Is your portfolio fit for the future or fashioned on the past? Businesses are reshaping for a better tomorrow through portfolio transformation.

Transcription

1 Is your portfolio fit for the future or fashioned on the past? Businesses are reshaping for a better tomorrow through portfolio transformation. Global Capital Confidence Barometer May th edition Real Estate, Hospitality and Construction (RHC) respondents The better the question. The better the answer. The better the world works.

2 About the study EY s Global Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by Euromoney Institutional Investor Thought Leadership. The respondent community comprises an independent panel of senior executives and select EY clients and contacts. Our 18th Barometer provides a snapshot of our findings, gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agenda. Participant profile: Respondent community includes over 2,500 senior executives surveyed in March and April 2018 Companies from 43 countries Respondents from 14 industries, including 147 from Real Estate, Hospitality and Construction (RHC) Produced in association with 2,258 CEO, CFO and other C-level executives Page 2

3 RHC key findings Macroeconomic environment and M&A outlook Broad based synchronized growth underpins buoyant economic outlook, with dealmaking intentions remaining at nearrecord levels. 71% see the global economy as improving 83% see the M&A market as improving 46% intend to pursue acquisitions Growth and portfolio strategy Executives are looking to transform their portfolios. They will be using divestments to raise funds to acquire technology and talent. 69% say that portfolio transformation is top of the boardroom agenda 65% identified an at risk or underperforming asset to divest during their most recent portfolio review 29% expect increased cross-border dealmaking as companies look across borders for growth and innovation External environment 91% 34% 42% Executives are looking outside their company to understand risks and opportunities. say increased infrastructure spending will have a positive impact on growth cite potential changes in trade policies and rising protectionism as a key risk to their business see rising inflation as the dominant risk to their current investment plans Page 3

4 Macroeconomic and external environment Page 4

5 Broad-based synchronized growth underpins buoyant economic outlook What is your perspective on the state of the global economy today? Improving Stable* 22% 28% 29% 65% 71% 75% With all major indicators of the global economy pointing up, RHC executives feel confident about global growth in 2018: Our survey shows 99% of RHC executives view global economic growth as improving or stable. Business leaders see little or no downside in the global economic outlook. Several quarters of synchronized growth globally, along with optimism around the impact of US tax reform, are contributory factors to this positive sentiment. 1% Declining 3% 6% Apr-18 Oct-17 Apr-17 *GDP growth = same as 2017 Page 5

6 RHC executives remain positive on the sector s economy What is your perspective on the RHC sector s economy today? Improving 55% 66% A majority see the sector s economy improving: However, there has been a shift in sentiment towards stability vs. six months ago. There also appears to be little downside with only 5% seeing the sector s economy declining. Stable* 27% 40% Declining 5% 7% Apr-18 Oct-17 *GDP growth = same as 2017 Page 6

7 Corporate earnings the main pillar of executives confidence in capital markets Please indicate your level of confidence at a global level in the following: Corporate earnings Credit availability Short-term market stability Equity valuations/ Stock market outlook Improving 77% 70% 52% 55% 49% 40% 53% 47% 55% 41% 49% 37% Stable 22% 28% 45% 42% 47% 46% 44% 48% 37% 56% 45% 36% Declining 1% 2% 3% 3% 4% 14% 3% 5% 8% 3% 6% 27% Apr-18 Oct-17 38% 45% 6% 23% 39% 43% 51% 53% Apr-17 Declining 2% Strong corporate earnings bolster upbeat assessment of capital market conditions: The outlook for corporate earnings, credit availability and short-term market stability remains strong and all have improved over the last six months. Executives remain confident in the capital markets. Page 7

8 Strong increase in confidence for capital market indicators in the RHC sector Please indicate your level of confidence in the following for the RHC sector: Corporate earnings Credit availability Short-term market stability Equity valuations/ Stock market outlook Improving 59% 60% 45% 61% 50% 64% 41% 58% Stable 34% 40% 38% 49% 35% 40% 41% 49% Declining 1% 6% 1% 6% 1% 10% 1% 10% Apr-18 Oct-17 1% 10% 35% 40%50% 64% RHC executives feel confident about the sector s capital markets: RHC executives see large improvement in credit availability, short-term market stability and equity valuations/stock market outlook. However, corporate earnings took a move towards greater stability. Page 8

