Navigating New Paths To Growth - A story of resilience and agility February 2021 - Paul Hastings LLP
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Navigating New Paths To Growth A story of resilience and agility February 2021
SECTION JUMP 04 06 12 19 66 78 122
Contents
Introduction 04
Executive Summary 06
Dealing with Macroeconomic Change 12
Growth Levers 19
Liquidity 20
Innovation and Digital 28
Acquisitions and Disposals 36
Cost Management 46
Reimagining the World of Work 54
Rebuiliding a purposeful
and sustainable economy 66
Sector Focus 78
Funds 80
Financial Services 88
Energy and Infrastructure 98
TMET 112
About Paul Hastings London 122
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4 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
services; energy and infrastructure and The year 2020 was unlike anything
technology, media and entertainment. that has gone before, and now 2021
brings with it new opportunities and
What emerges is a picture of positivity challenges. We will continue to discuss
against a backdrop of significant with our clients and share our insights
macroeconomic challenge. The impact on the topics highlighted here–should
Introduction
of the pandemic has been sector- you have any questions or comments,
specific, but no industry has escaped please do not hesitate to get in touch
its power to accelerate change and with your usual Paul Hastings contact
drive transformation. The impetus or email.
By Arun Birla, London Office Chair, Paul Hastings to Build Back Better is also gathering
pace–we are pleased to include in In the meantime, a huge thank you to all
Welcome to this market report from executives and their use of them, we this report the perspectives of our those who participated in interviews and
Paul Hastings, in which we are pleased conducted a programme of interviews clients and colleagues on rebuilding a roundtables for your engagement, and
to share the insights of our London and a series of roundtables to take the purposeful and sustainable economy. for sharing your insightful commentary.
practice. We embarked on this project in temperature of the market and gather
the summer of 2020, as the coronavirus insights. It is these insights, and our
pandemic continued to wreak havoc own thoughts, that we are delighted to
on our daily lives, our working practices share with you over the following pages. Thank you to the many clients and friends
and many of our business plans. In the who contributed to this report including:
first half of last year, our perceptions From what we have learned throughout
2020, and as we continue to grapple • Bessima Bahri, Moneygram • Carolan Lennon, Eir
of normality, predictability and risk
with coronavirus restrictions in 2021, it • Annette Bannister, MetLife • Andrew Lewis, ICG
were turned on their heads, but by the
is clear that the successful businesses Investment Management • John Mayes, Randstad
summer it was already apparent that
of tomorrow will be those that spend • Josh Berman, Cattleya • Olivier Rosenfeld, NJJ Telecom
smart organisations were navigating
this time repositioning for what • Ed Brogan, Brookfield Asset Europe
their way through and charting a path
comes next. In this report, we focus Management • Rod Schwartz, ClearlySo
to growth in a new reality.
on five of the key levers available to • Stephan Caron, BlackRock • Geoffrey Strong, Apollo
organisations as they navigate to the Alternative Investors • Samantha Thompson, Anglo
Inspired by the spirit of resilience and
future: liquidity, innovation, acquisitions • Michael Ellis, Abercrombie & Kent American
agility that we witnessed among our
and disposals, cost management and • Daniel Geller, Revolut • Nicole von Westenholz, Cheyne
clients and communities, we engaged
reimagining the world of work. We • Jane George, Campari Group Capital Management
with our many contacts to talk to
also delve in some depth into some • Emma Howell, Hermes GPE LLP • Walter Wang, TSM
business leaders about what this
of the sectors of the economy that we • Josh Hu, Huayi Brothers International • Matt Wilson, Uber
path to growth might look like. Keen
to explore the levers available to these know particularly well: funds; financial
6 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Those businesses that were
not caught unawares by these
megatrends, but had in fact dared to
challenge their own assumptions while
plotting future scenarios, were the
ones best placed to respond.
Executive The ability to move rapidly to identify
and manipulate cost levers was
Summary another critical differentiator last year,
as agile businesses moved quickly to
facilitate recruitment freezes, supply
Still firmly in the grips of a global have struggled far more if it were chain reorganisations, alternative
pandemic going into the spring of not for the learnings of the previous delivery models and reviews of real
2021, we can look back on last year economic crisis. Whatever the next estate requirements.
The banking industry was required
and begin to consider some of the crisis might bring, we all have much
And we must not forget that the to build in enhanced resilience in the
lessons learned. Chief amongst them to gain by taking stock of the lessons
crisis brought with it opportunity wake of the last crisis and has largely
has been the importance of liquidity, from this one.
as well as challenge: the chance to proved robust through the pandemic,
which has been a primary concern for
A significant proportion of the reimagine operating models, to pick up rising to the challenges of remote
many of our clients and looks likely to
disruption wrought by Covid-19 was distressed acquisitions, and to power workforces and cashless transactions
remain a considerable challenge for
simply an acceleration of disruptive ahead with investments in technology with relative ease.
some for a while yet.
trends that we had been aware to embed efficiencies for future growth.
