The Investment Opportunities in the UK and European regions after COVID-19

PBEC Insights UK & EU Markets – July 2020 An opinion piece by Renee Pan

Brexit and the 2019 general election has caused significant financial uncertainty within the UK. Brexit even though widely forgotten during the coronavirus pandemic is still very much alive. The UK are entering critical stage of negotiations with European Union. This along with the coronavirus (COVID-19) situation has increased the level of financial uncertainty within the region. Given the unprecedented scale of disruption caused by the COVID-19 pandemic, economies have stalled within most segments of the UK and wider global economies in ways not seen since the World War II, the prediction is that a  recession is likely to occur in the  very near future, which may well change how we live, work and operate for many years to come. This unprecedented change will provide many investment opportunities. Opening up new and additional levels of investment area for the APAC region investment companies, particularly within both the technology and healthcare sectors.

Investment models based on macro themed-approaches will provide less useful investment guidelines. This significant economic challenge under the current global pandemic environment is likely to increase financial volatility in certain geographical areas and add downward pressure on produc and services pricing. However, this environment also provides an extraordinary opportunity for investors to acquire quality companies at lower than expected valuations. Valuation are again at attractive levels. However, in is appreciated and understood that things may get worse before they get better. In these uncertain times, it is always tempting to wait for the perceived bottom to be reached.

Against the background of a weaker sterling currency, this will make acquisition and investments within the UK attractive for the first half of 2020. Sterling fell dramatically against the Chinese yuan following the UK’s vote to leave the EU in June 2016 and it has remained at a low level against the major currencies ever since. In August 2019, the sterling currency reached its history lowest point against the Chinese yuan for past two years. Asian investors, both private and institutional investment enterprises have been actively snapping up bargains. Uncertainty around Brexit plus the COVID-19 means a wide range of quality UK assets have been available to purchase with deals worth a total of £3.6 billion. During the second half of 2019, the sterling made a modest recovery following the appointment of a new UK prime minister, Boris Johnson and the subsequent general election in December 2019, created a clear outcome and greater certainty within financial markets.

China’s Belt and Road inspiration has enforced a more focused overseas investment strategy, it remains generally keen on seeing growth opportunities pursued internationally in a range of strategically valid areas from infrastructure projects to cutting-edge technologies. During the outbreak of  COVID-19, the Chinese businesses continue to pursue and try to complete overseas deals and pay attention to existing international operations, the UK is committed to strengthening its economic relationship with China even during the expected economic recession. However, with a wide range of international events planned and financial trends changes, this will continue to shape trade and investment patterns and opportunities between the UK and China for some time to come.

For the APAC region FDI opportunity, the investors will be about assessing the quality of any potential investment targets, as we move forward, private equity firms will be looking at decent opportunities while there is still an historically high amount of dry powder ready to invest. On the backside of each economic downturn, the sophisticated investors will be looking to invest in fundamentally strong companies at good valuations with good management as well as the intention of not falling for perceived “cheap” deals or low price companies in the current climate.

During the past three months, the incremental development of the coronavirus (COVID-19) outbreak has been prompting unparalleled financial responses across the continent of Europe within governments, financial institutions, companies and individual sectors.

Rahm Emanuel, former chief advisor to US president Barack Obama, during the 2008 financial crisis  mentioned that ‘you never let a serious crisis go to waste”.

Small and medium-sized enterprises (SMEs), which are the life blood of the European economy, currently have massive financial risk exposure. The acquisition trend that we had seen from Asian companies acquiring SMEs for values below 100 million euros in the last few years looks likely to continue as investment screening guidelines do not pay much attention to small businesses. The exacerbated current economic calamity will lead to even more acquisition opportunities for APAC investors. At the same time, certain FDI industries instead are predicted to grow and benefit from the COVID-19 crisis. According to specialists in Foreign Direct Investment, business sectors such as e-commerce, cybersecurity, renewable energy and private equity (PE) will benefit from this unprecedented virus pandemic.

Johannes Huth, the Managing Director of KKR mentioned that “during the global financial crisis we devoted all our energy to rescuing companies we already owned’. According to Lukas Schäfer, Senior Partner at McKinsey said ‘buy-out activity is pretty much dead, most of existing deals taking place are concentrated in healthcare, biotechnology”.

In Europe, PE-owned firms appear to be reluctant to use government aid. Also, many company’s do not qualify for state-backed loans, because of debt to loan debt rations being too high. The European Union also bans firms with accumulated losses exceeding 50% of share capital from receiving state aid. The PE industry one one hand is soliciting the European Commission to relax the regulations, and on the other hand, as of August 2020, PE firms will focus on their most troubled existing investments. For instance, the hard-hit leisure and travel industries. APAC market investors will be able to weather the crisis and the demand for alternative assets will continue to hold up, The perception is that the crisis will strengthen the PE industry within itself the “dry powder” that enables it to snap up bargains with APAC region counterpart.

COVID-19 should serve as a significant warning to governments worldwide. The combination of environmental degradation and wide economic interconnection has made the financial world more vulnerable than ever before. PBEC priority is to protect our members and partners participating in our events and dialogues as always, while ensuring that the members and industry partners have the support they need to safeguard businesses sustainability through this crisis and in to the future.

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