9 The re-emergence of inflation raises old fears What is the bigger risk to your current investment plans? Rising inflation Market volatility Interest rate hikes 10% 39% 42% After several years of persistently low inflation, executives cite rising inflationary pressures as a key risk to their investment plans: From a longer-term perspective, the reemergence of inflation poses the biggest risk to investment plans. Inflation can easily trigger higher material costs and wages as well as undermine supply chain agreements. More so than market volatility, currency shifts and interest rate hikes, rising inflation could place an immediate strain on the availability of cash to reinvest and recycle into growth opportunities. Currency fluctuations 9% Page 9

10 Executives are navigating a wide range of external issues that could hamper growth What do you believe to be the greatest nearterm risk to the growth of your business?* Political uncertainty Geopolitical tensions Changes in trade policy and protectionism 30% 34% 33% 44% Disruptive forces, including technology, digital transformation, sector blurring and changing customer behaviors Interest rate increases 53% Uncertainties out of their direct control are unsettling executives, but understanding the issues is the first step in being able to navigate these risks: With policy becoming harder to predict, just over half of executives see political uncertainty as a key risk to their business and a large number cite geopolitical tensions. If protectionism increases, it could interrupt the efficient flow of goods and services between countries. Disruptive forces, including technology, digital transformation, sector blurring and changing customer behaviors, could have a more immediate impact on their businesses. Understanding the broad swath of external risks enables executives to understand the transformations needed within their own ecosystems. This will better enable them to survive and thrive in a fast-changing environment. *Respondents were able to select up to three options. Only top five risks displayed and results reflect the percentage that chose each risk. Page 10

11 Government investment in infrastructure Page 11

12 RHC executives anticipate increased investment by governments in infrastructure Do you expect the government in your country to increase infrastructure spending over the next 12 months? Global respondents 81% RHC 19% How will government spending on infrastructure impact your growth plans? Important, it will increase our growth rate 73% 64% Critical, our growth is at risk if there is no investment 18% 14% No impact 9% REHC RHC 22% Global Global 25% Oceania 1% US 41% Where should government infrastructure spending be focused? 75% 91% APAC and India 9% 87% 99% Japan 59% 13% 69% EMEA 31% Improving transport infrastructure 38% 36% Housing/home build programs 26% 6% Public services infrastructure (schools, hospitals) 23% 19% Building new technology infrastructure 13% REHC RHC 39% Global Yes No Page 12

13 Boardroom agenda and shareholder activism Page 13

14 A new era of continuous portfolio transformation beckons Which of the following will be most prominent on your boardroom thinking during the next six months?* Portfolio transformation buying and selling assets to reshape your portfolio for the future 69% Impact of increased economic and political uncertainty 41% Shareholder activism, including returning cash to shareholders 38% Increasing regulatory or governmental intervention 29% Impact of digital technology and transformation to our business model/threat of digitally enabled competitors 22% *Respondents were able to select up to three options. Only top five risks displayed and results reflect the percentage that chose each risk. Identifying strategic gaps in their portfolio is the main priority for boards: The paramount need to reshape portfolios in an era of accelerating change means a shift to an almost continuous assessment of current operations, risks and opportunities. Page 14

15 Technology fosters many of the questions boards are asking as well as the answers Which of the following technologies are most prominent on your boardroom agenda? Cloud computing and big data AI and robotic process automation Distributed ledger technology (blockchain) Others 6% 16% 34% 44% Boardrooms are focused on technology to improve decisionmaking and boost company performance: One technology that boardrooms are currently focused on is cloud computing. This is where the data and technologies to understand the data collide. Companies are increasingly using analytics, artificial intelligence (AI) and instantaneous data gathering to make better-informed decisions about their portfolio. As such technologies become more widely adopted, they will influence every area of a company s operations and decision-making processes. Companies are more focused on ownership and control of data than ever before. Page 15

16 Activist shareholders and executives in tune about the need to transform portfolios On what do you expect shareholder activists to focus their influence in the next 12 months? Divesting/disposal of assets 44% Returning cash to shareholders or buybacks 22% Driving cost reductions Changing company strategy 12% 13% Increased investment/acquisitions 7% Appointing board members 2% A more activist shareholder base has emerged: Both board members and activist shareholders are keenly focused on portfolio transformation and asset disposals. Page 16

17 Portfolio transformation Page 17

18 Executives look to optimize their fitness for the future by transforming their portfolios How frequently are you reviewing your portfolio? Continuously Every quarter 8% 4% 3% 3% Every six months 33% 27% Annually 55% 64% Less frequently than 1% annually 2% REHC RHC Global Is this more frequent than three years ago? RE, HC and cons 32% 68% Yes No If yes, what is the key reason for reviewing your portfolio more frequently? The threat to our business from digitally enabled competitors and startups 30% Changing customer behaviors 23% Sector blurring/increased competition from companies in other sectors 13% 17% Impact of digital technology and transformation to our business model 17% Identifying areas for investment Page 18