For the funds market, where
The global financial crisis, now over of for some time, most notably in
Resilience and agility alternatives have seen a dramatic
a decade ago, was an important relation to the use of technology.
growth in assets under management
learning experience for many. The The pandemic has greenlighted the If there are two key attributes that
over the past decade, fears of
banks are certainly in far better adoption and investment in digital board members will need to focus
exposure through over-leveraging
shape to support businesses than transformation that many had been on instilling across their businesses
proved unfounded as the
they were in 2008, but in 2020 even forecasting for some time, creating a going into 2021, they are resilience
diversification baked into portfolio
the most well-capitalised companies seismic shift towards remote working, and agility. Leadership for growth
construction illustrated the resilience
have been forced to explore funding digital collaboration, online banking, in the next decade will undoubtedly
of most managers. Likewise, in the
options beyond their current lenders. cryptocurrencies, ecommerce, home require both in abundance, challenging
energy and infrastructure sector, the
Many of the corporates beset entertainment and more, which had executives to work to institutionalise
pandemic delivered proof of concept,
by liquidity challenges in 2020 might been stalling only through trepidation. such values across their organisations.
with the asset class traditionally
8 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Boardrooms must now turn their Drivers of future growth
attention to how they can embed Opportunities now stand out as
agility into their businesses for 2021 businesses position for growth in a
and beyond. Stakeholder engagement post-pandemic environment. First,
will be critical, as the past year has alternative investors have weathered
demonstrated how organisations the storm – fundraising has continued
rely on their people to adapt quickly. across the growing asset classes
While individuals have struggled with of private equity, private debt and
everything from childcare to mental infrastructure, where record levels of
health through the pandemic, by dry powder now stand ready to deploy.
and large employees have risen to
the challenge and developing agile This wall of capital in the hands
workforces for the future is now of private funds is far greater than
recognised as critical. anything that was available in the
aftermath of the global financial
considered non-cyclical or counter- When it comes to agility, we have
Others have addressed the need for crisis, putting these investors in the
cyclical and performing in line with witnessed operating models upended
agility going forward by working to driving seat to provide much-needed
expectations when tested. overnight and many that have
get ahead of opportunities, whether capital to the all-important mid-
responded well to the need to pivot
that means private equity firms market as it emerges from the crisis.
Building resilience is now key, as their strategies, particularly in the
honing smart approaches to auctions, The appetite among institutional
organisations shift the spotlight to hospitality and TMET industries. At
corporates preparing for public M&A, investors to support telcos investing
identifying paths to growth. In this Uber, for example, Associate General
or a market-wide appreciation of the in 5G, fibre roll-out and other critical
report, our clients talk about adopting Counsel, Matt Wilson, tells us about
need to stay on top of regulatory communications infrastructure
new approaches to risk, increasing how the business shifted overnight
changes coming down the pipe. should not be underestimated,
their focus on critical sectors, hard- from one reliant on taxi services
Many, particularly in the hospitality nor should their ability to back
lining diversification and avoiding to a model driven by food delivery.
industry, have made use of the crisis corporates investing in tech-enabled
overleverage. Every business will Alongside these shifts in business
to bring forward capex projects and transformation strategies.
likely face a heightened regulatory models has come a far more agile
take advantage of downtime, while
focus on operational resilience, the approach to risk sharing, where
the majority of businesses have Alongside the power of the alternatives
need to pay ever-increasing attention industries paralysed by the pandemic
looked again at the need to operate industry, the incontrovertible power
to addressing legal risks associated – such as film and TV production –
leanly and efficiently in order to be of technology to now drive forward
with data, cybersecurity, employment navigate a way through by upending
in good shape for future challenges. business growth can no longer be
practices and more, and an imperative long-held approaches to risk allocation
debated or ignored. Every company
requirement to keep close to existing between parties.
and alternative lenders.
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will need to be alert to new technology fibre and 5G, as well as the shift to
earlier and in a more agile way than greener energy generation. With
before, standing ready to invest so much state funding already
in technology for efficiency and to absorbed by stimulus packages
drive alternative delivery models, through the pandemic, the likelihood
considering carefully how it can bring that private capital will stand behind
customers, employees, shareholders this investment is hard to ignore.
and leadership along. Action plans
for the year ahead need to set out If the engines of growth are to be led
the shape of the optimum return by private capital, technology and
to the office and the continuation infrastructure, it is already apparent
and revival of client engagement that the direction of the recovery will
programmes, with technology sitting firmly point towards a much more
at the heart of those transitions. sustainable growth story. A renewed
focus on corporate purpose – to
Finally, governments around the world include diversity and inclusion as
have committed in various ways to well as environmental, social and
putting infrastructure at the heart of governance issues – will be integral
the global recovery, with promises to future paths to growth, whether
to build back better as they invest stimulated by regulatory change,
in infrastructure as the engine of investor demands, consumers or
growth. What that investment looks employees.
like will vary across jurisdictions, but
it will undoubtedly include significant The ability of today’s business leaders
backing for the infrastructure now to appreciate these new imperatives,
required to sit behind the technology and adapt and advance their business
we are using so much more frequently, models accordingly, will be what sets
such as network access, reliability, apart the winners of tomorrow.
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need to demonstrate the viability of new of the pandemic are poorly placed to
continental operations is pressing. continue with their pre-Covid Brexit
planning. In some sectors, the impact
One senior executive at a global financial of the two trade shocks in such close
institution says: “Brexit is going to have an proximity could be disastrous.
impact and we’ve already started planning
Dealing with
for that, moving more people on the Andrew Lewis, Global Head of Legal &
continent. People have already put their Compliance at Intermediate Capital Group,
hands up and will be transferred, though I says: “Our planning always assumed a no-
Macroeconomic think some of that transferring has slowed
because of Covid.”
deal scenario because we were planning
for the worst. So the pandemic didn’t really
Change Many in the financial services industry,
change how we were looking at it.”
and beyond, feel adequately prepared At Irish telco eir, CEO Carolan Lennon
While dealing with the impact of 2020 was not spent focusing on the having got to the brink of a no-deal exit says her biggest concern about Brexit is
Covid-19 and identifying new paths mechanics of an orderly exit as had at the start of the year. Stephan Caron, the wider impact on the economy. She
to growth, businesses have been been hoped. Brexit planning, if not Managing Director and Head of European says: “I don’t think Brexit is going to be
simultaneously grappling with a already embedded or well underway, Private Credit at BlackRock Alternative a huge issue for us, because 99% of our
period of quite unprecedented needs to continue with some vigour Investors, says: “Our Brexit plans were in business is in the Republic, but if it has
macroeconomic change. On 31 now that the UK has officially left the place already pre–Covid – we had made a negative impact on the Irish economy
January 2020, the UK formally left EU and is shaping a new direction. the changes that we had to make and lots then we don’t know how that will translate.
