Private equity and venture capital update

Welcome to the first edition of Osborne Clarke’s private equity and venture capital update.

We hope that you find it interesting. If you would like to discuss any of the content, or have a subject that you would like us to cover in the next edition, please let one of us know. Our contact details are set out below.

Market trends

Exits: the IPO route

After a record beating 2014, HSS Hire and thetrainline.com (both backed by Exponent) were looking like the first private equity UK IPO exits of 2015. But thetrainline.com’s announcement that it was preparing for an IPO put it in play and KKR was able to swoop in for one of the first secondaries of the year – reportedly securing thetrainline.com for £50m-£75m under the expected IPO valuation of £500m. Meanwhile, Blackstone is reported to be pursuing a twin-track exit strategy for Centre Parcs, and Advent-backed DFS has announced its intention to float.

We predict that these transactions will set the tone for 2015, with financial sponsors hedging their bets between a potentially more lucrative IPO and a quicker, cleaner, exit via a trade sale or secondary buyout. However, sponsors will need to be aware of the possible sensitivities of institutional investors if they intend to pursue a twin-track strategy: Exponent reportedly felt the heat after pulling thetrainline.com’s float, which may partly explain why the HSS float has got off to an underwhelming start.

We look at the main differences between an IPO exit and a trade sale or secondary buyout for a private equity investor here.

Smart cities: opportunities for financial sponsors

Smart cities is a solution to the challenge posed by the urbanisation of the global population. Our report on smart cities, available to download now, focuses on four issues: smart grids, innovative transport solutions, energy storage and building efficiency.

Our research shows that access to finance is seen as the biggest obstacle to the development of smart cities in Europe. Coincidentally, this is where the respondents to our survey saw opportunities for private equity and venture capital: they predicted that venture capital and private equity funds will be the most active investors in smart technology companies over the next three years.

Find out more about smart city innovations and trends at our smart cities microsite.

Crowdfunding: the regulator is watching

Crowdfunding is gaining traction as an alternative source of finance for UK businesses. In 2014, for the first time, business loans (£749 million) accounted for a greater proportion of the market than consumer loans (£547 million). The amount raised on investment-based (i.e. equity) platforms grew by 201% to reach £84 million.

In the UK, loan-based and investment-based crowdfunding is regulated by the Financial Conduct Authority (FCA). Last week, the FCA published a report on crowdfunding, which has some interesting things to say about how it is supervising this maturing market and the use of social media and websites to make crowdfunding promotions.

Click here for our note on the FCA’s report.

Legal and regulatory news

Ownership and control of portfolio companies: new disclosure rules

Who owns or controls your portfolio companies? This information will be publicly disclosed in a new “people with significant control register” (PSC register) which, under current Government plans, will have to be kept by all UK private companies from the start of 2016.

The register will contain information on individuals who ultimately own or control more than 25% of a company’s shares or voting rights, or who otherwise exercise control over the company and its management. The register will be publicly searchable through Companies House.

Some good news for private equity: individuals will not be registrable only because they are, or have an interest in, a limited partner in an English limited partnership which has invested in a UK private company. This should mean that passive investors in private equity funds stay off the register of their portfolio companies. However, the detail around the legislation is still not settled, and a thorough analysis of the ownership structure around each investment is still likely to be needed when the plans become law (which the Government expects to happen before the general election).

Follow developments on the PSC register at our dedicated microsite.

Investors and regulators call for more transparency

In the US, the SEC’s announcement last year that it was investigating private equity firms – because of concerns over improper fees and expenses allegedly being charged to investors – continues to have an impact, with the probe reportedly extending to bribery allegations in respect of payments to secure investments from sovereign wealth funds and inadequate disclosure of performance figures. In response, private equity houses have been disclosing and/or quietly reducing opaque fee arrangements and, in some cases, reportedly refunding investors.

Relations with investors and regulators seem more harmonious on this side of the Atlantic, although UK investors have recently called for greater transparency of net returns.

Buy backs from leavers: new rules

Buy backs from leavers at low values (typically from bad leavers) should be easier following changes to the buy back rules which will come into effect on 6 April 2015. The changes clarify existing rules and will allow for a simpler buy back process, even where the portfolio company does not have distributable profits. The new rules are subject to an annual limit of the lower of (i) £15,000 and (ii) 5% of the company’s paid up nominal share capital as at the beginning of the relevant financial year. The buy back can be priced above or below the nominal value of the shares being bought back.

Click here for our note on these changes.

Osborne
Clarke news

In the last quarter, we
advised on 14 PE/VC deals with an aggregate deal value in excess of £350
million, including:

• Investis on its investment by ECI Partners 
• RJD Partners on its buyout of Burgess Marine 
• Alcuin Capital Partners on the disposal of Osprey Publishing Limited 
• Highland on its $20m investment in Intersec 
• Avvio on its £3.5m growth capital investment from Calculus 
• Accel Partners on its new financing for medical tourism start-up Medigo 
• On a £50m Life Science venture capital funding 
• Fever Tree on its IPO 

Osborne Clarke’s London office has also expanded its private equity practice with new Partner Russell Van Praagh joining from McDermott Will & Emery UK LLP, and new Associate Directors Wyn Jones and Mark Saunders. The team now has 10 specialist PE lawyers, making it one of the largest London-based teams in the mid-market. 

Dates for the diary

18 March 2015: UK Budget
1 April 2015: Main rate of UK corporation tax reduced to 20%
7 May 2015: UK general election