KPMG Private Equity Forum. 11 December 2017

Transcription

1 KPMG Private Equity Forum 11 December 2017

2 Agenda Introduction Nick Stevens KPMG CI Brexit and the fundraising considerations Iain Bannatyne Ben Honeywood KPMG UK KPMG CI EU Blacklisting update John Riva KPMG CI Local PE Trends Rob Kirkby KPMG CI Q&A KPMG Channel LLP, a UK Islands limited liability Limited, partnership a Jersey and a member Company firm of and the KPMG a member network firm of independent of the KPMG member network firms affiliated of independent with KPMG International member Cooperative firms affiliated with ( KPMG International ), a Swiss entity. All rights reserved. KPMG International Cooperative ( KPMG International"), a Swiss entity. All rights reserved. 2

3 Brexit and the fundraising considerations Iain Bannatyne, KPMG UK Ben Honeywood, KPMG in the Channel Islands 11 December 2017

4 European fund raising market Continued increase in capital raised by European managers, which if trajectory continues, will result in 2017, exceeding 2007 existing record level. Adding to the global levels of dry powder, which continue to trend up KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4

5 European exit market Exits are trending down due to currently highly priced assets, resulting in longer hold period. Reduction is largely driven by corporate transactions increasing the proportion of PE Secondary deals. Likely to see the proportion of secondary buy out deals continue to grow given level of capital at PE managers disposal, KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 5

6 European acquisition market Continue of trend of increase in bolt on s as a proportion of deals, demonstrating managers have to work harder to get the returns. Also keeps liquidity in the lower levels of the market, despite the funds being raised by the bigger managers KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 6

7 Why the need for change? It s Brexit Stupid! AIFMD Flexible Managers Broader factors impacting decision making 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 7

8 What does the future look like? Based on cross section of 35 of our key PE clients covering a variety of strategies Category 3 (22%) continuing to use offshore structure e.g. Channel Island, Cayman, Delaware 16% 22% 62% Category 1 (62%) set-up or considering EU jurisdiction and/or increasing substance of existing EU operations Category 2 (16%) continuing to use fully UK based structure Category 1 Category 2 Category KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 8

9 What does the future look like (part 2)? BVCA TLR 14% 14% 72% Luxembourg Dublin Status quo 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 9

10 Brexit The UK voted to leave Ease of access to the EU markets Desirability of the UK market Access to talent 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 10 ( KPMG International ), a Swiss entity. All rights reserved.

11 AIFMD AIFMD EU passport Non-EU AIFM NPPR, reverse solicitation Third country passport Fourth country treatment Sustainability of delegation 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 11 ( KPMG International ), a Swiss entity. All rights reserved.

12 Flexible managers The rise of the host AIFM testing the water Substance and what it might mean for Advisory firms Growth of the diversified PE Houses agnostic domiciles 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 12 ( KPMG International ), a Swiss entity. All rights reserved.

13 Broader factors impacting decision making Investor preference Political landscape and public opinion Tax considerations Growth of new markets 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 13 ( KPMG International ), a Swiss entity. All rights reserved.

14 Recommendation Those with an UK AIFM need a post Brexit EU AIFM contingency plan, either a: - Third party solution, or - In house solution Luxembourg currently leading the pack for private equity but Ireland becoming a credible alternative for AIFM s Those currently without an EU AIFM may go the same way but on the face of it, BREXIT does not change anything 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 14 ( KPMG International ), a Swiss entity. All rights reserved.

15 Luxembourg considerations

16 How UK private equity/debt funds raise money in Europe? Parallel funds structure EEA Investors Management Agreement VAT free fees for Risk Management Services, VAT free fees for Portfolio Management Services PE/DEBT House US/UK Investors AIF SCSp EU AIFM Advisor LTD Investment Manager Cayman Fund LPS GP Services GP LPS Profit split LP Delegation agreement Fees for Portfolio Management Services LP Background Certain potential EU investors in PE House s Funds have expressed their inability to invest in a non-eu fund structure/indicated their strong preference to invest in a European structure leading to parallel fund structures SCSp Investments Key takeaways of a parallel fund structure Ability to market the structure in Europe using passport EEA investors would invest in the AIF whereas Non- EEA investors would invest in the Cayman vehicle. This ring fences the impact of AIFMD to the AIF and the economics associated with EEA investors (such as the costs of AIFMD compliance) 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 16 ( KPMG International ), a Swiss entity. All rights reserved.

