Getting the Deal Through - Market Intelligence: Private Equity
First published in GTDT – Market Intelligence - Private Equity, 2018
What trends are you seeing in overall activity levels for private equity buyouts and investments in your country during the last year or so?
Appleby has been fortunate to have acted on a number of transactions which evidence the culmination of some trends we highlighted last year. Deployment of capital in the fiduciary administration space and real estate sector continue to be attractive with a number of global private equity firms looking at this asset class with increasing interest in Cayman and also globally. As anticipated in the luxury real estate market, there have been significant exits from real estate and hotel positions. High-end and luxury hotel chains are the target of private equity (PE) investment with substantial moves being made by well-known PE shops. The traditional trust and corporate services industry finds itself in a phase of aggressive consolidation through roll ups and acquisitions by PE Funds. Stable revenues and the opportunity to apply rigorous management methods make this asset class attractive for PE.
Looking at types of investments and transactions, are private equity firms continuing to pursue straight buyouts or are other opportunities, such as minority-stake investments, partnerships or add-on acquisitions, also being explored?
Minority stakes continue to be popular. This popularity appears to come from the opportunity for PE shops to “try before you buy.” However, once the validity of the investment becomes apparent, we now also see PE shops consolidating their positions by either majority acquisitions or full buyouts. Perhaps in a shift from the minority stake strategy, there seems to be a trend where PE shops elect straight buyouts as their initial investments, rather than a minority stake. Further, the PE shops appear to go it alone rather than sharing ownership with another firm. With increased frequency, PE shops are gulping down the entirety of an opportunity when one is identified, especially in the fiduciary and corporate space.
What were the recent keynote deals? And what made them stand out?
We are lucky enough to be involved in some great deals. These include Five Mile Capital Partners LLC’s disposal of the Ritz Carlton to Dart Real Estate - truly a magnificent portfolio property for the Caribbean. Also, we were involved in the disposal by TMF Group, a global provider of compliance and administration services to CVC Capital Partners for a total consideration of EUR 1.75bn.
The further disposal of the Deutsche Bank Alternative Fund Services from Apex Group Ltd. and Genstar Capital highlights how global fiduciary platforms and organic growth sectors continue to be attractive as an asset class to PE Houses.
Does private equity M&A tend to be cross-border? What are some of the typical challenges legal advisers in your jurisdiction face in a multi-jurisdictional deal? How are those challenges evolving?
Yes, we are seeing private equity M&A as being almost exclusively cross-border, involving the use of Cayman Islands structures for the pooling and staging of the investment monies, with onward investment subsequently being made in another, onshore jurisdiction. Typical challenges include regulatory risk and consents, governing law issues and actual due diligence protocols. Cross-border deals sometimes have laws that are just similar enough to be dangerous, so great care and attention is needed across jurisdictions to ensure that the deal is legal and binding, and obligations are enforceable. Generally, clients’ expectations are also higher. Cross-border work is more demanding than ever before in this increasingly complex regulatory and compliance environment.
What are some of the current themes in financing for private equity transactions? Have there been any notable developments in the availability or the terms of debt financing or the terms of financing for buyers over the past year or so?
Secured bank financing continues to be used, given the relatively cheap cost of debt capital resulting from prevailing low interest rate levels. This theme has been consistent for the past several years. Sponsors have been able to obtain covenant-lite packages to go along with the larger equity cheques (in historical context). Going forward, macro issues and global uncertainty (US elections, Brexit, political instability, central bank interventions, etc.) will probably play, in turn, into the price of debt packages.
How has the legal, regulatory and policy landscape changed during the last few years in your country?
The Cayman Islands has recently introduced limited liability partnerships and unveiled a new Foundation Companies Law. Both of these structures appear to have resounded with investors based upon the interest we are receiving. We have already seen significant uptake on recently-introduced limited liability companies in the jurisdiction. This is not unexpected given their familiarity and popularity in other jurisdictions such as Delaware. Cayman continues to have a stable political landscape (having just enjoyed another peaceful, democratic election) and a sophisticated regulatory and legal framework. Cayman has implemented FATCA and the CRS, which provide for the automatic exchange of financial information to the US and CRS Participation Jurisdictions. This, together with Cayman’s implementation of the OECD’s Country by Country Reporting Initiative, further emphasises the jurisdiction’s willingness to provide full transparency for tax purposes. Private equity firms continue to look at the Cayman political and legal framework with a fair degree of certainty and confidence. I do not see this changing anytime soon.
