By Andrew Frost, Executive Director at Lawson Conner (part of IQ-EQ)
Global market appetite for Mergers and Acquisitions (M&A) look set to remain strong, despite the continued market turbulence caused by the pandemic, particularly across special situations distressed and private debt strategies.
A growing number of countries are emerging to the dawn of a retreating pandemic which is currently set towards presenting increasingly favourable market conditions for fund and investment managers seeking new or additional M&A opportunities. Global equity markets have regained significantly from their recent lows demonstrating confidence returning. Future focus from an M&A perspective is heading towards horizontal and vertical market acquisition, together with the consolidation of businesses within verticals that have been hardest hit by Covid-19.
DCM funding in support of M&A has been the predominant heavyweight over and above equity during the past year and this dynamic is set to continue, making the DCM a key area of interest for M&A fund and investment managers who are looking towards leveraging the new opportunity landscape. Reduced time to transact, combined with operational excellence, compliance and regulatory know, how will also be of primary interest in supporting investment from small cap and mid cap opportunities for both large and small and new and established players.
Market leading innovators are creating digitised hosted solutions with wholly or part managed service offerings around regulatory compliance and their associated and respective fund governance – delivering operating cost savings whilst raising efficiencies and reducing risk.
Here we highlight what should be significant focus areas for M&A Investment and Fund Managers in the near-term market transition:
Speed to Market
Key to the M&A pursuit for start-up or emerging funds will be in their agility and ability to capitalise on leveraging the investment opportunities quickly, together with relatively predictable costs of acquisition. For many fund and investment managers that operate on tight timelines and budgets, the choice between gaining full FCA compliance versus having an Appointed Representative (AR) solution is a logical one – AR facilitates the ability to be fully operational and compliant in a matter of weeks combined with relatively predictable spend, as opposed to the alternative possibility of FCA compliance taking up to a year, together with a pronounced increase of risk of un-qualified spend and overstretching budgets. Equally, taking the fastest route to AR accreditation in terms of timeline does not preclude later migration to a full FCA licence over the longer term, if that is a strategic ambition horizon.
AR works by effectively outsourcing to a ‘Principal Firm’ who assumes the regulatory oversight and compliance monitoring. Area around regulatory reporting, ongoing governance and a robust training and competence program with established policie and procedures around gifts and benefits, PA dealing with SMCR and GDPR compliance all form and comprise the integral elements of the Regulatory Host’s service expertise and platform offering.
Regulatory and Compliance risk reduction
The ever-changing regulatory and compliance landscape presents one of the biggest burdens for fund and investment managers. With constantly evolving and changing legislation, it becomes a hugely onerous and costly operation to maintain. This is without factoring the necessary internal staff resources of hiring and retaining highly skilled and well-paid professionals.
Recent changes in the European markets and the departure of the UK from the European Union presents challenges in an evolving legislative environment with a particular possibility of the risk potential of European political and FCA divergence. Investment and fund managers are finding themselves fundamentally operating in unknown and uncertain terrain and this is set to continue until greater clarity is established. However, by adopting timely and proactive measures towards engaging early with specialist outsourcers who are able to provide operating platforms that support governance, regulatory infrastructure and risk compliance reporting, this overhead can be reduced significantly and reciprocally, time to execution accelerated. Importantly, these managed provider services may be complemented with passporting capabilities, facilitating investment enablement towards operating across border jurisdictions. Fund managers can significantly improve due diligence and reduce risk, complexity and unnecessary overhead to their strategies by outsourcing many operational and transactional components – permitting increased time towards greater focus and acceleration of the core business.
Traditionally we have seen slower adoption of innovation by both new and existing entrants to the world of DCM but we are now seeing visionaries that are leveraging the benefits of an increasing digital transactional hosted approach, achieved through RegTech platforms and their like. This approach simplifies and reduces time to market in the construction and ongoing maintenance of fund portfolios and is significantly underpinned by dedicated managed service providers and their expert staff.
Exponential gains may be realised in speed of execution, reduction in costs, increased operational elegance and reduced risk, particularly focused towards support of Alternative Investment and Debt Capital driven fund and investments. Reciprocally, we are also seeing the drive to digitise complete deal workflow for high volume low margin deals on the market facing side across the AML and KYC burden of investment and target due diligence.
Digital transformation can remove the onerous overhead costs associated with investment governance whilst simultaneously reducing both qualitative and quantitative risk together with driving down operational costs – no mean achievement.
Adoption of a digitally centric approach removes many ‘pain points’ relating to setting up, launching and maintaining Debt Capital and Alternative investment funds. In most cases these fund types are seen to benefit from outsourcing of the substantial and arguably, the broader and more generic operational and governance tasks – including due diligence, compliance and regulatory.