Evolving M&A trends: private equity transactions amid the Covid-19 crisis
William D. Greenlee Jr
DFDL, Myanmar and Singapore
DFDL, Myanmar and ASEAN Desk
The Covid-19 pandemic has pushed countries across the world into an unprecedented humanitarian and economic crisis. Investor-friendly laws and regulations with transparent administration and clear decision-making processes are imperative for weathering this crisis. While private equity investments withstood the global financial crisis of 2008, businesses increasingly look to them for investment in the current climate, based on the lessons learnt from previous downturns. Policy makers should enforce progressive laws and regulations with well-thought out strategies to drive investment in these challenging times.
With financial crises and economic disruption making its presence felt all over the world, the deal pipeline for merger and acquisition (M&A) transactions has become constrained to value investing and bargaining for inexpensive assets, impacting every stakeholder including private equity (PE) investors. Potential investors are thus now required to reassess their investment plans in order to mitigate risks and to maximise returns.
Private equity investors proved their ability to weather the impacts of the global financial crisis of 2008 due to their flexible and solution-oriented approach which had generated strong returns when traditional asset-class were on a downtrend. PE investments generally follow a similar business model in almost all jurisdictions. These investments generally commence with the signing of a general document (in the form of letter of intent, memorandum of understanding or a term sheet) evidencing prospective investment between a PE investor and a company. After this, the PE investor conducts legal and financial due diligence on the company leading to the negotiation of transaction documents including share subscription agreements and shareholders agreements. PE investments are generally pursued through a combination of ordinary and/or preference equity and convertible debt.
In this article, we discuss the investment landscape in the frontier market of Myanmar as compared with the sophisticated economy of Singapore, as well as policymakers’ responses to maintaining credit lines in support of investments amid the Covid-19 crisis.
Private equity investments in Singapore
Singapore has established itself as a first-class location for both outbound and inbound PE investments. Its pro-investor laws, regulations and low tax rates make it the most secure and viable destination to invest in Southeast Asia. This successful formula has resulted in the majority of transactions into other parts of southeast Asia being routed through Singapore, which typically serves as the holding company location whereby foreign investors establish a local controlling entity under Singaporean laws.
There are no dedicated regulations governing PE investments in Singapore; these are generally driven by the Singapore Companies Act and the Contract Act. Additionally, compliance with the Anti-Money Laundering and Countering the Financing of Terrorism Regulations is a prerequisite for any investment in Singapore. The Singapore Companies Act has been amended to promote investments such as by granting exemptions to private companies from holding annual general meetings if they send their financial statements to shareholders within five months from the financial year end.
The Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) launched the Variable Capital Companies (VCC) Framework on 15 January 2020, which caters to operational flexibility and cost savings for investment funds. It is aimed at encouraging more funds to be domiciled in Singapore and enhance Singapore’s value as an international fund management centre. Capital gains from the disposal of equity investments are also exempt from tax, provided that the divesting company had held at least 20 per cent of the ordinary shares in the investee company for a continuous period of at least two years.
In the last few years, Singapore has witnessed immense investments in financial technology ('Fintech') which have also been supported by grants offered by the Singaporean government. In late 2018, the MAS announced initiatives to support financing in private markets, including a programme setting out $5bn for management with PE and infrastructure fund managers who are committed ‘to either deepening their existing presence or establishing a significant presence in Singapore’.
This is further supported by the introduction of the Venture Capital Investment Model Agreements (VIMA) for the early stage of venture capital transactions for cost efficiency. In light of the deepening Covid-19 crisis and investors stepping back, the Singaporean government has also announced a ‘Fortitude Budget’ to provide additional support to promising start-ups which can demonstrably sustain their innovation and business activities.
Private equity investments in Myanmar
Myanmar is a newcomer to M&A transactions in the region, although its regulatory landscape has matured over the past few years with the enactment of the Myanmar Investment Law 2016 (MIL) and the Myanmar Companies Law 2017 (MCL). The Myanmar government has also liberalised several business sectors, thereby promoting greater levels of foreign investment into the country.
The MIL and MCL together form the primary legislation regulating foreign investments in Myanmar. Several ancillary laws and regulations also support the regulatory framework depending on specific business sectors. A foreign investor holding an Investment Permit issued by the Myanmar Investment Commission (MIC) is entitled to obtain various tax benefits and long-term leasehold rights over the land/premises for a period of 50 years, extendable twice for a term of ten years each. This works as an exception to provisions of the Transfer of Immovable Property Restriction Act 1987 (TIPRA) which limit foreign investors to obtaining title to immovable property or entering into a lease for a maximum of one year.
