66% of the audience members of DLA Piper’s webinar “Doing PE deals in Europe” on Monday 19 April, told us that the use of management financial advisers was common in PE deals in their home jurisdiction.
Leading partners from some of DLA Piper’s European offices Michael Heene (Antwerp), Matthieu Lampel (Paris), Gerald Schumann (Munich) and Jochem Beurskens (Amsterdam) formed the panel, which was moderated by European Head of Private Equity, Tim Wright. The session was opened by John Pryor (partner, London), drawing on some of the key statistics and conclusions from our latest Global M&A Intelligence Report and providing an introduction to the European Private Equity markets.
The panel were joined by an audience from over 10 jurisdictions across various industries, from banking and investment to infrastructure and IT.
Both the local market knowledge of the panel and questions from the audience raised some interesting aspects to consider when completing PE deals in Europe:
- Pricing Mechanisms – According to 55% of the audience, locked box is the most common form of pricing mechanism used in Europe. This formed a consensus with both our own data and our panel, going against the initial expectation at the start of last year that there would be a move to completion accounts due to the impact of the COVID-19 pandemic. The reason for this was attributed to the buoyancy of the market in the second half of last year, leading to a large number of auctions and more seller friendly terms that a locked box mechanism provides. While this view was shared by the panel there were variations identified across the different jurisdictions, such as the possibility of having a hybrid approach in France using principles from both locked box and completion accounts mechanisms.
- Conditionality around deals – Our statistics show that just over half the deals across Europe in the past year had a gap between signing and closing. The requirement for a gap is however not consistent between jurisdictions with some jurisdictions being much more likely to require a gap than others. Transactions which involve Germany as a jurisdiction often require a referral to the Federal Cartel Office in Germany, although changes to the notification thresholds in Germany have led to a reduction in the number of deals being referred. All panel members agreed that requirements to consider and to file under new or wider foreign investment rules were on the increase, which is likely to result in more transactions being conditional on such approval or clearance being obtained.
- W&I insurance – W&I is increasingly common across the jurisdictions represented by our panel and is seen more and more as a standard transactional tool. Some jurisdictions, such as the Netherlands, have been more open to accepting insured deals as a typical and acceptable structure however, than others.
- Investment structure – The concepts and structures around investment vary across jurisdictions due to local company and tax laws. All of the panellists agreed that it was important to understand and consider such laws and rules early on in any transaction, especially where the transaction is cross-border or involves key management members in different jurisdictions. Thin capitalisation rules may materially impact the ability for structures to be highly leveraged with third party and shareholder debt (as is common in the UK). This can lead jurisdictions such as France to require higher proportions of equity investment to be made through ordinary stock, with ratchets and “free shares” commonly used to reward managers. Meanwhile attractive tax rules for managers in Belgium have driven the use of grants of subscription rights as a means to incentivise managers.
- Leavers, sweet equity – While the factors that impact the value that managers get when leaving vary across jurisdictions, there was agreement across our panel that the reason for leaving is the main factor which influences the value received by a leaver. The jurisdictional background of the sponsor (and of their lawyers) often impact their views on “what is normal” when dealing with leavers and such influences may be at odds with local market practice. Our statistics look at the price for shares which different categories of leavers receive on death, dismissal for cause, dismissal without cause and on resignation (only 1% of management who resign get the full value vested).
- Leavers, attack on the strip – Practices vary across the markets, in the UK it used to be the case that the strip (or rollover/reinvestment equity) was inviolate but this view has come under pressure in particular in relation to so called “Very Bad Leavers”. In France, all shares are open for compulsory purchase in a leaver scenario and it just comes down to a matter or price.
- Management financial advisers – The audience were unanimous regarding the presence of management financial advisers in private equity deals in their home jurisdictions, with 66% claiming that management financial advisers are commonly used. While all panel members have seen the presence of management financial advisers in PE deals, they diverged from the audience slightly with the view that they are much more likely to be seen in larger deals and in particular where the deal is advised from London.
- Conclusions – what are the lessons?
PE sponsors investing in jurisdictions in which they have less experience need to be wary of the differences. In particular:
- Not knowing the local market (a failure to both appreciate local expectations and exploit them) can put the sponsor at a significant disadvantage;
- Legislative differences need to be considered;
- Not appreciating local jurisdiction structuring norms could result in an unworkable funding and incentive structure being proposed; and
- Not factoring in the expectations/use of the local adviser market can misalign the sponsor with the process requirements
A copy of both the webinar recording and our latest Global M&A Intelligence report are available upon request.*
*Please note that requests for this webinar recording from other law firms will not be processed.