Private equity and venture capital in the USA (outbound investment)

Written on 31 Jan 2017

As we consider the state of global investment activity, we can look back at the statistics of 2016 which show a reasonable year for cross-border investments, an increasing confidence of VCs and corporate investors (CVCs) supporting fast growth businesses in a different jurisdiction.  This has mainly been US investors taking equity in European and Asian companies, but outbound Asian investors are being more prominent in the league tables, particularly outbound from China in tech businesses.  However, there are many other newsletters and glossy reports cutting the numbers in every direction, which is best left to accountants and VCs.

The biggest question is how will 2017 fare against the year just completed and in one of the most uncertain political climates we have experienced for some time?  The issue is not just that one market is impacted by an election or change in regulation, but that we have a number of issues which could materially change the world – both in terms of economy but (perhaps more important in the short term for investors), confidence.

The most immediate is the change of administration in the US when the Republicans regain government but with a very different style of President and one which has shown a reluctance to look beyond borders (or indeed to penalise those who do).  US investors are sophisticated and particularly the CVCs may be less inclined to make overseas investments if they are able to repatriate the billions of dollars currently “stuck” overseas if the President fulfils his promise to reduce the tax rate to bring those funds back into the US – particularly if they are then used for domestic investments.

However, whilst the US is the first in line to change, Europe equally faces an unstable future with the UK starting the Brexit timetable by the end of Q1.  Whatever the outcome of the trade deals done between the UK and the EU and the UK and the rest of the world, there will still be a time when nobody has clear answers in terms of the final outcome nor the impact it will have on the way in which business is done in Europe.

Passporting within the EU will continue around the remaining 27 Member States, but could be withdrawn from UK funds in 2019 (or when the negotiations conclude with the EU).  Non-UK EU employees may be granted residence rights in the UK but almost certainly new entrants will need visas similar to US (and non-EU) citizens which will cause operational changes.

Continental Europe will also not escape with elections in Germany and France, unsettled times following changes of government in Italy and the euro continues to struggle against the US dollar (which may work in favour of investments from the US).  Asian investments overseas remain limited, but for those with confidence, short term risk could result in longer term gains assuming the world returns to normal in the next couple of years.

Overall the trend towards aligning market terms irrespective of geographic location and the acceptance by investors, companies, management teams and advisors to support cross-border deals is a reflection of the increasing ease and normality of doing business globally.  It will be a pity to experience a decline in globalisation, but if there is then we would expect it to be short term until confidence rises and the upside of maintaining a portfolio of companies from around the world can be achieved and support the every growing customer demand for international goods and services.