A ‘foreign company’ as defined under TIPRA refers to a ‘company or partnership organisation whose administration and control is not vested in the hands of the citizens of Myanmar or whose major interest or shares are not held by citizens of Myanmar’. However, in practice, the authorities have considered a company with even just one foreign shareholder as a foreign company.
The MCL almost entirely eliminated the differences between Myanmar-owned and foreign-owned companies that was enshrined in the previous companies law, and also followed a progressive approach where it permitted up to 35 per cent foreign ownership interest in a company with Myanmar citizens or entities as shareholders before it is classified as a foreign company (even this classification no longer puts foreign companies at a disadvantage). Foreign ownership interest can be:
‘in the form of direct shareholding in the company, a direct or indirect shareholding in another company which itself holds a direct or indirect shareholding in the first company or through an agreement which provides the holder with an indirect or direct right to exercise control over the voting rights which may be cast on any resolution of the company.’
While the MCL relaxed foreign ownership restrictions in a company, it specifically states that ‘provisions of MCL relating to foreign companies will not affect any provision of TIPRA’.
With evolving market conditions and a more favourable regulatory landscape, many PE firms have used their expertise from running their business globally to navigating investments in Myanmar. Texas Pacific Group (TPG), one of the world’s biggest private equity groups, gained a foothold in Myanmar in early 2014 when Myanmar emerged from military rule. TPG invested about $40m in Apollo Towers Myanmar Ltd. as a majority stakeholder. In 2018, Pan Asia Majestic Eagle was also acquired by TPG, which made TPG the biggest telecommunications tower owner in Myanmar. Also, Myanmar witnessed its largest buy-in/cash-out deal in 2017 when Thai Beverage Co. acquired a 75 per cent stake in Myanmar Distillery Company Limited and Myanmar Supply Chain and Services Company Limited where TPG sold its 50 per cent stake in Myanmar Distillery Co for around $495m (which it initially bought for $150m in 2015), representing a substantial return on its investment. In some of these deals, TPG accessed acquisition financing from international banks, thereby demonstrating that Myanmar is open to the usual forms of financing of PE deals.
The Myanmar PE market is also led by other reputable players such as Anthem Asia, Delta Capital, Myanmar Investments and Myanmar Strategic holdings. Progressive regulations and encouraging government policy have provided additional tailwinds to PE investments in Myanmar. Most currently, the recent entry into force of the Insolvency Law 2020 will facilitate PE firms in acquiring valuable assets going under the hammer at attractive valuations.
The Myanmar Government implemented the Covid-19 Economic Relief Plan on 27 April 2020 which aims to promote investment and international trade. However, Myanmar still urgently needs to regulate grey areas of fintech and e-commerce, which are crucial in this virtual world, with a well-thought out strategy inviting to stimulate and support potential foreign investments in this area.
Reshaping investments amid global crisis
The Covid-19 crisis has left wounds which will lead to structural implications in every economy. Like any other developing nation, Myanmar is a capital-starved economy where investments are generally a blend of equity and debt. These are testing times for every country, be it a developed nation like Singapore or a frontier market like Myanmar. Where a country having enough reserves to support its economy is facing challenges, sparse fiscal capacity would lead a country into unenviable economic terrain in terms of both domestic and international investments. Therefore, policy makers must cautiously implement steps to underwrite risks not only to provide immediate relief but to drive investments in the country in the near future.
In the coming months and years, we expect most investments to be centred on business continuity, remaining focused in their current portfolios and biding their time. However, PE investors will be able to move more quickly. Businesses will attempt to shore up equity, thereby paving the way for PE investors to grow fast and capture market share. It is likely possible that there will be an increase in the usage of convertible instruments by PE investors, specifically in sectors such as technology, consumer goods, pharmaceuticals and e-commerce. The turbulence caused by Covid-19 is not permanent: a cautious approach would capitalise on the potential significant investment opportunity. Investors should consider curative strategies that shift from boilerplate clauses under transaction agreements to more tailored variants of the same:
• extensive due diligence should become imperative;
• contractual clauses on representations and warranties should be critical with minimum exclusions;
• clauses on ‘material adverse effects’ and force majeure should be specifically tailored to include references to pandemics like Covid-19;
• the transaction documents should specifically permit ‘virtual’ visitation rights;
• financing terms should be carefully scrutinised in light of potential challenges and changes in law, including prolonged government approvals if applicable; and
• solvency reviews should be carefully undertaken.
Covid-19 is unprecedented, but M&A activity is sure to follow – albeit with slightly different approaches taken by investors and increased investments in solution-driven businesses. These investments will save ‘crippled’ economies in the spirit of ‘necessity as the mother of innovation’.