GPs expect cross-border deal flow to normalise by the end of 2022

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Over three-quarters (77 per cent) of private equity fund managers expect the volume of cross-border deal flow to make a full return to pre-pandemic levels by the end of 2022, aided by an end to travel restrictions and improved digitalisation, according to new research.

Of these, over a third (37 per cent) of respondents expect deal flow to fully normalise before the end of 2021. A further 40 per cent expect this to happen in 2022, while 16 per cent expect it in 2023. UK-based private equity firms are most confident of a fast recovery, with 44 per cent of respondents believing that normalisation will occur by the end of 2021, while their European (34 per cent) and North American (33 per cent) counterparts are slightly more conservative.

New analysis shows that 2021 has already seen significant volumes of M&A. In H1 alone, 28,175 M&A deals have been completed, a 27 per cent increase on the whole of 2020 and 7 per cent higher than the first six months of any other year since at least 1999. The data also highlights that those deals had a record-setting combined value of USD2.82 trillion – up 132 per cent compared to last year, and almost 20 per cent more than the previous all-time high recorded in 2007.

The new study, ‘Recovery to Rediscovery: Capitalising on a Changed Private Equity Landscape’, was commissioned by Auxadi, a provider of accounting, tax and payroll services to private equity, real estate and multinationals, and was based on interviews with 100 senior-level private equity investors based in the UK, Continental Europe and North America with average assets under management of EUR14.4 billion.

The research highlights the extent to which private equity managers are increasingly targeting overseas acquisition; GPs estimate that of the 18 acquisitions made on average by a private equity fund over its lifetime, over half (52 per cent) will have a cross-border element. Regionally, North American GPs are most likely to engage in cross-border acquisitions, estimating that 57 per cent of deals will be done overseas, ahead of the UK (51 per cent) and Europe (48 per cent).

The most attractive overseas markets for investments continue to be the established Western geographies, with most respondents planning to invest in Europe (92 per cent), the UK (85 per cent) and North America (76 per cent) over the coming five years.

Auxadi’s report reveals several challenges faced by GPs in conducting to cross-border deals that can derail the process; 41 per cent of respondents cited different compliance regimes, closely followed by cultural differences (40 per cent) and insufficient levels of transparency in information supplied during due diligence (39 per cent).

To mitigate the risks involved in cross-border transactions, the study shows that a sizeable proportion of private equity firms have already taken steps to outsource the running of some elements of their fund to third parties, with many more planning to do so in the future. For example, almost half (44 per cent) already outsource regulatory reporting requirements and a further 38 per cent said they will do so going forward.

Rima Yousfan, COO at Auxadi, says: “Despite the continued impact of Covid-19, GPs are clearly optimistic that cross-border deal flow is well on its way to making a swift recovery, particularly as valuations may be considerably more attractive further afield than their home market. 

“With over half of a private equity fund’s acquisitions expected to contain a cross-border element, it’s vital for GPs to streamline what can be a very complex process with unfamiliar compliance and regulatory regimes creating unexpected roadblocks.  Our clients find that working with a partner with local experts on the ground and an intimate knowledge of the local market conditions can make a huge difference to the chances of success.”

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