The dust has finally settled on the US Presidential elections. While most dealmakers are relieved that a big source of uncertainty has been dealt with, they will have to brace themselves for higher corporate tax and detrimental changes to the treatment of carried interest. Regulatory burdens will also become more onerous under a Biden Presidency, potentially blunting deal making activity. But all things considered, the conditions necessary for a much improved deal-making environment in 2021 have emerged.
The reasons for such optimism are apparent at the tail end of 2020. The prospects of a vaccine being available in the first half of 2021 are now clear. The only question is the efficiency of distribution and the effectiveness of mass immunization programs. A post Brexit trade deal between the UK and EU is almost at hand. Financial conditions remain benign as governments continue to provide fiscal stimulus and central banks maintain low interest rates and preserve asset purchase programs.
Businesses with strong balance sheets will seek opportunities for inorganic growth and private equity sponsors with ample dry powder will intensify their hunt for investments. In such an environment, animal spirits will be fuelled by an increasing fear of missing out as businesses transform digitally and exploit the potential of the Fourth Industrial Revolution to drive productivity growth.
The need to make supply chains more resilient against shocks will also drive deal making activity as re-shoring and near shoring become strategic imperatives. The search for resilience will also drive for sustainability in ways of doing business. Combined with capital from asset managers and pension funds focused on environmental, social and governance investment principles, businesses with sustainability embedded in their DNA will be the subject of investor attention as governments, investors and the general public get serious about the green new economy.
The effects of an adjusting business environment in which resilient businesses that have more effectively weathered the impact of the pandemic rise above pandemic impaired businesses will create opportunities for acquisitions, consolidation and re-combinations. Restructuring and insolvency will ensue from the gradual reduction and cessation of stimulus packages, furlough schemes and temporary relief from legal action in the immediate aftermath of the pandemic. Businesses reliant on such artificial props for survival will undergo restructuring, dispose non-core assets, be re-capitalised or liquidated, all duly lubricated by the continuing availability of competitively priced financing.
But pitfalls will remain. Nationalism and identity politics will continue to dominate. The recently tabled national security and investment law in the UK is just the latest in a long list similar laws enacted by many Governments including those in the West and India, Japan and Australia. Undertaking cross border deals will become harder and take longer as clearances become more complex. Not only due to heightened foreign investment scrutiny but also because of the efforts of competition authorities to stem transactions that result in greater concentration and domination of data and technology by an ever smaller coterie of elite global tech giants.
The bifurcation of technology between China and the US will continue to impact trade and investment flows and by extension, deal-making activity. Supply chains will adjust accordingly and it will be harder for the two supply chains to commingle. Business owners will not only find their universe of customers and suppliers becoming smaller but also their pool of investors. In a continuing reaction against globalisation, participants of one “techno-sphere” will find themselves increasingly unwelcome in the other.
In the meantime, tech giants will, in 2021, likely face the most significant onslaught that they have ever experienced from regulators, politicians and the general public. Instead of being voracious acquirers of competitors, they will more likely divest and restructure.
The effect of restructuring and insolvency will also be an unknown. The recent defaults of State-backed enterprises in China is an omen that certain assumptions may no longer hold in 2021. The long term effects of the pandemic on financial institutions and financial infrastructure remain to be seen. Asset prices have recovered from the sharpest fall in history in the steepest ascent ever recorded off the back of massive fiscal stimulus packages financed by the most rapid expansion of sovereign debt in economic history.
Meanwhile, central banks have rapidly accumulated the largest haul of financial assets since the advent of quantitative easing to keep long term interest rates low. Banks now record the thinnest net interest margins in their history as interest rates turn negative and rapidly ageing populations struggle to find returns for retirement.
How long can this last? In many ways the inevitable adjustment to the global economy and in turn, the deal-making environment, have not yet been seen. This uncertainty is probably what represents the greatest risk to the prospects of a swashbuckling year for deal making activity in 2021.
Munir Abdul Aziz
Managing Partner
E: munir.abdulaziz@wongpartners.com
Wong & Partners
Level 21, The Gardens South Tower Mid Valley City
Lingkaran Syed Putra Kuala Lumpur 59200, Malaysia
T: (60) 3 2298 7854
W: www.wongpartners.com/en