The last six months have brought Europe to a tumultuous precipice and unchartered territory in terms of what the future of the European Union will look like and the level of ease of trade across the EU countries and their counter parties. As the British negotiator David Davis and the EU negotiator Michel Barnier begin Brexit talks this week, the TMA Europe annual conference in London on Friday (16 June) sought to assess the impact of key elections in the EU on investing in stressed and distressed situations within the European continent.
Market players from other regions in the world gave their outside view on investing in the region amidst the political turmoil, while a German advisor gave an inside view.
EY’s recent European Attractiveness survey showed foreign direct investment into Europe up 15% in 2016 from 2015, which reinforces the increasing desire of companies outside Europe looking to invest in the region, according to Andrea Guerzoni, a partner at EY and leader of EY’s Transactions Advisory Services for Europe, Middle East, India and Africa.
European M&A is also set to increase over the next 12 months, said Guerzoni, citing EY’s Capital Confidence Barometer.
“The biggest danger to investment in the region, especially inbound, is if we get more regulatory creep, and Europe, particularly the EU, becomes more protectionist,” said Guerzoni.
“The impact of Brexit and the referendums is overrated. The driving forces for investment thesis are business cases and market forces,” said Thomas Welte, a partner at Autaco, an accounting and tax firm based in Munich. He reasoned that investors are not deterred by a changing European Union because the EU has not existed in the same unchanging format since its inception with its six core members.
Welte also pointed out that the restructuring regimes across the EU are undergoing changes for the better, but that having different legal regimes could be considered a strength, especially when it comes to creating new company structures and entities during a restructuring.
What does hinder workouts is the lack of harmonised labour and market laws, which prevents investment in areas of the EU where labour systems cannot be dealt with easily, such as France, Welte added.
The political issues in the European Union and the Brexit negotiations will not deter Chinese investors, according to Fergal Power, a partner at KPMG in Hong Kong.
The recently released 13th Five Year Plan for China’s planned economy outlines strategic reasons to invest in several areas of the world: for natural resources it turns to Australia and South America, for tech the US, and the EU represents the second largest consumer market.
Chinese investors are actively looking at relevant platforms that they can support and invest in, said Power, citing the recent acquisition by China’s Geely Automobile Holdings Ltd of Volvo. The Chinese are especially looking at British retailers such as Tesco and Sainsbury’s that they can bring to China to feed the growing middle class.
This is also why they will be very active in anything related to infrastructure that bring Eastern Europe closer to Asia, such as the Belt and Road initiative, said Power.
But distressed investing is not an area Chinese investors are comfortable with, said Power. “Chinese investors seem less willing to take on riskier investments,” Power added. Instead, the Chinese are keen on investing in innovation, including not only tech but also design—areas that they can bring back to their own internal market.
Meanwhile in Canada, Milly Chow, a partner at Blakes, suggested there was more of a wait and see attitude towards the UK specifically. Direct investing is somewhat on hold in order to see how Brexit will unfold; whether it will be hard Brexit or soft Brexit, she said.
But with the broader EU continent, Canada has just entered into a comprehensive trade agreement with the European Union that is set to become effective in July. It will eliminate 98% of tariffs when it becomes provisionally effective.
“It was supposed to become effective to coincide with our national holiday 1 July but there appears to be a bit of a kerfuffle over cheese, so it may be delayed,” Chow said.
Canada’s southern counterpart has grappled with its own political turmoil under newly elected President Donald Trump.
“From a business perspective, things are actually pretty good,” said James H.M. Sprayregen, a partner at Kirkland & Ellis. The new Trump administration actually features many individuals with business and bankruptcy backgrounds.
Those individuals include former ExxonMobil CEO Rex Tillerson as Secretary of State, former banker Steven Mnuchin as Secretary of the Treasury, former Goldman Sachs president Gary Cohn as director of the National Economic Council, and billionaire investor “king of bankruptcy” Wilbur Ross as Secretary of Commerce.
As a result of Trump’s perspective on many trade deals and dislike of overregulation, “there was this massive euphoria around the potential deregulation”, said Sprayregen. “But that has chilled as it’s been a lot of talk and no action.”
On a global investment perspective, it is no secret that the US president is not a fan of existing trade deals the US has with many regions and has a fixation on the US trade deficit. However, “it’s a lot more bark than bite,” said Sprayregen, pointing out the little action to date.
The US also needs to fix its tax system into one that is more positive to US businesses as well as businesses wanting to make investments abroad, added Sprayregen, suggesting Trump may tackle the issue.
Beyond its own national political situation, “the EU is a big deal for Americans,” said Sprayregen. It can be a lot to take in for a country where the majority do not own a passport. There are a lot a languages and cultures to be dealt with, and there’s the sentiment that the EU is against the US when it comes to competitiveness and business, added Sprayregen.
“There is the sense that the EU has unfairly deployed its regulatory body against American companies, particularly tech giants,” said Sprayregen, referring to recent EU tax and antitrust regulators ordering Apple to pay EUR 13bn in back taxes, challenging Google’s competition tactics, and prohibiting Uber from operating some of its services in the region.
Both Chow and Sprayregen agree that many investors also view the EU as an overregulated market place with a complexity of different legal systems, languages, and cultural differences that is little helped despite EU efforts at harmonisation. It is not an actual barrier to business but something which must be navigated, they said. Chow encouraged continued harmonization of laws and regulations for the EU, including insolvency laws, to provide a more favorable investment environment.
Also, given that the EU market is much more of a bank market than North America, investors must navigate the illiquidity that comes with it. “Investments are harder to get out of, so when you’re in it, you better be in it for the long term,” said Sprayregen.
Overall, Sprayregen believes there is no reluctance from US investors to look at the EU, especially compared to Asia. It has a reasonable rule of law and the difficult insolvency framework is baked into the risk/reward aspect of investing, he said.
TMA Europe Debtwire Awards
Later in the day, Debtwire’s Editor-in-Chief Ken Meehan presented the TMA Europe Debtwire Awards to the winners. Best Turnaround for Small Company went to Aurelius Investments for Fidelis HR, Best Turnaround for Large Company went to Latham & Watkins for Scholz Group, Best Turnaround Firm of the Year went to PwC, and the Rising Star award went to Erik in’t Groen from Kruger.