the EU and the delivery of Brexit was of training sessions were organised for I still think telecommunications is like
front of mind. Most organisations Banks in the UK are under intensifying our teams, so I don’t think it’s changed electricity and water–during the pandemic
were absorbed with implementing pressure to get their new hubs anything. Therefore we’re confident that we saw how important telecoms is to
operational changes that would allow in the EU up and running quickly we’re ready to operate in this new post- homes and businesses. While we did put
their smooth transition to a new EU/ now, despite the fact that Covid’s Brexit world.” extra resources into supporting our small
UK trading environment, and then the unexpected travel bans and remote business segment, which was the one most
pandemic hit. working have thrown into question In other sectors, it is also apparent that the impacted, the rest of our customers from
plans to relocate bankers, traders, risk pandemic has left companies in a worse large businesses to consumers continued
Brexit managers and others from London to state of preparedness for Brexit. A report to use our services and in many cases their
The full impact of the pandemic on Europe. How regulators will respond from the Institute for Government warned usage increased. I think the impact of Brexit
the UK’s exit from Europe is yet to be to these new dynamics, particularly if in July 2020 that the virus has made on us will be minimal enough.”
understood, but certainly the transition the pandemic continues throughout a difficult task much harder, and firms
period that ended on 31 December 2021, remains to be seen, but the reeling from the economic consequences
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Employment disruption UK unemployment hit its highest with the sectors benefitting most from
While coronavirus support measures the country into an official recession. level for more than four years when that support including accommodation
have been broadly welcomed by The economy shrank 20% compared it rose to 5% in the three months to and food services; arts, entertainment
businesses, the UK economy suffered with the first three months of the year, November 2020, up from 4% when and recreation; and construction,
its biggest slump on record between as household spending plummeted the pandemic struck, but is expected according to HMRC. Employment in
April and June as lockdown pushed and output fell. to increase even more – with young the retail sector fell 45% in August,
people the worst affected – when the the sharpest decline since 2009,
furlough wage support scheme ends. compared to a drop of 20% in May,
Real GDP fell by 20.4% in Quarter 2 2020, the largest
That scheme has backed some 9.6 with more job losses expected,
quarterly contraction on record
million workers through the lockdowns, according to the CBI.
UK, Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2020
Index (2019 Q4 = 100)
105
Young people hit by rise in unemployment
100
Percentage of economically active people aged 16 – 24
who are unemployed
95 30%
90
25%
85
20%
80
15%
16 – 24:
13.4%
75 10%
2008 Q1 2009 Q3 2011 Q1 2012 Q3 2014 Q1 2015 Q3 2017 Q1 2018 Q3 2020 Q1
Source: Office for National Statistics – GDP first quarterly estimate 5%
UK:
4.1%
0%
2010 2015 2020
Source: Office for National Statistics. Margin of error: ± 0.4%
Further interventions will be needed staff development schemes and create
to address unprecedented levels of a future workforce equipped to deal
unemployment throughout 2021, with with the shifting demand for labour and
the onus shifting to businesses to accelerating pace of automation.
embrace apprenticeships and other
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Trade wars
Finally, as if the unprecedented dual New trade barriers have the potential
economic shocks of Covid-19 and to cause widespread disruption,
Brexit were not enough for businesses though Stephan Caron is optimistic
to contend with, US-China trade war about resilience in the European
concerns and the uncertainty and mid-market. “The reality is a lot of
controversy around the US presidential the companies we invest in are not
election have added a further layer of big enough to the point where they
complexity. Companies will now be have to worry about the effects of
turning their attention to adjusting to trade tariffs,” he says. “Mid-market
working with a new and very different companies tend to be quite domestic
US administration, which should prove and, when they do have international
positive in many sectors. operations, it’s not a big part of their
business.”
Josh Hu, General Manager at Chinese
film studio Huayi Brothers International, Caron adds, “The US elections are
says the trade war is being felt. important, but big geopolitical events
generally have less effect on the
It’s interesting because
mid-market. We do have portfolio
if you look into the
companies that will be impacted by
marketplace, I’d say you
the Brexit withdrawal agreement, but
cannot feel the impact of we know what the worst possible
the trade war. But if, for outcome might be, and we stressed
example, you are looking that going into those deals.”
into financing opportunities
in response to Covid, Still, it seems indisputable that the
you do feel that people’s long-term prosperity of the UK lies in
responses, and potential embracing multilateralism and striking
investors’ responses, are new high-quality trade deals, putting
influenced by it.” the onus on the government to support
exporters reeling from the pandemic
while simultaneously increasing efforts
to attract inward investment.
