Private Equity Reactions to Protectionist Measures


Economic conditions have been largely favorable for dealmaking in 2018. U.S. companies received a boost to their earnings thanks to the decline in the corporate tax rate from 35% to 21%. Interest rates remain historically low. And deal financing has been widely available to acquirers.

To find out how deal practitioners are responding to the changes in global trade, Mergermarket on behalf of Toppan Vintage spoke with six experts for their insights.

Toppan Vintage question: Private equity firms are known for acting opportunistically. To your knowledge, how are they reacting to the protectionist measures and the overall climate? Leading industry experts weigh in...

Daniel Wang, Managing Director, Harris Williams says: We have PE clients that are thinking about Asian buyers, particularly Chinese ones, and their question in this protectionist climate is, "If I were to sell my business today, how much interest would there be from China?" Everybody’s aware that the Chinese can pay high valuations. However, PE firms also know there won’t be real Chinese interest in businesses with any relationship to high technology, the military and defense industries, or aviation and aerospace because the Committee on Foreign Investment in the United States (CFIUS) will block such deals.

But private equity is not looking to hold back on selling assets because of what's going on. There are extremely high levels of interest from buyers in Europe, the U.S., the rest of Asia, and Australia. We're still seeing a lot of assets brought to market, as opposed to a halt or a decrease in activity.

Jack Bell, Managing Director, Pantek Partners adds: We tend to advise on deals that are very global or cross-border in nature, with clients looking for global opportunities as part of their investment thesis. If they're investing in U.S. companies, that is generally because they're looking to enable them as global platforms for the businesses they're executing. As such, I don't see a lot of PE activity going in the other direction.

But some of the PE firms we deal with are, in light of the tariffs, spending time reviewing their investments internally, looking at the deals they've already done. One might be a steel company they invested in three or four years ago, which is all of a sudden subject to tariffs, and possibly isn't as much of a global play as when they made the initial investment. Basically, there’s a lot of internal portfolio reviewing going on in reaction to the tariff activity and protectionism.

Euan Rellie, Senior Managing Director, BDA Partners weighs in: I think PE firms will hunt for bargains. They always do. PE firms are opportunistic, and dealmakers will be looking for any tiny niches that benefit. But sentiment and confidence are more important than anything else, and I think both are suffering at the moment because of the tariffs.

However, just to be fair, on the flip side confidence has benefited from the tax cuts that disproportionately helped corporates. We’re also seeing attempts to try and mollify the pain from tariffs by selectively giving aid to, for example, farmers, and giving some sort of carve out to certain manufacturers that require steel. But in simple economic terms, these distort the market unnecessarily, and that's a bad thing.

From a PE perspective, the silver lining is that U.S. sponsors will probably be able to buy assets more cheaply over the next few years, because the market will be declining. I haven't seen sponsors get more aggressive, however. Overall, we've seen them act a bit more cautiously at the margins so far. I don't want to exaggerate the change of activity, but I think people are beginning to wonder when the next recession will be. I can't imagine that we have three years of uninterrupted growth from here without a downturn. I think prices will come down, and activity will become subdued.

John E. Lash, Director, BDO Advisory says: Whether they are considered opportunistic or resilient, PE firms have historically demonstrated the ability to successfully navigate major economic shifts and evolutions in global trade policy. As such, they are likely to view potential investments with the same fundamental metrics that drive deal valuation. But they may consider an increase in execution risk when evaluating high-value targets in specific critical infrastructure industries that fall under regulatory scrutiny or national security regulations.

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The New Wave of Protectionism    


What effect is protectionism having on sentiment among dealmakers? Are the measures actually bolstering domestic M&A? And how is private equity responding to the new conditions? We explore how deal practitioners are responding to the changes in global trade in our full report

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