Despite the severe impact of the COVID-19 pandemic on M&A markets across regions and sectors in 2020, the Cayman Islands showed resilience and adaptability, retaining its position as a pre-eminent jurisdiction for M&A transactions. Activity levels dropped in Q2 2020 as the pandemic spread rapidly around the world and some cross-border transactions, in which Cayman Islands companies are often the target vehicles, were suspended. However, a strong recovery began early in the second half of 2020 and since then the Cayman Islands has seen increasing M&A and related activity in an encouragingly wide variety of transaction types and forms.
The keystones of the Cayman Islands' resilience during 2020 were its position as the offshore jurisdiction of choice for establishing private equity fund structures, the global popularity of the organisational forms it offers and the swift and effective action taken by the Cayman Islands government to facilitate the electronic and virtual management and closing of transactions.
Despite the challenges presented by the first half of 2020, the authors continued to see a degree of cross-border M&A activity during this period, principally in sectors that were badly affected by the pandemic. Interest in potential transactions involving acquisitions of controlling or larger stakes in Cayman Islands target companies in the travel and tourism, and hospitality sectors was particularly noticeable in this period. In many cases, these transactions were backed by private equity funds seeking to capitalise on reduced valuations. Many of them did not proceed due to problems posed by the pandemic but a small number of relatively high-value transactions did complete.
There was a sharp upturn in cross-border M&A transaction volume shortly after the beginning of the second half of 2020, with private equity funds playing a particularly active role in the turnaround. Private equity fund-backed transactions in the TMT, fintech, pharmaceuticals and healthcare sectors were predominant during that period and remain predominant at the time of writing.
There is also increased interest in distressed cross-border acquisitions of Cayman Islands targets in sectors more adversely impacted by the pandemic, or with business models that are no longer viable given the current climate, and the authors expect this trend to accelerate into and throughout 2021.
Co-investment Platforms and Joint Ventures
With global M&A deal volume being depressed and economic uncertainty amplified during 2020, the need for strategic and creative deal structuring solutions increased. Cross-border co-investment platforms and joint ventures involving Cayman Islands vehicles continued to be used during 2020. These investment structures allow companies and investors to pool capital and combine market expertise, which furthers innovative collaboration among deal makers and allows for expansion into diverse sectors with ultimately less financial risk for each participant.
While 2019 primarily saw an increase in co-investment platforms and joint ventures in the energy and natural resources sectors, 2020 saw a shift in the use of these investment platforms to M&A activity in asset classes such as distressed loans and distressed real estate, including the hospitality sector. M&A activity through co-investment platforms and joint ventures has continued so far this year as deal makers increasingly look to combine expertise and resources to take advantage of the anticipated global recovery.
A SPAC (special purpose acquisition company) transaction is described in general terms as an IPO for a private equity investment that is still to be determined. SPACs are commonly known as "blank cheque" companies because investors in them commit money to an unidentified future investment. Once the SPAC IPO is completed, the proceeds are held on trust until a suitable investment opportunity is identified, or, if no such opportunity is found within a specified timeframe (usually around two years), proceeds are returned to investors. The Cayman Islands exempted company is a vehicle of choice for SPAC IPOs because of the simplicity and flexibility of the jurisdiction's companies legislation and their familiarity to stock exchanges.
2020 saw increased demand for SPAC IPOs; 59 SPAC IPOs completed in 2019 and 248 completed in 2020. At the time of writing, there have already been over 220 SPAC IPOs in 2021. If this trend continues, the number of SPAC IPOs will significantly exceed the 2020 total by year end.
Most SPAC IPOs are arranged by US managers and take place on the New York Stock Exchange and NASDAQ. However, Asian managers have begun to show interest in SPAC IPOs on US stock exchanges in the past few months. In response to this trend, stock exchanges in Hong Kong, Singapore and Indonesia are considering lifting their long-standing prohibitions on the raising of funds for unspecified purposes. If they do this, it seems likely that Asian managers will start to use their regional exchanges for SPAC IPOs and that the trend of increase in transaction volume in this space will therefore continue.
