auxadi.
“Europe is the largest single market in the world with a proven track record in private equity investment,” Victor Salamanca, chief executive of Auxadi, told Private Equity International. “It’s a leading region when it comes to innovation across multiple sectors and the continent’s strong economy provides attractive avenues for private equity investors.”
In addition to fewer challenges when it comes to language, education, cultural differences and time zones, easier access and lower interest rates also mean higher returns can be seized for European investments, he added.
Last year saw cross-border M&A activity, which includes PE-backed deals, drop by half in terms of value and one-fifth by volume compared with pre-pandemic levels. This year, Salamanca said Auxadi has seen M&A volumes bounce back, fuelled by cross-border activity, which accounted for 41 percent of all deals in the first quarter, up from the 37 percent last year.
More than half of respondents in Auxadi’s report, Recovery to Rediscovery: Capitalising on a Changed Private Equity Landscape, identified the economic rebound following the end of the pandemic as the “major driver” for a recovery in cross-border dealflow.
“PE houses are betting outside of their home markets because of the number of opportunities and pent-up demand in other regions globally,” Salamanca said. “While there may be complexities around tax regimes, regulation as well as political instability in other region, it’s a matter of risk and opportunity on the return on investment.”
Planning for recovery
More than one-third of GPs in the survey (37 percent) expect full normalisation of cross-border dealmaking before the end of this year; 40 percent expect this to happen in 2022, and the remaining 16 percent in 2023, the report found.
UK-based GPs are most confident of a fast recovery – 44 percent of respondents expect normalisation will occur by the end of 2021, compared with European GPs (34 percent) and North American GPs (33 percent).
Overall, Europeans are most pessimistic about a fast recovery – 23 percent said it won’t arrive before 2023 and a further 6 percent expect it to be beyond that. Salamanca noted that the pessimism is a result of the slower vaccine rollout in continental Europe than in the UK and US.
Meanwhile, North American GPs are likely to be the most active with cross-border deals over the course of a fund’s life, with more than half (57 percent) of the expected deals done overseas. That compares with 51 percent of deals for UK GPs and 48 percent for Europe GPs.
Among GPs that have been active in transatlantic deals this year are European healthcare specialists GHO Capital Partners and ArchiMed. Recent investments from GHO, which has gathered more than €2 billion for its third vehicle, include Velocity Clinical Research, a company managing clinical trial sites across North America, and X-Chem, a US-based drug discovery service provider. ArchiMed set up its New York outpost last September and has earmarked a portion of its latest vehicle for mid-cap companies in North America. On Saturday, US manager Fortress Investment Group, the Canada Pension Plan Investment Board and Koch Real Estate Investments agreed a £6.3 billion ($8.7 billion; €7.4 billion) deal for British supermarket group Morrisons.
The deal environment is also opening up renewed interest in cross-border transactions into countries where there are “riskier but potentially higher returns to be seized”, including Latin America, the report noted. More than 90 percent of North America-based managers plan to invest in Latin America between now and 2025. Salamanca said that this is interest is driven by proximity to the region, cultural links, as well as the growing talent coming out of Latin America’s fintech and financial services sectors.
Among sectors, there is strong interest in energy, industrials and information technology. Ninety-three percent of respondent said they plan to invest in energy, especially in renewable energy companies in the coming five years.
GPs, however, still face obstacles for deals with a cross-border element. These include different compliance regimes in various jurisdictions – cited as the biggest hurdle for investors – followed by cultural differences and a potential lack of transparency when conducting due diligence.
Other challenges include valuation misalignment between buyer and seller as well as jurisdictional difference in law and regulatory framework. Overall, these challenges have been made more difficult by the lack of face-to-face meetings and due diligence, the report noted.