19 Divestitures will be a critical component of successful portfolio transformation As a result of your most recent portfolio review, what was the main action taken? Following your most recent portfolio review, over what time frame have you achieved or do you expect to achieve your objectives? We identified an asset at risk of disruption to divest 36% Within six months 23% We identified an underperforming asset to divest 29% We identified areas where we need to make acquisitions 16% We differentially invested capital in a particular business unit 7% We did not take any specific actions 7% We rebalanced capital allocation across the whole portfolio 5% Within one year Between one and three years 24% Between three and five years 4% Over five years 0% Don t know 1% 48% Executives look to divest: This may be an opportune moment to divest. What may not suit one portfolio may be an ideal fit for another. Page 19

20 Human capital transformation Page 20

21 Changing business models and more flexible labor complexities still being resolved Which of the following workforce issues is your organization encountering?* Determining how to utilize contingent workers 66% Problems in identifying and hiring people with the right skills 58% Restrictions on the cross-border movement of workers 33% Difficulty in reskilling our existing people to better respond to technology changes 30% Deciding on if/when to outsource particular functions 15% *Respondents were able to select all options that applied. Only top five risks displayed and results reflect the percentage that chose each risk. As portfolios and business models become more agile, fluid and responsive to change, the challenges in securing the right mix of workers are greater: The increasing use of more flexible workforce models raises complex issues and may expose companies to financial and reputational risk. The need to maintain continuity of operations, and build and retain institutional knowledge also comes into play. Page 21

22 M&A outlook Page 22

23 Dealmaking to continue as companies look to transform Do you expect your company to actively pursue mergers and acquisitions in the next 12 months? 56% 59% 50% 57% 56% 56% 52% 33% 40% 51% 46% 35% 32% 30% 35% 50% 43% 39% 41% 49% REHC average since % Average RHC REHC Global Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 While future RHC dealmaking intensions remain above their CCB average, they will likely be disciplined: Executives are continuing to be more disciplined in their dealmaking, with more than two-thirds (72%) saying they have failed to complete or have walked away from a deal in the past 12 months. And of these, the majority (56%), say it was due to competition from other buyers or disagreement on price/valuation. Page 23

24 RHC executives are signaling their confidence in the global M&A market What is your expectation for the global M&A market in the next 12 months? Improving 37% 51% 83% The vast majority of RHC respondents expect the global M&A market to improve over the next 12 months: Executives are signaling a continued confidence in the global M&A market. However, executives are mindful of the shifting landscape of governmental or regulatory intervention in dealmaking. 16% Stable 44% 55% 1% Declining 5% 8% Apr-18 Oct-17 Apr-17 Page 24

25 RHC executives expect the sector s M&A market to show strong improvement What is your expectation for the RHC sector s M&A market in the next 12 months? RHC respondents are optimistic about dealmaking: Improving 68% More than two-thirds of RHC executives see the M&A market improving and none see any downside. 51% 32% Stable 42% 0% Declining 7% Apr-18 Oct-17 Page 25

26 RHC pipelines expected to increase Considering the next 12 months, how do you expect your M&A pipeline to change? Increase 43% 50% Executives optimistic about their pipelines: Fifty-percent of respondents expect their pipelines to grow, up 7% from six months ago, and no respondents believe their pipelines will shrink. 41% 50% No change 54% 50% 0% Decrease 3% 9% Apr-18 Oct-17 Apr-17 Page 26

27 Completions to rise as dealmaking underpins growth options Considering the next 12 months, what is your expectation for the number of deal completions by your company compared with the past 12 months? Increase 36% 41% 41% 59% Completions may benefit from better targeting: Nearly 60% expect to complete more deals in the near term vs. our last survey. But discipline will be maintained. Companies are increasingly using sophisticated methodologies to source potential targets. They are also using new and evolving due diligence techniques and analytics to assess planned acquisitions. No change 56% 51% 0% Decrease 3% 13% Apr-18 Oct-17 Apr-17 Page 27

28 Executives expect increasing competition for assets Do you expect to see increasing competition for assets in the next 12 months? Yes No 19% 81% The competition for assets broadly expected to heat up over the next year: More than two-thirds of executives see private equity taking a bigger role in dealmaking for these assets. If so, from where? Private equity and other funds 69% Corporate buyers 31% Page 28