It will be interesting to see what proportion of SPACs actually deploy the funds they are holding inside their investment horizons and what proportion of them return funds to investors. Some industry experts are suggesting there are not enough suitable targets in the market to meet the current level of demand. It is likely that the performance of SPACs this year and next year will determine their future popularity.
Private Equity Secondary Transactions
After a downturn in Q3 2020, there was a marked resurgence of private equity secondary transactions in Q4 2020, particularly in the area of general partner (GP)-led transactions. These rose to greater prominence in response to the pandemic and are becoming an increasingly important and standard portfolio management tool. At the time of writing, there are numerous sales and acquisitions of fund interests, "synthetic secondaries" and "management secondaries", many of which are GP-led.
Given they allow buyers to perform detailed analysis of fund assets and give managers additional time to maximise value and find liquidity solutions, demand for GP-led transactions is expected to increase this year. More generally, the authors are confident that the very significant amount of unallocated "dry powder" left over from last year and earmarked for deployment by buyers (estimated at USD61 billion at the end of 2020) bodes well for private equity secondary transaction volume this year.
Asset Manager M&A
2020 saw a number of acquisitions of minority stakes in private equity managers. This market is relatively new and is driven by the number of private equity firms that are now at a stage in their life cycles at which they require additional capital to expand into new markets and products, attract talent and improve internal operations. Many of these firms have also arrived at a position in which they need to monetise founder equity to assist with their succession planning and the incentivisation of future leadership.
Currently, there is a small number of big buyers in this market. Blackstone's Strategic Capital Group, Goldman Sachs, Petershill Funds, Dyal Capital Partners and Wafra together account for a large majority and have collectively invested in over 50 managers. More buyers seem to be entering this and there are signs that some of them may be considering more unusual investments in non-liquid or less liquid asset managers (for example, managers of real estate and venture capital funds).
Given the high level of demand for investment from target firms and (as mentioned above) the significant volume of unallocated "dry powder" in the market, the authors expect activity in this space to increase this year.
While the period prior to the pandemic was largely characterised by financial growth, sectors such as hospitality, retail and energy experienced financial challenges and distress during 2020 as the pandemic spread. As a result, there was a rise in consensual restructurings involving financially distressed Cayman Islands companies.
Consensual restructurings are widely used to assist with preventing the loss of value in a company that can result from a formal court-driven insolvency process. In addition to extending maturity dates on loans and bringing in additional financing from existing or new lenders, consensual restructurings employed creative strategies in 2020 from an M&A perspective.
One approach taken by lenders was consenting to distressed companies divesting non-core assets to increase immediate access to capital in order to assist with continuing operations. Equity injections were also seen, whereby shareholders contributed new capital to distressed companies, including by subscribing for additional shares as well as debt for equity swaps, whereby creditors cancelled debt owed to them by a distressed company in exchange for shares. Equity issuances and debt for equity swaps in the context of consensual restructurings typically occurred in situations where the distressed company's financial position was negatively impacted in the short term but was viewed as likely to recover in time. While these strategies may dilute existing equity holders, these equity holders, as well as lenders who become shareholders, may see an upside if the distressed company becomes profitable later on, with the prospect of future distributions by the company or share sales taking place.
Despite the pandemic, Mourant saw an encouraging amount of activity in the Cayman Islands M&A market in 2020, acting for foreign buyers on several small but locally significant inbound transactions in the IT outsourcing and real estate sectors. In addition, the theme of merger and consolidation in the local corporate, trust and fiduciary services sector continued in 2020 and there are signs that it may expand into the restructuring and insolvency services sector this year.
While headwinds remain, it is expected the continued rollout of vaccines, the abundance of available capital, the global rebound in stock market prices and pent-up demand for deal making (among many other positive factors) will likely lead to a worldwide increase in M&A and related activity in the next six to nine months. The outlook for activity in this space in the Cayman Islands for the rest of this year is therefore encouragingly positive.