Political Risk and Economic Nationalism in Cross-Border Private Equity
On 21 November 2019, Thomas Schulz, head of Noerr London, participated in a panel at the IBA’s Private Equity Transactions Symposium along with Eliana Catalano (BonelliErede), Stephen Drewitt (Macfarlanes), Marco Pierettori (Investindustrial) and Stephen Adams (Global Counsel), chaired by Richard Hall (Cravath Swaine & Moore).
The panel considered the climate of ‘political risk’ – substantial changes in policy or law driven by economic or national security concerns; and ‘economic nationalism’ – a government preference for local business ownership; and the subsequent effects of both on the global private equity industry.
Issues discussed included the approach of private equity sponsors to political risk and suggestions for best practice and tools to protect against pre- and post- closing political risks; and also the recent changes in regulatory regimes in the EU, UK, Germany, Italy, USA, Canada and Australia.
Thomas Schulz spoke on the German regulatory environment and the impact of the German Foreign Trade and Payments Ordinance, which provides for cross-sector foreign direct investment screening on the basis of threats to Germany’s public order or security, and also the new EU Screening Regulation, which establishes the framework for screening of foreign direct investment into the EU, which entered into force in April 2019 and applies from October 2020. Further changes to the law are being considered such as an extension of review periods and notification obligations as well as stricter rules for governmentally controlled or funded investments. Mitigation agreements dealing with matters such as confidentiality, supply of goods and services, ITAR regulations, contractual penalties and others need to be considered carefully when making investments under the German regime.
The panel discussed the impact of the various regulatory changes on private equity transactions – greater delays and risks to deal execution, and the impact on fund formation, investor pools, fund documentation and the secondary market for limited partner interests; and the general trend towards harmonisation of private equity deals globally. Lastly, the implications of Bilateral Investment Agreements for structuring of investments and the scope of protection for financial sponsors was discussed, an area which appears rather underestimated by the PE industry.