Will M&A fill the post-Covid FDI gap?

As FDI activity is expected to slump by 40% in 2020 due to the Covid-19 outbreak, according to the UN Conference on Trade and Development (Unctad), cross-border mergers and acquisitions (M&A) may present a cheaper and safer opportunity for both investment promotion agencies (IPAs) and multinationals investing abroad.

Unctad’s World Investment Report 2020 does not paint a positive picture for either greenfield or brownfield FDI, saying: “Both new greenfield investment project announcements and cross-border M&A dropped by more than 50% in the first months of 2020 compared with last year.”

However, the World Bank Global Investment Competitiveness Report 2019/2020 highlights that in developing countries brownfield investment has doubled as a share of FDI over the past ten years.

And even beyond developing countries, director of product strategy at Bureau van Dijk David East said in a conference call this week that an “M&A strategy is going to be critical as IPAs move forward in a post-Covid world”.

Industry players across North America, Latin America and the Caribbean foresee a new wave of deal opportunities in the digitalisation sector, which is widely expected to emerge favourably from the crisis. Healthcare, logistics and, especially in South America, energy and infrastructure are also seen as healthy prospects for future deal pipelines.

Digital opportunities

In an uncertain economic landscape where supply chains have been significantly affected, M&A looks set to rise in prominence as a way of investing abroad. In Brazil, the attractiveness of M&A is increased by a devalued real, according to CEO of FDI advisory firm Strings Sergio Costa.

“A devalued currency has created huge opportunities as assets have become extremely cheap for investors in euros, pounds and dollars,” he says. “M&A deals are rising as a way of bringing FDI into Brazil as companies try to get more immediate and cheaper access to the country as well as mitigate greenfield projects risk.”

According to Costa, who formerly worked at IPAs Apex-Brasil and InvestSP, and now helps foreign investors establish themselves in Brazil, healthcare and pharmaceuticals as well as e-learning and flexible working space providers are going to be fruitful sectors for investors looking for an entry point into the country.

As Covid-19 is largely expected to permanently change the way in which people work, digitalisation is broadly recognised as an emerging investment theme of the future.

Asked what sectors are proving to be the most resilient when it comes to M&A deals, KPMG Brazil’s corporate finance partner Luis Augusto Motta replies: “Internet and digital companies. We are seeing an appetite from strategic companies from traditional segments to acquire equity portions in start-ups and digital companies.”

In its call to action to IPAs, Bureau van Dijk’s East pointed out that tech start-ups often require fresh capital injections and will be a good potential source of FDI in the post-pandemic world.

A preference for predictability

In the Caribbean, technology has been identified as a way in which to diversify the region’s many economies away from tourism, one of the sectors most harshly hit by the pandemic.

Suzette Hudson, senior adviser at the Caribbean Association of Investment Promotion Agencies (Caipa), says: “Regarding new areas for investment, Caipa will be focusing significant attention on non-hotel-related investment opportunities, particularly looking at digital FDI, as outsourcing is a priority given its ability to create jobs quickly. High-tech agriculture [will be in focus], given our need to ensure food security, healthy living and feeding our tourists when they are able to return.”

As investors seek stable sectors offering long-term cash flow and predictability in the wake of Covid-19, energy and infrastructure M&A, particularly in Latin America, is an area set to prosper.

“We expect those industries with a longer-term approach, such as energy and infrastructure, to recover quickly after a short period of slight decline,” says Maria Luisa Cravo Wittenberg, head of the investment division at Apex-Brasil. “The [Brazilian] government has planned concessions and privatisations that must be taken into consideration to ensure an accurate view.

“For example, a congressional vote is being pushed on sanitation projects, which would provide 24 million with access to improved sanitation, given that four million Brazilians still do not have access to safe water.” Foreign capital will be essential for such projects, she adds.

Gaming appeal

The outlook for the energy and infrastructure sectors is not as promising in the US, where the lack of a clear stimulus package is leaving questions unanswered for investors. Here too, however, the healthcare and pharmaceuticals sectors, and parts of the technology sector, have seen continued cross-border M&A activity during the Covid outbreak.

“We entered this pandemic after one of the hottest M&A runs I have seen in the years following the global financial crisis,” says Alan Zoccolillo, head of law firm Baker McKenzie’s North America transactional practice.

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“When Covid struck, however, only the deals that were already at an advanced stage went ahead, with the rest of our clients either trying to get out or renegotiate. Aside from predictable sectors such as healthcare and biotech, we have seen good M&A activity in gaming as people tried to remain entertained while on lockdown,” he adds.

Zoccolillo says that between April and May, overall M&A volumes dropped by 15–20%, with private equity firms dominating the scene. The consensus seems to be that this trend is not going to turn around anytime soon, with opportunities mostly arising in distressed assets.

“M&A activity will… pick up with respect to the distressed sales of companies or parts of companies in order to restructure and survive,” says Randall Chafetz, managing executive officer and deputy chief executive of MUFG’s global corporate and investment banking division. “Private equity is well positioned to take advantage of these situations as they are sitting on a large amount of dry powder and have a risk appetite that positions them well to participate in the revival of out-of-favour sectors.”

While uncertainties remain as to whether summer will be the end of the Covid-19 crisis or a second wave in autumn is to be expected, some sectors have shown more resilience than others and, especially in certain regions, cross-border M&A might indeed represent new hope for FDI.