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Dealmaking has changed significantly after the outbreak of the pandemic. We have seen shifts not only in deal number and value, but also in the seller-buyer dynamics, in their expectations, the deal structure, and even in the parties' communication – with "remote" being the word of the year.
We have been asked to be even more thorough in due diligence and to look at every new aspect when assessing a target from a legal perspective. And we have had to be more creative then ever in setting up legal solutions to allow parties to align expectations and to bridge valuation gaps.
We sat down with Andrei Gemeneanu managing partner of Morphosis Capital, to discuss his views on how the m&a players will redefine their strategies in the post-pandemic world.
One of the very few things that has not changed in the m&a landscape over the past year or so, is that private equity ("PE") investors have a lot of available funds and the willingness to deploy capital. Building on past lessons learned, PE funds want to make sure they seize the momentum and continue to get deals done. This is also true in Romania, a country that has seen increasing interest from investment funds in the past years.
Confronted with the challenges posed by last year's health crisis and its economic ramifications, the first reaction of PE funds was to take active measures to secure the solidity of their existing portfolio companies. Once they shored those up, the question of new investments arose, and different funds decided to act in different ways in this respect.
"We have chosen to lean into the new reality and to accelerate our capital deployment. Our second deal in Romania was done entirely, from start to finish, during the pandemic.", said Andrei Gemeneanu, the managing partner of Morphosis Capital, a Romanian private equity fund focused on growth capital investments in small and medium enterprises ("SMEs"). Morphosis Capital, which was established in 2018, is supported by the European Investment Fund (EIF) through the Regional Operational Programme. It has a capital of EUR 50m, which it aims to invest in high-growth Romanian SMEs.
"We have chosen to lean into the new reality and to accelerate our capital deployment. Our second deal in Romania was done entirely, from start to finish, during the
pandemic.", said Andrei Gemeneanu, the managing partner of Morphosis Capital
While SMEs are typically the companies most affected in crisis situations, it might prove more difficult than before for PE funds to spot high-growth potential. Still, as resilient business models have always been important for PE funds when considering a new investment, what better way to test this resilience than by taking a look at how a company adapted to the disruption caused by the pandemic?
Companies that have risen to the occasion are now better positioned in the eyes of PE investors. They are, says Andrei Gemeneanu, "the kind of companies we like to partner with", companies that "we believe have something unique about their business, business model and human capital, that places them in a good position to go through the crisis." Overall, he says, talking about investing in the Romanian high-growth SMEs market, "I remain very confident in our opportunities."
Naturally, PE funds might rethink their investment focus, considering that some industries have had a hard time adapting to the new context or recovering from its impact, while others may be at the peak of their development. For Morphosis Capital, things have not changed in this respect compared to their initial mindset. According to Andrei Gemeneanu, "our strategy has always been to invest in FMCG, technology, healthcare and B2B services. This is very much valid today." Still, the fund is "a bit more careful about what niches of those sectors we decide to invest in, particularly when it comes to FMCG, as we are still waiting to see how the new consumer behaviour is shaping up."
From a legal perspective, the actions taken and the measures implemented by the target companies in order to mitigate the impact of the health crisis became more present on our radar. Hence, the scope of due diligence has become even more complex, with a particular focus on topics such as: compliance with more specific requirements applicable during these days, re-negotiated/suspended agreements, postponement of financing, revisions of health and safety plans, risk assessments and instructions, temporary lay-offs, work from home, reduced working programme, paid days off, etc.
Talking about challenges in the current m&a landscape, one of the immediate effects of the new normality was the occurrence of valuation gaps. The high volatility in the market made use of historical earnings useless in predicting a company’s future earnings. Tools aimed at bridging the valuation gap by allocating uncertainty risk between buyers and sellers, such as earn-outs, are expected to become increasingly popular.
But essentially, as Andrei Gemeneanu puts it, what is important is that PE funds "look forward together with their partners and share the risk of that future" and that can only be done "by rolling-up our sleeves and working together in a hands-on way to make the companies in our portfolio successful."
From a dealmaking perspective, it will be difficult to predict how this will change the dynamics of negotiations. Sellers will witness increasing pressure to sell, with some of them being forced rather than willing to go into such process, but it is nevertheless true that buyers may also face an increasing competition for their potential targets.
As companies need capital sooner rather than later, getting deals done quickly is essential. This is even more so applicable in the new context, and everyone – founders, investors and consultants – are constantly working to keep up with ever increasing paces of PE investments.
For Morphosis Capital, the pandemic triggered the need to reconsider internal processes with an aim to find ways to accelerate dealmaking. "Speed is a very important currency in dealmaking, these days. By rethinking our processes and teaming up with experienced consultants, such as the Schoenherr team, we managed to set a new benchmark for our investments and took a deal from day one to closing in only four months", said Andrei Gemeneanu.
For m&a lawyers this translates into full availability, adaptability and capacity to be oriented in finding quick and viable solutions for any kind of obstacles. Lastly, the use of legal tech solutions and efficient legal project management tools is no longer a nice addition to the legal services, but an essential part of it.
And speaking of technology advancement, digitalisation is of the boxes that founders interested in attracting PE investments need to be able to check sooner rather than later. When considering an investment, Morphosis Capital also looks at the company's "sustainability and digitalisation, where the latter incudes for us the company's ability to trigger digitalisation or to deal with digital disruption", according to Andrei Gemeneanu. He gives the example of the fund's first investment, the business process automation solutions provider DocProcess, the business skyrocketed during the pandemic, when companies that previously regarded digitalisation a "nice to have" invested in this direction, become convinced during the pandemic that it should be considered a "must have".
This is a good time for high-growth Romanian SMEs wanting to further develop their business to seize the moment and attract PE investments. To quote Andrei Gemeneanu, this is the best moment for founders to "prioritise capital-in, versus capital-out, as a viable way to make their companies leaders in their sectors." The dealmaking process is probably more streamlined than ever and the market more prepared than before to quickly adapt to new challenges.
authors: Mădălina Neagu and Cristina Enaga
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