18 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Growth
Levers
Liquidity
Innovation and Digital
Acquisitions and Disposals
Cost Management
Reimagining the World of Work20 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Liquidity
The lockdown of significant
parts of the UK economy that
began in March 2020 resulted
in sharp revenue declines in
many sectors, with airlines,
hotel operators, retailers and
car manufacturers among the
hardest hit. Other businesses
saw an increase in costs as
they were forced to shift to
remote working and address
considerable disruption to
supply chains and customer
demand.22 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Accelerated business lending While some companies could make From a company perspective, one
As poor trading conditions and In contrast to the 2008 financial crisis, additional drawdowns on revolving executive at a UK mainstream media
restrictions continued through the the Covid-19 crisis saw bank lending credit facilities, others had to approach player says her business also learned
year, many CFOs faced severe accelerate as businesses sought banks to arrange short-term extensions liquidity lessons from the last crisis.
revenue declines that put sudden loans to help cover their costs when to facilities or covenant waivers. Even “During the last financial crisis, liquidity
and unanticipated pressure on revenues dropped and banks were well-capitalised companies were forced was an issue for us, and the business
working capital lines and liquidity. well-positioned to respond. Banks to explore options beyond incumbent learned a lesson and really equipped
According to an EY ITEM Club Interim lent non-financial companies just over lenders, including special situations itself well. So, actually facing down the
Bank Lending Forecast published in £30 billion in March 2020 – around funds that could deploy capital more barrel of this pandemic and economic
August 2020, additional bank finance 100 times the average of net lending flexibly and creatively at short notice. collapse, we are in a much better
was tapped by a significant number over the preceding 12 months. With The amount of money now available in position. We have liquidity, we have
of corporates and SMEs during the government-backed loan schemes also the private credit markets is much more good cash reserves and we have a
first few months of the pandemic, making an impact, lending continued significant than it was during the global great banking facility, so that is less
with business lending expected at high levels through the year and is financial crisis, European private debt of a concern.”
to hit its highest level in 13 years likely to remain high through at least managers had almost $93 billion of
capital available as of December 2020, State intervention
compared to an average decline the first half of 2021.
of -1.4% from 2010 to 2019. according to data provider Preqin. The UK government, in some cases
alongside the Bank of England,
Lessons from the global introduced several support initiatives
Annual growth of lending to SMEs and large businesses financial crisis to help corporates deal with liquidity
Seasonally adjusted
Total Large businesses SMEs
One leveraged finance expert says and other funding issues through the
% changes on a year earlier
25% banks are in much better shape to crisis. In addition to the Coronavirus
20% respond to the demand for liquidity Job Retention Scheme, various
than they were during the last crisis. business rate and grant reliefs, an
15%
“We have transformed from a liquidity extension of the HMRC time to pay
10%
perspective, and that is partly why tax arrangements and the deferral of
5% we were very well placed when we VAT payments, low-interest loans have
0%
suddenly faced a massive liquidity been made available through the Covid
call in the early weeks of March and Commercial Financing Facility (CCFF),
-5%
Jan Jan Jan Jan Jan Jan Jan April 2020. Everyone drew down and the Coronavirus Large Business
2014 2015 2016 2017 2018 2019 2020
we ourselves did not have a liquidity Interruption Loan Scheme and the
Source: Bank of England Statistics Money and Credit Report (October 2020)
crisis, because of the lessons of Coronavirus Business Interruption
2008 and the buffers we had.” Loan Scheme.24 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Change in forecasts for 2020/21 public sector net While many businesses of all sizes He adds:
borrowing, March–July 2020 spent the spring and early summer of
Result of automatic Result of
We looked at liquidity in
2020 investigating options available
terms of what the needs of
changes in the economy government policy
£400bn £55.8bn £372.2bn to them under these schemes,
the business might be over
a significant proportion found
£83.7bn
they were ineligible or took policy
the next 6–12 months, and
£300bn
decisions not to tap into taxpayer- it has been difficult to look
£52.8bn
funded support mechanisms. beyond that. We feel pretty
£24.5bn -£5.2bn
good about what we see in
£200bn
£105.7bn
Walter Wang, Vice President of the portfolio–there might be
£100bn
£54.8bn
Operations at esports business one or two names where
TSM, says: “We are a company there is a little bit of stress,
£0bn that is growing. Fortunately, we and we need to keep an eye
felt confident we would be able to on that, but generally we’re
March 2020 Lower tax Higher welfare Other forecast Support for Support for Support for July 2020
forecast revenues spending changes public services thresholds businesses forecast
Source: Institute for Government analysis of OBR, Fiscal Sustainability Report, July 2020; and OBR, Covid policy
navigate this difficult time without in a good position.”
measures database. Chart adapted from OBR, Fiscal Sustainability Report executive tables, C3.
any government aid.”
By the end of April, more than £10
In asset management, many fund billion of commercial paper had been
managers made similar decisions purchased through the CCFF, with 35
The Cost of Covid-19 to the UK’s public finances in 2020/21
and instead went to existing bank business issuers. At the same point,
and non-bank lenders to seek more than 25,000 business loans had
Support for businesses £55.8bn Lower tax revenue £105.7bn forbearance or extensions of credit. been issued through the business
Liquidity pressures varied enormously interruption scheme, at a value of
across sectors, and therefore portfolio £4.2 billion, according to the Office
Support for households £83.7bn Higher welfare spending £24.5bn
exposures are mixed. Stephan Caron for Budget Responsibility. With the
at BlackRock Alternative Investors job retention scheme estimated to
Support for public
Changes in forecast -£5.2bn (saving) says: “We see understanding where have cost £35 billion by August, and
services £52.8bn
the liquidity pressures sit as one of the extended to run beyond April this
Total result of government Total result of automatic changes: key stress tests, like everyone else. We year, the uptake of government support
policy: £192.3bn £125bn are fortunate that we invest in a lot of initiatives has been considerable
defensive businesses that weren’t so and is likely to end up costing well
Total cost of Covid-19 (change in public borrowing 2020/21) £317.4bn affected by the crisis, and therefore in excess of £100 billion.
Source: Institute for Government analysis of OBR, Fiscal Sustainability Report, July 2020; and OBR, Covid policy liquidity pressures have been far
measures database. Chart adapted from OBR, Fiscal Sustainability Report executive tables, C3.
less there than in other sectors.”26 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Richard Kitchen, Finance Partner at for extra cash was the government
Paul Hastings, says: “The experience of schemes, there is going to come a
businesses from a liquidity perspective point where the government is no
depends very much on the camp that longer supportive and that money
they fell into. Those private equity is going to dry up.”
portfolio companies that didn’t pull
down on government schemes and He says those companies that moved
instead went to their existing lenders quickly to address liquidity challenges
and found them to be supportive will will likely be among the first to emerge
likely continue to receive that support. from the crisis.
