Private equity and venture capital update - July 2016

Welcome to the latest 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 a future edition, please let one of us know. Our contact details are set out below.

Best regards,

Mark Spinner, Alisdair Livingstone, Rob Wood and Dipika Keen

Brexit impact

As the dust settles and the political machinations play out, we have looked at what Brexit is likely to mean for a number of different sectors and areas of law.

For M&A activity, the impact of Brexit is going to be felt most immediately through its impact on general economic performance and outlook, rather than changes to the legal environment. M&A markets are, of course, highly sensitive to uncertainty and we are anticipating a dip in the short term in M&A activity in some sectors, although other sectors have not seen any immediate drop-off in activity levels. In particular our PE and VC financial sponsor and management advisory practices continue to remain very busy with at least seven completions and twelve new instructions since the leave vote was announced.

In the short term, the weakening of sterling (principally against the dollar) means that UK targets may look to be increasingly attractive to overseas buyers from a headline price perspective, but future currency headwinds (particularly for domestically-focused targets where the majority of earnings are in a weaker sterling) and medium-term regulatory uncertainty may offset some of this headline advantage. Targets with a wider geographical spread with non-sterling denominated revenue streams (especially those with dollar income) may well find themselves attracting a premium.

In addition to overseas buyers, we anticipate that private equity funds – many of which will have investment deadlines on the horizon – will remain on the look out for attractive targets. Uncertainty is also never good for the debt markets but at present the mainstream clearing banks continue to lend and do not appear to have been particularly knocked off course by Brexit, although we are receiving some indications that significantly leveraged deals (with a debt load of around £50m or higher) may be harder to execute in the short term. Equally, we expect that early stage (Series A/seed capital) investment activity will remain healthy, given the equivalent investment mandate driver.

In the medium term, regulatory uncertainty as the terms of Brexit are negotiated and implemented will take over as the key unknown affecting M&A activity in the sector for those targets with business models with significant exposure to the EU, and is likely to depress valuations until there is a clearer direction of travel.

For businesses looking to access the capital markets, we think that stock market volatility will mean that waters will remain choppy for IPOs for the foreseeable future, and so this will become a less attractive means of achieving an exit.

Whilst much remains up in the air, the early appointment of a new Prime Minister and her early engagement with the EU regarding the terms of a Brexit may help settle jitters and give a sense of the direction of travel as regards trade and financial regulation.

Click here for more information on other sectors and areas of law as well as practical steps which businesses can take now to prepare.

Smart cities

The built environment – the manmade setting for human activity, including residential, commercial and industrial buildings as well as parks and public spaces and supporting infrastructure such as energy networks and transport – is getting smarter. Perhaps you already have portfolio investments in this space or are looking for future opportunities.

If so, please have a look at our new report on Smart cities in Europe: The future of the built environment. The report addresses two core questions: How can the built environment become smarter? What are the challenges and obstacles that might prevent this from happening? To obtain answers we spoke to some of the leading individuals in the smart built environment movement, from innovative technology start-ups and specialist consultancies to global multinational corporates, large real estate investors and government agencies.

The report explores how smart built environments leverage data, new technology and innovative and collaborative thinking to deliver services that benefit citizens. Our interviews highlighted a huge number of obstacles to the built environment becoming smarter. Yet, despite the challenges, our case studies demonstrate that built environments are becoming smarter and an essential shift in mind-set to a smart way of thinking is under way.

Read the full report here.

PSC Register regime now live

The people with significant control (PSC) register regime is now live. UK companies and limited liability partnerships (LLPs) have had to start keeping their register from 6 April 2016. And PSC register information had to start being filed at UK Companies House with effect from 30 June 2016 (as part of the company/LLP’s first confirmation statement, which has replaced the annual return) where the information will be freely publicly available via Companies House’s online search portal.

As we have covered in previous updates, the PSC register is a new compulsory corporate register which names, and contains information on, individuals or relevant legal entities who directly or indirectly control UK companies and LLPs, as well as those who have the right to exercise significant influence or control over a trust or firm (such as a limited partnership fund) where that trust or firm has significant control over a company/LLP.

We have been helping our clients to analyse their corporate structures, create PSC registers for any UK companies and LLPs within those structures, report their PSC information to Companies House and ensure that their interests are correctly recorded in the registers of their portfolio investments.

And following the initial roll out phase, the updating of PSC information will have to become embedded in future investment processes (for example, on a new acquisition or investment round or a buy back from a leaver). You should bear the PSC register in mind when making new investments and disposing of portfolio companies since each PSC has an obligation to notify the Company of its status. In this regard we are also now starting to see PSC notices being included as completion deliverables in both Investment Agreements and SPAs.

Please contact any of us if you would like help with your PSC register compliance. We also have a set of resources dedicated to the PSC register here.

Realising value through litigation

Litigation funding – the funding of claims by third party investors – has hit the headlines recently with the legal costs of bringing the world’s largest ever litigation – a claim just commenced against MasterCard for $19 billion relating to credit card charges – being met by litigation funding. And many more modestly-sized claims are being funded this way too. Litigation funding is now potentially available for arbitration as well as litigation and for claims abroad as well as in the UK.

If you or your portfolio companies have value locked up in potential claims, it would be sensible to consider litigation funding. Litigation funding is non-recourse and can help you to realise value from claims without costs outlay or risk to your company. Possibly, you have claims that are not being brought out of concern about the legal costs involved? Here is a way to realise some value from such claims.

At Osborne Clarke we have conducted many cases for clients using litigation funding, leading to our clients recovering damages with no outlay of legal costs. We know the market for litigation funding; we know which funders are best to work with and which are best for particular types of claims. We can help you to investigate whether litigation funding is of interest and, if it is, guide you through the process of selecting a funder and obtaining funding.

Read more >

Osborne Clarke news

In the first half of 2016, we advised on over 40 PE and VC deals, including advising:

• Management on the $1 billion (£760 million) sale by Terra Firma of the Odeon & UCI Cinemas Group to AMC Theatres
• Highland Europe on its £30m growth capital round in Condeco Group
• Finanzcheck on its €33m series C round from HarbourVest
• LDC on the management buyout of ADEY for an undisclosed sum and on the £140m AIM IPO of Joules Group plc
• LendInvest on its £17m growth capital round, led by Atomico Ventures
• RJD Partners on three transactions: the secondary buyout of Morecambe Leisure 1 Limited funded by Palatine Private Equity, the management buyout of Babington Business Limited, the sale of portfolio company ISG Technology
• NewVoiceMedia on a $30m series F round, led by Salesforce Ventures, BGF Ventures and existing shareholders Technology Crossover Ventures, Bessemer Venture Partner, Highland Europe and Eden Ventures
• Management on the sale of Ascendos Rail Services Limited to Beacon Rail Services Limited backed by Pamplona Capital Partners IV, LP, the US based investor with €3.0 billion of committed capital under management
• On the management buyout of Indigo Telecom by a Maven and YFM backed newco