Charlotte Hultman has lessons after 15 years of supporting private equity firms

10 April 2019
The global market for mergers and acquisitions has changed significantly in recent years.

Chinese firms, for example, have spent freely since 2013, driving up prices and causing authorities in the U.S., the EU and elsewhere to worry about the safety of their intellectual property and even their national security. But Chinese outbound activity has waned in the last two years, and Japan actually outpaced China in 2018, with 649 deals worth $184.2 billion.

Despite the volatility, including China’s diminished spending, 2018 was still the third-busiest year ever for M&A. Along with this activity — much of it involving cross- border transactions — comes the need to comply with evolving local legislation in a tightening global regulatory environment. Not surprisingly, acquirers are looking to third parties for advice when engaging in deals. Dealogic reports that in 2018, advised global M&A volumes reached $3.35 trillion, “their highest levels since the renowned M&A record-breaking year of 2015.”

To get some insight into what it takes for a private equity firm to successfully build and manage a portfolio of companies in today’s fast-paced, evolving market and regulatory landscape, I talked with Charlotte Hultman. Charlotte is group commercial director for Vistra’s Corporate and Private Clients division for Europe and the Americas. She has spent nearly two decades in the Luxembourg financial sector, and has extensive experience providing advice on private equity transactions, as well as implementing cross-border structures for multinational companies. A dual Luxembourgish and Swedish national, she holds a Swedish law degree and an LL.M in international business law from the Vrije Universiteit in Amsterdam.

How long have you been providing services to private equity firms, and how do you help them?

Since 2005 I’ve been working with private equity firms of all sizes, from start-up funds to large, established funds. I work primarily with the CFOs, VPs of HR and general counsel to help them support their portfolio companies.

Have you seen many changes in this market and your services during those 15 years?

Definitely. The reasons for the changes are complicated, but basically they involve a shift away from offshore to onshore investment fund set-ups and changing regulations, such as the AIFM [Alternative Investment Fund Managers Directive 2011/61/EU], which came into force in 2011. In our current global regulatory environment, it’s important to make sure that any established companies operate with sufficient substance — that is, that they have genuine business activities and aren’t letter box companies established to avoid tax and other obligations.

Alongside these changes we’ve seen a dramatic increase in the demand for our back-office and advisory services. Private equity firms are coming to us for help when establishing and maintaining their portfolio companies and when they engage in cross-border M&A transactions, such as carve-outs.

You mentioned that when you work with clients, you typically help CFOs, VPs of HR and general counsel. Are there any areas of compliance that typically surprise people in these roles when they’re engaging in cross-border acquisitions?

Depending on their international experience, what surprises most people in these positions is the vast regulatory differences between countries in Europe. To take an example, an American CFO might quickly grasp that there are differences between, say, China and Japan. But because of the European Union bloc and other factors, he or she might assume European countries operate as one. That’s definitely not the case, and it surprises many business leaders how significantly compliance and HR obligations can differ between European countries, even between neighbors.

Could you give an example?

In countries such as the UK and those in the Nordic region, you can set up a company online and even purchase a shelf company. Amendments to a company’s articles of association may also be filed electronically with the company register. Other countries — such as the Netherlands, Germany, Belgium and southern European countries — require the services of a local public notary to incorporate a company. Any amendments to the corporate object, names, increase in share capital and so forth also must be made in front of a notary. This requirement represents additional costs and administrative burdens, and can sometimes involve a rather lengthy process. All of which needs to be taken into account when planning for a cross-border acquisition or M&A carve-out.

It must be difficult for private equity firms to keep track of the various country-specific regulations.

Understanding the regulations of your target countries — and keeping up with regulatory changes over time — is a significant burden on PE firms. And the more their portfolio companies grow, the more difficult the task becomes.

Related to that, most general counsel find it difficult to easily access consolidated information about their global operating entities. Very often such information is managed in spreadsheets or held locally, and there can be considerable record-keeping inconsistencies between countries. This is in fact one of the main reasons our clients come to us — we have the expertise and software to provide insight into and control over operations in multiple countries.

What are some other challenging aspects of engaging in cross-border deals and what can private equity firms do to protect themselves?

Unfortunately, there are many factors that can impede success when engaging in a cross-border deal or M&A carve-out. So far I’ve only mentioned regulatory differences, but don’t underestimate cultural differences, language barriers and time zones when entering a new jurisdiction. Understanding and accounting for these types of differences is another significant reason PE firms engage third-party experts like us.

On a more technical level, it’s also critical to account for what the acquisition structure will look like and which parties are responsible for doing what during the acquisition.

Could you clarify what you mean by “acquisition structure”?

By that I’m referring to the master holding company structure, which can involve several layers and countries. The targeted companies will transition into this structure. In many cases, the master holding company will need to establish operating bank accounts, signatory powers and take other steps in the target country in order to make the transition happen.

As I mentioned, it’s important to understand who is responsible for fulfilling certain tasks within your own organization when making an acquisition. For example, it’s critical to involve members of your HR team and legal counsel when reviewing employer obligations in the target country, including any mandatory benefits requirements. In all cases, it’s essential to communicate — even to the point where you think you’re over-communicating — both within your own organization and with the employees you’re about to acquire. In most cases, there are strict communication requirements when it comes to any newly acquired employees. Obviously, you should understand and comply with these.

Are there any compliance requirements or other challenges people frequently overlook when making an acquisition?

One fact of cross-border deals that I think is not as well-known as it should be is the difficulty of getting bank accounts operational after a change of ownership. This can take time — two or three months in extreme cases, primarily because of widespread and increasingly stringent KYC [know-your-customer] requirements. We strongly recommend that you know the anticipated timelines and requirements well before making any deal, and if possible use a bank you already do business with. (In some cases, you can ask for your institution’s correspondent bank if they have no presence in the target country.)

Above all, it’s critical to understand the target country’s unique requirements as far in advance as possible, whether those are related to bank accounts, legal entities, employer obligations, tax, immigration or insurance. Many of our first-time U.S.-based clients, for example, are surprised by the extent to which local employees are protected by law when a business is transferred. It’s always easier to overcome these challenges if you fully understand them early in the process of vetting a deal.

Are there certain countries you encourage firms to operate in and certain countries you routinely caution them about?

Again, you want to know what you’re getting into, regardless of your target country, so you can understand your true risks and potential rewards. To take an example, there are many good reasons to expand into Brazil. To start with, it’s one of the top ten economies in the world. That said, it has a notoriously complex corporate tax regime that can be difficult for an expanding company to navigate.

Ultimately, we don’t want to dissuade firms from operating in certain countries like Brazil. In fact, we have a very successful office there to help countries expand into and operate in the country. The point is we want our clients to fully understand what they’re getting into when planning for an expansion or acquisition, and then help them establish and maintain operations in accordance with local laws.

What’s the most memorable thing anyone’s said to you about working in the private equity market?

I remember a founder of a large PE fund once telling me that Vistra did not really take holidays, that we are always available. The comment spoke to how a service provider in this space has to be super responsive, even if that means picking up the phone in the middle of a golf game (something I have done many times!) It’s a competitive market, and that kind of dedication is what it takes to build trust.