However, if your first port of call
Europe-Based Private Debt Assets under Management, 2000 - 2019
200
Assets under Management (€bn)
180
160
140
120 120
100 91
80 80
67
60 43 53
37
40 11
8 27 33 61 59
5 6 5 21
20 1 1 1 1 1 2 2 4 4 13 16 33 34 36 36 42
9 12 13 12 16 18 18
0
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dry Powder (€bn) Unrealized Value (€bn)
Source: Prequin Pro
*Figures exclude add-ons, grants, mergers, venture debt, and secondary stock purchases
Key takeaways:
• Start thinking now about how their lenders quickly in real-
your business model might time discussions based on
be challenged in a post- pragmatic and realistic
Covid environment and get scenarios were the ones that
ahead of liquidity issues by found those institutions to be
talking to lenders early. Those most supportive.
businesses that engaged28 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Innovation If there is one good thing to
emerge from the chaos wrought
and Digital by the Covid-19 pandemic, it
is the launch pad for technical
innovation that it has provided
to businesses. If necessity is
the mother of invention, it is
little wonder that the rapid
pace of change seen in 2020
has brought with it a swathe
of digital transformation.30 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Agile working Having workers operating from Digital transformation
The most obvious sign of digitisation tools to facilitate it. Many are looking kitchen tables rather than secure Beyond the agile workforce, the
is the accelerated adoption of remote to maintain that momentum. office environments also creates experience of the pandemic has
working. According to PwC’s CEO cyber and data risks, both of which given companies the green light
survey last year – based on interviews Jane George, General Counsel and have been the subject of enhanced to invest in the tech that will drive
with nearly 700 CEOs in 67 countries Public Affairs Manager for Northern, regulatory scrutiny. One regulatory their digital transformation and
through June and July 2020 – 86% Central and Eastern Europe at Campari counsel at a UK broker dealer says: allow them to seize market share
of UK CEOs believe the shift towards Group, observes: “We were just “Where large-scale organisations through the recovery. Whether that
remote collaboration is here to stay. rolling out Microsoft Teams when the have dispersed and employees are means speeding up supply chains,
Furthermore, 77% think there will be lockdown happened, and that caused working from home, that has obviously putting robotics to work, setting
an enduring shift towards increased the rollout to happen much more amplified the need for monitoring to up new e-commerce channels,
automation. The world was already quickly, within a week. There was no keep track of regulatory compliance. using social media to conduct tech-
moving towards more agile workforces, opportunity for people to grumble and That is particularly important with driven market research or leveraging
but the coronavirus pandemic has resist–people just had to adopt it and trading activities, where people are artificial intelligence (AI) to increase
made that happen much faster, forcing they did. They got up and ran with it.” adopting ad hoc solutions to deal efficiencies, Covid-19 has injected
businesses to quickly develop the with challenges and are removed new urgency into the pace of change.
But remote working does not come from the usual surveillance of
without challenges, and there are working at a trading desk.”
those that believe the logical next
step is the adoption of virtual reality The pandemic is accelerating Sharply, putting UK business years
ahead of where they expected to be
(VR) technology in workplaces. digital transformation By a matter of months
Companies are already making use of
VR for collaborative team workshops A next-generation
48% 30%
operating model
and for training – a PwC study into
the effectiveness of VR for soft skills
A seamless digital
training found VR learners train four customer experience
30% 50%
times faster and were four times more
focused than those in a classroom New digital business
models and revenue 20% 38%
or using online training. For meetings, streams
VR goes beyond standard video
New workforce model,
conferencing software to allow with human workers
22% 32%
augmented by automation
endless numbers of resizeable and artificial intelligence
whiteboards, for example, that would 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
not be possible in the physical world. Source: KPMG UK CEO Outlook 202032 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
imaging, have served to highlight the A senior executive in one of the
possible. Where corporates had digital bulge-bracket banks says:
strategies two years ago, tech now
Our technology division
needs to be integral
The COVID-19 crisistohas
every part of
accelerated the digitisation
is massive now; it’s one
of customer
the interactions by several years
business plan.
of our biggest divisions.
We have our in-house
Average share of customer interactions that are digital, % Precrisis COVID-19 crisis
The OECD estimates that as many
people developing all kinds
100
as 14% of jobs could disappear
Global Asia Pacific in the Europe North America
Adoption Adoption Adoption Adoption
next acceleration
20 years as companies
1
automate.
acceleration 1 of platforms toacceleration
acceleration 1 develop 1
3 years 4 years 3 years 3 years
documents intelligently,
65
KPMG’s UK CEO Outlook 58 2019 55
53
showed business leaders prioritising extract data and analyse41
it, even 32digitising our
36
tech spending over training to improve 32
25 25
committee memos.
22
their20organisational
20
resilience, 19
with 18 19
two-thirds planning to spend more There is a huge amount
of investment going into
0
on tech than capital
JUN MAY DEC JUL
investment into
2019 2020 Years ahead of the average rate of adoption from 2017 to 2019
1
those innovations.”