17 Irish considerations

18 Funds Market in Ireland Industry Size Total Assets Under Administration (EUR Bn) Irish Domiciled Funds 4, ,000 3, % 4% 22% 3, % 2,500 2, % 1, % 1, Bond Alternatives Aug 2017 MMF Balanced Equity Other Source: Irish Funds 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 18

19 Jersey position

20 Why Jersey (Channel Islands) Fund raising offering remains compelling: - NPPR remains in place, works in a number of situations, demonstrated by numerous recent high profile fund raisings in CI during 2017 (and many planned for 2018); - Non - EU 27 capital remains significant majority of the capital base in Jsy. Operating model is in place and effective - Stable regulatory frame work, implemented by regulator who knows asset classes and nuances of the industry; - Well established work force, NED and service provider community; Jersey Assets under management up 14% year on year (PE $91bn); fund raising remains on course... Global market remains buoyant KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 20 ( KPMG International ), a Swiss entity. All rights reserved.

21 Thank you

22 EU Blacklisting Update John Riva 11 December 2017

23 External Strategy for Effective Taxation Proposal: Mechanism to evaluate Third Countries to determine whether they should be black listed" Should replace the Tax haven EU list Criteria based on whether third country abides by the concept of Tax Good Governance standards on tax transparency, fair taxation and anti-beps measures 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 23 Document Classification: KPMG Confidential

24 The good news

25 Jersey not included on the Blacklist American Samoa Bahrain Barbados Grenada Guam Republic of Korea Macao SAR Marshall Islands Mongolia Nambia Palau Panama St Lucia Samoa Trinidad & Tobago Tunisia UAE 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 25 Document Classification: KPMG Confidential

26 The not so good news

27 The 3 criteria Tax transparency 1.1 Committed to implement CRS 1.2 At least largely compliant for exchange of information (including CRS) 1.3 Participate in OECD MCAA Future Criterion: International initiative on future global exchange of Beneficial Ownership Fair taxation 2.1 No preferential tax measures that would be regarded as harmful under the EU Code of Conduct on Business Taxation 2.2 The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction Failed Implementation of anti-beps measures 3.1 Addressing harmful tax practices 3.2 Tax treaty abuse 3.3 Country-by-Country reporting 3.4 Improvement in cross-border tax dispute resolution Future Criterion: Positive assessment of BEPS implementation 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 27 Document Classification: KPMG Confidential

28 We weren t alone Guernsey, Isle of Man, Bermuda, Cayman and Vanuatu BVI, Turks & Cacaos and Bahamas may also join us 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 28 Document Classification: KPMG Confidential

29 What constitutes real economic activity? In order to define criterion 2.2, the Code of Conduct principles are used to determine if the 0% rate is granted even without real economic activity and substantial economic presence: Real economic activity relates to the nature of the non-taxed activities Substantial economic presence relates to the factual manifestations of the activity that benefits from the non-taxation at issue By way of example, the following elements, taking into account the features of the industry/sector in question, will be considered: adequate level of employees, adequate level of annual expenditure to be incurred; physical offices and premises, investments or relevant types of activities to be undertaken. Whether there is an adequate link between real economic activity carried on in the jurisdiction and the profits which are not subject to tax Whether tax authority are capable (and are actually doing) investigations on carrying on real economic activity and exchange relevant information with other tax authorities 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 29 Document Classification: KPMG Confidential

30 Concerns with Criterion 2.2 CD or OT EU Member State Substance Profits 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 30 Document Classification: KPMG Confidential

31 Fund Structure Jersey EU Member State Fund Management Agreement Manager Directors No employees Outsource agreement Transfer Pricing for IA is based on cost plus model Investment Adviser Directors Large no of employees 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 31 Document Classification: KPMG Confidential