29 Executives holding firm on dealmaking discipline even as M&A market accelerates Have you either failed to complete or cancelled a planned acquisition in the past 12 months? Yes No 4% 3% 20% 18% 28% If yes, what was the primary reason? Competition from other buyers/disagreement on price/valuation Intervention by activist investors 56% Concerns about competition or antitrust reviews Regulatory or governmental intervention Issues uncovered during due diligence 72% Valuation concerns and increased competition compelling buyers to walk away: With both equity and M&A valuations at elevated levels, the pressure on buyers is increasing. But executives are acutely aware that the deals still have to make both strategic and financial sense. They are unwilling to overpay for assets. External concerns are also a barrier to getting deals over the line. Activists and antitrust regulators have also stymied deals over the past 12 months. Page 29

30 US tax reform Page 30

31 US tax reforms may bring some upside to M&A Do you expect the recent changes in corporate taxation in the US to have an impact on global M&A? 70% 79% 69% RHC REHC respondents US respondents Non-US respondents Companies are still considering the full implications of US tax reforms and their strategic response: Both US and non-us executives do see some potential boost to dealmaking from the US corporate tax code reforms. However, a similar number of non-us executives are downbeat about the potential impact. The majority do not expect a material impact either way. Taxation levels, in and of themselves, generally do not drive dealmaking. Tax is part of the calculations on valuations and future growth potential, but deals are driven by strategic objectives. 16% 13% 16% 14% 8% 15% In today s environment of relatively loose monetary policy, strong corporate earnings and elevated stock prices, the ability to fund deals has not been an impediment to M&A. Increase dealmaking No impact Decrease dealmaking Page 31

32 Reforms see some lapsed deals resurrected Yes Are there any deals that you had previously decided not to pursue or put on pause that you are considering again in the light of recent changes in corporate taxation in the US? 8% 21% 24% REHC RHC respondents US respondents Non-US respondents The full implications of US tax reforms yet to be seen: Where there may be an uptick is inbound activity into the US. A fifth of RHC executives say they are reconsidering deals they had previously decided not to pursue or put on pause in the light of recent changes in corporate taxation in the US. Given the fluidity of the situation, executives should carefully consider all implications and the potential opportunities the reforms may yield. 79% No 92% 76% Page 32

33 Major themes in M&A Page 33

34 A return of PE and an increase in crossborder dealmaking dominate M&A What will be the main themes of M&A in the next 12 months? A return of private equity as a major acquirer of assets 31% An increase in cross-border dealmaking 29% An increase in cross-sector M&A driven by technology and digital 18% An increase in hostile and competitive bidding 12% A return of megadeal M&A activity 7% A slowdown in M&A activity 3% Similar to the results six months ago, PE dominates the main themes of M&A Executives see PE as the biggest story over the next year. Despite fears of greater protectionist actions by governments, executives still expect cross-border M&A to be a major theme of M&A in the next 12 months. Page 34

35 Lack of high-quality assets the largest potential risk to dealmaking What do you see as the biggest potential risk to dealmaking in the next 12 months? Lack of high-quality assets 40% Regulation and government intervention 34% High valuations 10% Funding availability for deals 9% Shareholder activism 5% I see minimal risk to dealmaking in the next year 2% Two risks dominate RHC executive concerns: Forty-percent of respondents cite a lack of high-quality assets as the biggest risk. Government and regulatory intervention is also cited as a major potential risk to dealmaking. These will also have to be considered carefully when assessing deals. Page 35

36 Sector outlook Page 36

37 The US and China remain the top two investment destinations from six months ago Top five investment destinations 1 US 2 China 3 Brazil 4 Canada 5 France Page 37

38 Participant profile Page 38

39 Survey demographics RHC respondents What are your company s annual global revenues? What is your position in the organization? >US$10b 10% US$5b-US$10b 8% US$3b-US$5b US$1b-US$3b US$500m-US$1b 10% 16% 34% 25% 56% 19% Senior VP, VP, Director C-level executive Head of business unit/dept. US$250m-US$500m 22% What best describes your company ownership? 54% 37% 8% Publicly listed Privately owned Family owned Government-/stateowned enterprise 1% Page 39

40 EY Assurance Tax Transactions Advisory About EY EY is a Global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the Global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you re preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda EYGM Limited. All Rights Reserved ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/ccb ey.com/rhc