2017 2018
Daniel Geller, Lead Legal Counsel services and, in doing so, becoming developing their workforce’s skills
at fintech Revolut, says: “While more familiar and confident with and capabilities.
providing money to customers accessing what were once traditional
travelling abroad was impacted, we services offered exclusively via bricks-
found customers really looked to take and-mortar banking and financial Across business areas, the largest leap in digitisation
is the share of offerings that are digital in nature
advantage of other newer products, services providers. We found that, on
like cryptocurrencies, trading, and the whole, our customers quickly got Average share of products and/or services that are partially or fully digitised, % Pre-crisis COVID-19 crisis
commodities.” more comfortable with fintechs, crypto 100
Global Asia Pacific Europe North America
and new ways of transacting online, Adoption Adoption Adoption Adoption
acceleration1 acceleration1 acceleration1 acceleration1
He adds: “We found customers were and we hope to see this trend carrying 7 years 10+ years 7 years 6 years
60
taking advantage of buoyancy in on into next year as well.”
55 54
50
cryptocurrencies during 2020, for 35 34 34
41
33 33
Rapid adoption 29 31
example, and the upheaval allowed 28 26 26 25
us to push those more innovative In specific response to the pandemic,
products a bit more to our customer the speed with which companies 0
base. Our customers, like the rest of have been able to develop robotic, JUN MAY DEC JUL 1
Years ahead of the average rate of adoption from 2017 to 2019
2017 2018 2019 2020
the United Kingdom, were at home, contactless solutions to everyday Source: McKinsey report on how Covid has pushed companies over
relying on digital applications to tasks, and the rapid advances made in the technology tipping point and transformed business forever
access critical day-to-day financial testing and monitoring tech like thermal34 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Data security
As companies have dramatically At the end of 2019, before any of us Key takeaways:
accelerated their digitisation agendas, had even heard of Covid-19, Accenture • Be alert to, and stay up to training on data privacy and
their reliance on and use of data published research showing 84% of date on, new technology and cyber risk, enabling and
has increased exponentially. At the C-level executives believed that they digitisation opportunities for empowering employees
same time, acquisitions of technology would not be able to achieve their your business and ensure to embrace technological
businesses, often underpinned by business strategy without scaling AI. your chief compliance advances in a way that remains
digitally-native data architecture, took They thought if they did not make officer, information security/ safe, compliant and secure.
off during 2020. the investment, they would be out data protection officer and
of business by 2025. And yet, at the • Consider HR and cross-
other members of senior
Sarah Pearce, Partner in the Privacy time, only 16% had made the shift business discussions to allay
management are involved
and Cyber Security Practice at Paul from experimentation to widespread fears of automation/AI/tech
with discussions as early
Hastings, says: “People are conscious adoption of AI capabilities. Accenture innovation replacing humans in
as possible. This will help
that they need, and want, to push the looked into what set these top the workplace. To improve buy-
ensure adequate resources
boundaries of what technology can do performers apart, and identified in and adoption, focus on areas
are committed to optimise its
and roll it out quickly, but they need to a need for strong data, multiple of opportunity in business and
use, and avoid data privacy
make sure that it is done in compliance dedicated AI teams, and a board-level productivity improvement that
and security issues creating
with applicable laws and regulations, commitment to strategic, company- align with the wider workforce
hurdles to deployment.
notably those relating to data privacy wide deployment. Employee reluctance as well as strategic/financial
and security. That is particularly true was identified as a barrier. • Pay close attention to goals.
as it goes hand in hand with the employee engagement and
regulators being more active in terms In other words, a huge hurdle is
of enforcing those laws, with some getting the buy-in of stakeholders for a
significant fines announced recently.” fundamental scaling of tech – a global
pandemic that threatens to overhaul
It is also true that the new generation every business model on the planet
of consumers is much more savvy has certainly shifted thinking, moving
about enforcing their rights in respect the dial profoundly when it comes
of data, particularly in Europe. to customer, employee, investor and
Pearce adds: “All of this means that shareholder appetite for revolution.
compliance really needs to be front of
mind, but it certainly shouldn’t hinder
the roll-out or take-up of technology.”36 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Acquisitions
and Disposals
After a strong start to 2020,
European M&A volumes
dropped dramatically at the
end of March 2020 and have
been gradually recovering ever
since, as most major European
economies continue to deal with
restrictions on movements and
activities.38 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
With most sectors either working These numbers are in part the M&A deals by sector B2B B2C Energy Financial services
Healthcare IT Materials & resources
from home, operating at limited result of several mega-deals
100%
capacity or closed completely, a closing in the second quarter that
90%
significant number of transactions had been announced many months
80%
were pulled or put on hold at the before the impacts of Covid-19, but it
onset of the pandemic in Europe. is nevertheless clear that transactional 70%
Still, figures from PitchBook’s 2020 appetite did not dry up completely. 60%
European M&A report make for pretty With many transactions put on 50%
positive reading, with European M&A standby or slowed by the lockdown, 40%
totalling an impressive EUR1,064 we could even see pent-up demand 30%
billion in 2020, keeping pace with 2019 and backlogs fuelling strong M&A 20%
figures despite the pandemic. numbers into 2021.
10%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*
M&A Activity Europe to end Q3 2020 Deal value (€B) Estimated deal value (€B)
Source: Pitchbook | Geograhpy: Europe
Deal count Estimated deal count
12,393
11,805 10,478
10,969 11,246
10,380
10,178 10,041
9,794
8,713
7,647
8,036 7,352 Sponsor-backed M&A new collaborative tech and new due
A marked difference between the diligence requirements, those buyers
5,950
current economic slowdown and rebounded in the second half and are
previous downturns is the existence sure to feature heavily as M&A markets
4,217
of significant volumes of dry powder go into the recovery.
