In the field of Private Equity we identified the following five trends that will shape your agenda in the coming year. The five main developments we have identified are:
- M&A: hot, hotter, hottest
- W&I insurance on the rise
- Lev Fin: a New Normal?
- WHOA: restructuring made easy
1. M&A: Hot, hotter, hottest
Despite Covid-19, M&A deals were on the up in 2020. So far nothing less for 2021, in fact, the increased activity we have seen so far suggests that the M&A market will continue to be extremely competitive. This should also not be a surprise given the reported amounts of capital that still need to be put to work. Some of that capital will be allocated to special purpose acquisition companies (SPACs) as their entering the market will continue well into this year (see below). The SPACs add to the already crowded market space. In this space, we’ve seen a growing number of new investors too. Finally, opportunities for distressed M&A should be on the rise once the real effects of the Covid-19 pandemic begin to show. We would expect these to be in sectors like transport, energy, construction, leisure and hospitality.
The reverse merger using a SPAC came into its own in 2020. This alternative to the traditional M&A exit started in the United States and is now growing in popularity in Europe, as evidenced by the number of reverse listings on Euronext Amsterdam. It can be used for a variety of transactions – such as IPOs and corporate spin-offs – by private equity firms, venture capitalists and other founders. Based on what we see on the market and the deals we are currently working on, we expect SPAC activity to continue in 2021, barring unforeseen events affecting the economy and global capital markets. The ambition of realizing a SPAC listing on Euronext Amsterdam is a process that requires an integrated approach in the capital markets, tax, corporate and regulatory area, which makes our firm uniquely suited for the task.
3. W&I insurance on the rise
More competitiveness in the M&A market, an increasing number and amount of W&I related claims and less appetite to take on risk has reportedly seen premiums and cover percentages rise. In addition, there are increasingly more types of ancillary insurance products available to allow bidders to be even more competitive in an auction. We’d also expect W&I insurances to continue expansion into the distressed M&A space. This will come with certain challenges with limited possibilities for due diligence, increased complexity and generally more uncertainties. There is an interesting dynamic at play here. The nature of distressed M&A deals would see W&I insurance providers be more prudent and less likely to provide cover. On the other hand, on the buy-side, there should be real demand for adequate cover to be put in place as the insurance is likely to be the only real means of recourse against the seller.
4. Lev Fin: A New Normal?
Optimism about vaccinations and warmer weather makes us think about life and business going ‘back to normal’ (although the pace with which this goes is probably slower than we’d expected). ‘Back to normal’ will go hand in hand with a run-off of support programs put in place by the government. Bankruptcies are at an all-time low and may have been prevented by these programs, but regular payments (and catching up with all what has been deferred so far) will have to resume at some point. This adds to the costs of re-starting businesses and can be significant if you also take into account other or new costs to adapt to a ‘New Normal’. Continued WFH, different office or workplace set-ups, increased safety and health measures etc. are a few things even businesses largely unaffected by (or maybe thriving as a result of) Covid-19 will have to factor in. If your capital structure is fit to deal with this, you’ll continue business as usual, but others may not, and also have to deal with scheduled repayments and upcoming maturity dates. As with M&A, the leveraged finance market will continue to be competitive. Leverage has been at a peak in Private Equity backed deals. Also, we’ve seen flexibility afforded by finance documents still steadily increasing and as long as any of the newly added features will not have to be used or put through a test in a distressed environment, flexibility will align more and more to what is custom in the US market. For those whose financial metrics support a refinancing, 2021 should be a good year to do so before any market changes lead to greater pushback on terms and pricing from lenders (which in our view would be inevitable at some point).
5. WHOA: Restructuring made easy
The new Wet Homologatie Onderhands Akkoord (WHOA) provides an opportunity to restructure both your balance sheet and long term contracts in a way that was not available prior to 2021 and which follows established restructuring practices in both the US and the UK. If a restructuring is required in the wake of the pandemic, this option should be explored. It allows for restructuring plans to be pushed through, even if not all creditors agree to such a plan. The court can already confirm a restructuring plan if creditors holding 2/3 of the debt support such a plan. At the same time, on the operational side, long term contracts can be addressed as the WHOA gives you the opportunity to request approval for changes to those contracts. If counterparties would not be willing to cooperate, those long term contracts can be prematurely terminated and any resulting claims from those counterparties can be part of the wider restructuring plan. We expect this change in negotiation position to assist you implementing changes that support the business going forward. As always, restructurings require a thorough, timely and pro-active approach to ensure staying in full control of this process.