GP Workshop: How to successfully engage in a cross-border transaction
Simon Finn, Managing Partner at Intriva Capital discusses how to diligence and enter cross-border transactions, while IK Partners CEO Christopher Masek, discusses post-deal navigation.
Simon Finn, Managing Partner, Intriva Capital
I would rank the areas that funds should consider when embarking on cross-border deals in two main categories: pre-deal and post-deal. It’s no good being the victor of making an investment in a jurisdiction if ultimately the execution and the asset management turns out to be much more complicated or if there are issues after signing the deal.
I would put regulation as the number one factor to be considered when it comes to cross-border deals. That dovetails into what you can and can’t do in an investment and with an asset post-acquisition.
The second key consideration is tax as the landscape is constantly moving. So, even if you think you had all of the facts at one stage, when it comes to considering the same type of deal 12 months later, you cannot just pull out the same playbook from the last deal.
Legal requirements differ by country and must be fully understood to ensure a deal can proceed. As with regulatory and tax issues, you should also examine legal constraints at the opportunity stage, when considering if a deal is viable.
After legal, we look at the management style of each company and the nuances of the country’s culture. It is important to recognise that while the senior leadership of most mid-market companies across our target geographies can converse in English, that doesn’t always mean that they’re on the same page culturally. This is why having a local presence is incredibly important, ensuring that the deal team has an appreciation and understanding of cultural nuances and communication styles. This should come into consideration both pre- and post-deal, to mitigate risks. At Intriva, we have a team coach that gets involved in some of our transactions when we want an assessment of certain personalities and management teams.
Finally, the availability of finance needs to be considered. Different jurisdictions can differ considerably on this. So, having a really strong understanding of debt capital markets is very important as that is at the heart of commercial assumptions on a deal.
When you are not too familiar with a certain jurisdiction, there is also a requirement to diligence the types of advisors and advice that you partner with. The answer isn’t simply the same law firm that you use in your home country, especially if the deal requires diving into a niche industry-specific advice. It’s much more than a beauty parade; you are almost diligencing and referencing advisors before engaging with them. This can take some more time in terms of getting the wheels in motion to be able to start evaluating an opportunity, but it really pays off in the long term.
Christopher Masek, Chief Executive Officer, IK Partners
Cross-border deals are really one of IK Partners’ strengths and a key element in our toolkit. When we are dealing with portfolio companies, it’s [cross border deals] where the private equity professional has a lot of legitimacy.
What we do systematically in all of our platform deals is that we identify upfront, on average, at least 13 add-ons. For us, it’s an important component because it’s a very tangible means of accelerating a company’s strategic repositioning. When you’re doing a deal, you seldom come across a management team that doesn’t want to do that, particularly where they’re moving from Small Cap to Mid Cap.
It’s a very competitive market out there and we find ourselves when we are competing with peers who are often national funds. In many cases, we have had situations where we’ve said: “We’ve met with management of these targets and they want to transact. If you do the deal with us, we will do that immediately.” Then, you have a very powerful and compelling argument in your favour.
We have seven European offices. So, when we’re meeting with a company based in the UK, where it’s confronted with Brexit for example, they’re saying, well, we want to make sure that we have a partner that’s credible; one that can help us develop successfully on the continent. This is where we’re able to go through that whole list before we do the deal.
What you have to consider when you’re doing this [a cross border add-on] is how you’re going to incorporate the team. You’ll have cultural challenges to consider, where, for example, you may have a family-owned business to navigate and integrate. Often, you may want to reserve some equity for partners that you intend to add, so that they can have an aligned interest with the business, as well as be added onto the board.
When you’re transacting in this way, you also want to get your financing right. When you’re doing your deal originally, if you say we’re going to do a buy-and-build, what we will typically do is over-equitise the deal and incorporate specific financing facilities to help execute this. The better and more sophisticated you are in doing this, you will have terms which, for instance, allow you to do things pretty automatically. For example, just a simple due diligence report, where you can even do pro formas and add synergies into it and really build your case around having automatic adaptive financing for it.
“When negotiating with international counterparties, it’s especially worthwhile pausing to consider both the form and channel of deal communications, particularly in light of cultural and/or language differences. Formally recognising the status that certain individuals hold in the discussions (and any other local customers or protocols) can be an important first step in building trust between the parties and ultimately drive a successful outcome. We increasingly see bidders make greater use of shared IT platforms to move through the initial commercial and documentation stages more efficiently. Whilst this has real benefits in terms of speed of execution, buyers in particular need to be mindful that some points are still best aired in private on a one-to-one basis.” Ben Shribman, London Partner, Cooley
“You need to get local advice on the ground and to be fully aware of the regulatory and legal environment that you’re dealing with. If you assume that the same regulatory and legal systems will apply, then you’re likely to undergo a challenging process. GPs need to understand this very early on and be in close conversation with the target’s management team and advisors. Not planning can lead to significant issues later on. In addition, you will need to have a really good grasp of the personalities involved, because, inevitably, it could be that some targets may not be familiar with a deal from the jurisdiction that you are in. Where we see most deals fail is actually where there is a lack of understanding around the personalities involved and what is needed for the deal to successfully close.” Gareth Davies, Private Equity Partner, Browne Jacobson
“Political and regulatory strategic planning is increasingly central. Understanding nuance and complexity is vital in road testing the viability of existing business models and future proofing assets to capitalise on change. Risks that look disparate and unrelated now will often overlap in the future: we can think for instance of logistical costs, the net zero agenda, and nationalistic attempts to impose new barriers on foreign trade. There are few sectors that are insulated from these questions, and many – from industrials to TMT to healthcare – that can only secure commercial stability through such strategic foresight.” Tom King Practice Lead, Global Counsel
“The key for success in cross-border transactions is thinking ahead and proper communication with the international deal team. It is important to give clear instructions and detailed guidance about what is required and expected from each jurisdiction as early as possible. This includes setting up and coordinating appropriate workstreams. Every member of the international deal team should know from the outset what has to be delivered by when and who the contact is with the home team for any questions and comments. Further, reasonable costs are a key factor for successful transaction management. The best practice to achieve effective cost control is to provide weekly time reports which keep the client up-to-date and avoid surprises when it comes to billing.” Ralf Kurney, Co-Head of the CMS Private Equity Group
“There is increased regulation worldwide – including foreign direct investment (FDI) regimes in Western and Eastern Europe, the Nordics and in the UK. These regimes are still being tested and can meaningfully impact deal timetables.[…]Knowing the local market can make a big difference when preparing a competitive offer. Bidders want to work with local advisers who not only know the local law, but also how their local market works and how a bid will be received. That means appointing the right advisers early in the process, including local counsel where needed, to make sure that they’re on our tree and we’re aware of all relevant issues.” Dan Graham, Private Equity Partner, Sidley Austin
This article was first published in Real Deals on 30 September 2021 and was written by Talya Misiri.