€1,064.2
in the hands of financial sponsors
€1,058
€1,100
€1,128
€1,100
€1,201
€563.6
€640
€568
€306
€511
€657
€658
€695
€877
looking to do deals. The annual Many cash-rich private equity firms will
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*
proportion of sponsor-backed M&A see an opportunity to snap up assets
Source: Pitchbook | Geograhpy: Europe
has been growing in Europe since with lower valuations as a result of
2012, and that continued in 2020, dislocation, or to consolidate positions
when 33.7% of deals were sponsor- in key sectors. Take-private activity
backed. While sponsors were less and carve-outs from major corporates
active in H1 of last year, turning their with balance sheet pressures could be
attentions to their portfolios and in line for an uptick. Auction processes
reassessing deal processes in the could be highly competitive in certain
face of remote working, the testing of sectors, pushing investors to sharpen40 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
up their auction strategies to react Public deals will be particularly Fund overview and LP perspective
quickly to opportunities. challenging in terms of access to Private capital overhang ($B)
information and time pressures against $3,000 Total
$2,603 2020
Ed Brogan at Brookfield Asset takeover timetables, as well as the $2,500 $2,489 $2,490 2019
Management expects the market need to commit significant resource $2,230 2018
$2,000 $1,882 2017
for deals to be competitive going and costs upfront. $1,744
2016
$1,644
$1,535
forward. He says: “We seek to position $1,500 $1,322 $1,340 $1,354 Overhang
2015
by vintage 2014
ourselves to do proprietary, bilateral Matthew Poxon, M&A Partner at Paul
$1,000 2013
deals where possible and, where deals Hastings, says: “We are managing to Cumulative
overhang
are intermediated and competitive, get public M&A deals done, but buyers $500
we typically look for an angle where need to allow time to prepare to do $0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*
we can bring more than capital to a those deals; they need to frontload
Source: PitchBook Private Fund Strategies Report Q3 2020
situation.” the preparation.”
M&A as a strategic response
Sponsor vs corporate backed M&A Sponsor-backed
More broadly, the adverse impact on as a significant part of our business
Corporate
Sponsor-backed % business confidence and valuations strategy. Through the entire lifecycle
12,000
was bound to affect M&A in 2020, as of our company we have identified
40%
fundamental changes in consumer and acquired assets, including
10,000
32.3% 33.1% 32.2%
28.7%
behaviour and supply chains played websites and technology, that have
30%
8,000 out. M&A is now likely to feature aligned with our future plans. While I
strongly in the strategic responses think M&A is important to our industry,
6,000
20% of corporates. As businesses I suspect in the next 12 to 18 months
4,000
across a wide range of industries we will see more venture activity than
10%
position to leverage M&A for growth M&A.”
2,000 and resilience, some may look to
divestitures and others to placing Josh Hu at Chinese film studio
0 0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 additional strategic bets in growth Huayi Brothers International says his
markets or in distressed assets. acquisition strategy will continue. He
Source: Pitchbook Q3 2020 European M&A Report
says: “We always only invest in those
Walter Wang at esports business TSM companies that are closely related
says: “We have always viewed M&A to the distribution and production42 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
of feature films, and we are carrying He adds, “Asset classes and sectors Roger Barron, Global Vice Chair M&A Change (MAC) clauses, but
on that investment strategy. After the will continue on markedly different at Paul Hastings explains: sellers would try to resist
crisis, we will have a simplified focus trajectories, and there will be Covid related MACs as the
back on content production, so that distressed assets in the market this Previous events, such as risk was a ‘known unknown’
will be the focus of any M&A.” year. Potential buyers will continue to the 2007-8 financial crisis
for all. Instead, we helped
assess those opportunities.” or the Brexit vote, affected clients build in structural
Finally, Stephan Caron at BlackRock parties in different ways
says his firm remains open to good Government support packages around
solutions, such as put and
at different times, but
acquisition opportunities: “We will the world will taper or take a new
call options over negotiated
Covid-19 was universal. We
always consider M&A as a strategy, form by the end of H1 2021, and it is deals with some parameters
had already been seeing a
but it has to have a compelling possible that those may have delayed to provide an acceptable
convergence of US and UK
narrative behind it. We have a plan some strategic decision-making and balance of risk, at least until
law and practice in areas
to grow the business organically, so put off distressed sales. As M&A such time as the markets
such as Material Adverse
we’re not dependent on M&A to grow, processes resume, new areas of became more settled.”
but if the right platform presents itself diligence will have emerged, including
and can fill a gap that gets us to scale the need to look carefully at the
quicker, that’s obviously something extent to which targets have relied on
we would consider.” government support packages through
lockdown. As parties look to share
Poxon says: risk, more joint venture structures are
We are seeing a K-shaped already starting to be deployed, while
recovery, with real estate, M&A deal terms such as termination
hospitality and retail and force majeure provisions will also
move up the agenda as transactional
businesses continuing to
activity picks up.
suffer from the impact of
Covid, while other sectors
that took a pause simply
because the economy as
a whole took a pause are
now increasing production
and revenues.”44 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Key takeaways:
• Keep acquisition opportunities • Give due consideration to the
under constant assessment, UK’s new National Security
particularly as signs of and Investment Bill, which
distress begin to emerge introduces a screening regime
when government support that means a much higher
funding comes to an end. In number of deals will be subject
public M&A, a great deal of to possible intervention on
preparatory work can be done national security grounds.
in advance to position buyers Early discussions with advisers
to seize opportunities. will be critical as the new law
came in in January 2021 and
• In private M&A, auction
has retrospective effect, with
processes are going to
the potential to catch deals
continue to be prevalent thanks
up to five years after they
to the wall of investor cash
have taken place.
fighting to acquire assets. Hone
a smart approach to auctions • These new rules continue a
in advance to increase the direction of travel that has been
chances of success, whether evident for some time, and
that means pre-empting bring the UK into line with other
the entire process or taking developed countries including
steps to increase certainty France, Germany and the US.
