The government approach to scrutinising foreign investors has stepped up a gear, with recently introduced measures to block prospective deals in sensitive sectors likely to be the tip of the iceberg. In addition to new measures targeting defence, computing and quantum technology investments, the government is already looking to introduce new powers which would let it decide whether any investment is relevant to national security. Taking inspiration from the rest of the G7 countries, the UK government will expand its power to use national security concerns to block foreign investors from buying strategic assets, with new criminal charges introduced for those who fail to follow the rules. For most investors the chances of the government intervening in future investments are slim, but the side effects of more red tape and longer potential wait times for approval may change the way the market operates. With the promise of more changes on the way, the Conservatives will need to consider whether their “party of business” credentials still stack up.
With powers to scrutinise all investments in “relevant enterprises” in defence, computing and quantum technology already in place as of June this year, the government is already moving to further widen its powers. A consultation is currently underway regarding proposals for a new system where investors voluntarily notify the Competition and Markets Authority (CMA) about deals. The government would then decide whether or not to launch an investigation into the deal. In practice, the system is unlikely to be considered voluntary, as the introduction of criminal charges for investors who conceal deals relating to national security will cause most to err on the side of caution.
In making the changes, the Department for Business, Enterprise and Industrial Strategy (BEIS) has created more work for itself and the CMA. Currently, the CMA deals with 62 cases a year. The government estimates that the new regime will increase that to 200. This additional regulation and the risk of deals being held up by a government inquiry is likely to act as a further brake on UK inbound mergers and acquisitions. This could lead to a potential shift in the market, particularly as Brexit uncertainty continues to pose serious questions for the City.
Regardless of how many investments are actually blocked as a result of the proposals, the government’s move towards a more protectionist stance has already begun to affect the market. The number of UK inbound mergers and acquisitions for the first half of 2018 was 289, a 17 per cent fall compared to the same time last year. The value of these acquisitions accounted for 57 per cent of total UK dealflow, the lowest share since 2009. The proposals create more uncertainty for private equity investors, as there is a lack of clarity over what exactly “national security” means, with the government leaving the definition (perhaps deliberately) vague.
The UK has been moving towards additional protections on investments for some time, with several interventions taking place, most recently in June 2018 when the government blocked the acquisition of an aerospace asset by a subsidiary of a Chinese mineral resource company. Chinese tech firm Huawei has also been under increasing scrutiny, with the Huawei Cyber Security Evaluation Centre (HCSEC) recently announcing it could only provide “limited assurances” that all the risks associated with the company had been mitigated. Huawei has been a controversial presence in the UK for a number of years, with an Intelligence and Security Committee report in 2013 being highly critical of the decision to allow Huawei to be awarded contracts in light of its potential links to the Chinese government.
For many investors, the side effect of the changes will have more of an impact than the regulations themselves. Because of the increased workload for the CMA, there is potential for deals to be held up in the review process. This may affect the time frame for the completion of deals, even those that do not require intervention from the government.
The government has already said that it plans on introducing more measures to boost its powers when dealing with foreign investors, so the industry should expect more scrutiny in the future. In an age of Novichok, trade wars and protectionism, this is perhaps not surprising, but the investment community will need to be prepared to adapt to the changes and consider the government’s view of their transactions into account as part of the due diligence process.
Lizzy Cryar, WA