What are the current attitudes towards private equity among policymakers and the public? Does shareholder activism play a significant role in your jurisdiction?
The policymakers in the Cayman Islands tacitly recognise the importance of the role private equity shops play in driving forward the global economy. No specific legislation or policy statements have been made favouring private equity investors over any others, but this is, perhaps, anticipated given the Cayman Islands’ government’s policy of creating a prevailing business-friendly environment to all commercial enterprises through its overarching legal and policy strategies.
What levels of exit activity have you been seeing? Which exit route is the most common? Which exits have caught your eye recently, and why?
As anticipated last year, we are now seeing a significant uptick in investors making exits in Cayman. A significant amount of activity has occurred in the luxury high-end real estate sector as well as the fiduciary and fund administration space. Private equity firms appear to be starting to use some of their significant stores of ‘dry powder’ to make new and larger investments than in the last few preceding years. The acquisition by CVC of TMF is a good example of this.
Looking at funds and fundraising, does the market currently favour investors or sponsors? What are fundraising levels like now relative to the last few years?
It has been said before and I will say it again, this is the golden age of private equity investment. Private Equity allows for very high rates of return. Sponsors with solid track records and great brand recognition seem to find no shortage of outsized limited partnership (LP) commitments, raising jumbo funds with relative ease. Despite all of the existing dry powder collected by sponsors, fundraising continues to gobble up dollars. An encouraging trend was the successful closing of a number of smaller funds early in the year. I think about USD 600 billion was raised by private equity funds for 2017. People in this space are predicting USD 750 billion.
Generally, their success rate on negotiating terms increases with the size of their commitment to the fund.
Talk us through a typical fundraising. What are the timelines, structures, and the key contractual points? What are the most significant legal issues specific to your jurisdiction?
This would all be pretty market standard. Raising a new fund has never been a simple task, especially now with the increase in raising well-established PE firms’ mega-follow-on funds. Much of the fundraising is done where the LPs are based, which is not often in Cayman, so there is not much to add here.
How closely are private equity sponsors supervised in your jurisdiction? Does this supervision impact the day-to-day business?
The Cayman Islands provides a generally-robust regulatory environment – this is applicable across the board and not to any one specific segment (such as private equity sponsors). However, such regulation is purpose-based and preserves the individual right to contract while not being overly-intrusive in its approach.
What effects has the AIFMD had on fundraising in your jurisdiction?
The AIFMD private placement regimes allow Cayman Islands funds to be marketed in a vast majority of EEA member states, so many funds wanting to do business in the region have not been swayed by the regulatory changes imposed by the AIFMD.
Although ESMA has deferred its assessment on whether it would recommend extending the AIFMD marketing passport to the Cayman Islands, we are confident that the Cayman Islands can satisfy any concerns ESMA may have and be granted the passport in the near future.
What are the major tax issues that private equity faces in your jurisdiction? How is carried interest taxed? Do you see the current treatment potentially changing in the near future?
The Cayman Islands presently impose no taxes on profits, income, capital gains or otherwise. No legislation has been proposed to change this and none is anticipated.
Looking ahead, what can we expect? What might be the main themes in the next 12 months for both private equity M&A and fundraising?
We expect to see a continued uptick in exit activity as PE firms begin to tap their glut of dry powder. This will result in a very competitive market and potentially cause pricing issues. Additionally, macro issues continue to cause debt pricing to remain uncertain, which disproportionately disadvantages sponsors, particularly in auction scenarios.
Reproduced with permission from Law Business Research Ltd. This article was first published in GTDT – Market Intelligence- Privacy & Cybersecurity 2018 (Published: November 2018). For further information please visit www.gettingthedealthrough.com.