32 Defensive measures against blacklisted jurisdictions The EU Commission agreed last year that work on exploring defensive measures at EU level should be completed in due time Defensive measures expected to be presented to the EU Council at the same time as when they agree the list There has been much speculation including: Withholding tax on payments Denying tax relief for payments CFC rules Limitation of participation examples Switch-over rule Reversal of the burden of proof Special documentation requirements Mandatory disclosure of tax intermediaries of special tax schemes with respect to cross-boarder arrangements Reputational and operational issues of doing business in blacklisted jurisdictions 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 32 Document Classification: KPMG Confidential

33 Complete speculation

34 Example of a Substance Test : Netherlands At least half of the total number of directors reside or are actually established in the Netherlands The directors have the required knowledge to perform their duties properly The entity has qualified staff for proper performance and recording of transactions entered into by the entity Board decisions are taken in the Netherlands The entity s main bank accounts are held in the Netherlands The bookkeeping takes place in the Netherlands The entity has properly complied with all tax reporting obligations The entity s registered office is in the Netherlands The entity has sufficient equity for the functions it performs, taking into account the assets used and risks run 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 34 Document Classification: KPMG Confidential

35 What could the notification regime be? The Code provides for rules of profit determination in respect of activities within MNE Groups to comply with internationally accepted principles, notably those agreed by OECD Do we need to include Transfer Pricing rules? With a notification and exchange regime for when the rules depart from international norms? Apply only to MNE Groups? Or a more enhanced CbC reporting regime for all companies? 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 35 Document Classification: KPMG Confidential

36 What s next? There is a need to educate the EU Code Group on the types of business undertaken in the islands Need to consider the appropriate changes to our laws (tax law, Company law or Control of Work and Housing?) to satisfy the substance requirements Universal or EU related business? Understand the type of extra reporting needed Need to consider gateway conditions to limit scope Universal or EU related business only? Enact legislation, if required, by the end of next year But KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 36 Document Classification: KPMG Confidential

37 What about zero tax rate, especially after Brexit? 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 37 Document Classification: KPMG Confidential

38 Local PE Trends Robert Kirkby, KPMG Deal Advisory 11 December 2017

39 PE investors are paying increasing multiples US MM M&A transaction multiples Equity/EBITDA Debt/EBITDA Valuation/EBITDA * Source: Pitchbook 2017 KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International"), a Swiss entity. All rights reserved. 39

40 Listed fiduciary performance in 2016/2017* Brexit Share price rebased to January 2016 February 2016 March 2016 April 2016 May 2016 June 2016 July 2016 August 2016 September 2016 October 2016 November 2016 December 2016 January 2017 February 2017 March 2017 April 2017 May 2017 June 2017 July 2017 August 2017 September 2017 October 2017 November 2017 December 2017 * As of 6 December Share price rebased to 100 in January Source: Reuters Sanne Intertrust STM FTSE 2017 KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International"), a Swiss entity. All rights reserved. 40

41 Channel Island multiples Historic development of transaction valuation multiples by size of target in corporate, trust and fiduciary services market Deal multiples chart 20x 18x 16x EBITDA multiple 14x 12x 10x 8x 6x 4x 2x 0x Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Note: bubble size indicates deal value Source: Capital IQ, KPMG Analysis 2017 KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 41 Document Classification: KPMG Confidential

42 Current key trends in Channel Islands M&A Transaction drivers are globally aligned however, trends post deal are jurisdiction and industry specific Multi jurisdictional presence Access to new distribution channels 1 Share of client wallet New Busines s flows Available financing Current Transaction Drivers Regulatory pressures Yielding counter cyclical investments Upselling / downselling Investment in IT Cultural fit Cyber / IT Industry consolidation A good integration 2017 KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International"), a Swiss entity. All rights reserved. 42

43 Due diligence themes cross sector Customer stickiness Strength of senior management IT due diligence Regulatory compliance Cash generative Corporate and private client risk Differentiated proposition Appropriate funding structure Cyber security 2017 KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International"), a Swiss entity. All rights reserved. 43

44 Q&A

45 Thank you

46 kpmg.com/channelislands kpmg.com/app The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Document Classification: KPMG Confidential