of execution.46 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Cost With so many organisations
plunged into crisis mode by
Management the coronavirus pandemic and
related social distancing and
lockdown measures, a sharp
contraction forced many to
focus firmly on protecting
balance sheets last year.48 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
The Deloitte CFO Survey published order as part of an immediate cost start mandatory collective information current and anticipated needs of the
at the end of Q2 2020 revealed a containment exercise. and consultation processes 45 business going forward while also
commitment among finance leaders days or 30 days prior to the date of realising the payroll cost savings.
to bearing down on costs and However, as the longevity of the dismissal to coincide with the end
building cash reserves, with defensive outbreak becomes a reality, business of the furlough scheme and mitigate Many have sought alternatives to
strategies very much in favour. In all, leaders’ focus must shift from the legal risk and payroll costs during that redundancies – including reductions
61% of CFOs rated reducing costs as urgent cost cutting to the important process or to hold tight and wait to see in pay and hours of work, temporary
a strong priority for their business in cost optimisation to ensure longer-term if government policy changes again shutdowns or workshare schemes –
the next 12 months, placing it above resilience. The focus at this stage is and offers either a life line or reduced all of which were especially attractive
increasing cashflow and reducing not only on achieving substantial cost support for a further period. where companies felt confident of a
leverage in the top three corporate reductions but also on doing so in a swift bounce back once restrictions
priorities. sustainable manner without impeding For many businesses, the workforce are lifted. As the focus has shifted
the business’s ability to thrive having is the most prized asset and difficult to longer term cost management
Identifying cost levers was top of the survived the worst of the pandemic. to replace and making severe cuts measures, performance reward
agenda in many corporate reactions risks hampering the speed with which programmes have come under review
to the pandemic. Daniel Geller at Payroll costs normal business can resume when and there has been a renewed interest
Revolut says: With staff wages often the most the opportunity arises. For those in alternative service delivery models,
manoeuvrable cost lever available to employers, this is an opportunity to including offshoring and near-shoring
When Covid first hit, and
bosses, redundancies have become transform the workforce to meet the options.
indeed whenever times are
necessary in some sectors of the
tough, we always reassess
economy, particularly as the levels of
a lot of our cost and spend support offered to employers via the UK has shed nearly 830,000 jobs since February 2020
and the vendors that we UK government’s Coronavirus Job Number of payroll employees compared with March 2020 (000s)
work with.” Retention Scheme (commonly referred
0
to as the ‘furlough scheme’) dwindle.
Short-term cost saving measures
-200
were part of the initial response The furlough scheme has been
to Covid-19, as business leaders extended several times and is now due -400
reacted to their rapidly changing to end on 30 April 2021. Undoubtedly,
operating environment. Temporary this seismic intervention has delayed -600
recruitment freezes, the renegotiation the need for further job cuts. However,
of key contracts, a review or delay of if the furlough scheme does end in
-800
Jan 19 Jan 20 Jul 20 Feb 21
upcoming capital expenditure and a April, large employers will again face Based on tax data.
halt to staff bonuses were just a few the unenviable dilemma whether to Source: ONS
© FT
of the measures introduced in short50 NAVIGATING NEW PATHS TO GROWTH A STORY OF RESILIENCE AND AGILITY SECTION JUMP 04 06 12 19 66 78 122 RETURN TO CONTENTS
Changing property demands to landlords at a time when clarity on Many businesses were already
Real estate costs are often the second Any assessment of whether real demand for space has been lacking. sharpening their focus on costs in
largest spend for businesses but estate cost savings are available to anticipation of a downturn or a Brexit
Sharpening the focus impact. Andrew Lewis at Intermediate
are harder to manipulate in the short business leaders will need to carefully
term. Covid-19 and its related social consider how the space they retain From a corporate perspective, some Capital Group says:
distancing and lockdown restrictions will be used. Whilst fewer staff in of the many other available cost levers
have resulted in commercial tenants offices may be a consequence, the that have been spotlighted include We have embarked on a
giving serious consideration to their space required for each employee the renegotiation of key contracts, number of initiatives to focus
real estate requirements both short considering social distancing, safety optimisation of inventory levels, the on costs and make sure we
and long term. and hygiene requirements will likely realignment of business, operating are getting the best value
increase, resulting in a reversal of the and cost models, external spend from our suppliers. That is
The growth of agile working has pre-pandemic trend of increasing management and business process something we were doing
led to the suggestion that some office density. optimisation. All businesses have anyway as we are always
businesses might significantly reduce observed a clear requirement for agile cost conscious. We haven’t
the requirement for office space going As leaders are reassessing their and scalable cost models and have made any redundancies
forward. Miles Flynn, Partner in the property requirements, landlords paid close attention to supply chain
or put people on furlough
Real Estate group at Paul Hastings, have come under pressure to accept over-reliance.
or reduced hours. There is
notes: “The lockdown measures short-term rent reductions or payment
certainly a fair amount of
resulting from Covid demonstrated holidays. Twenty-year fixed term leases
discipline but probably no
that many businesses can switch to are beginning to look like the stuff of
more than in normal times.”
remote working with relative ease. history, forcing property owners to
The increased flexibility in where we consider more flexible lease models,
work will remain after the pandemic; with shorter terms and more options
the benefit of retaining that flexibility to increase or decrease footprint
is clear. However, it is also clear that during the life of the lease, as well
there is real value in many cases to as potentially permit space sharing.
in-person collaboration and in the
improvements in workforce morale Where the future need for space and
and productivity that come with being a plan for how it will be used can be
together. It is likely that staff will want to determined now, there is a potential
retain the flexibility to work from home, window of opportunity for business
and that office spaces will become more leaders to renew and/or renegotiate
of a focus for collaboration, coaching, leases on favourable terms as the
training and bringing people together.” quid pro quo for providing certaintyYou can also read
