The UK has climbed back into the top 10 most attractive countries for renewable energy investment but the outlook for the industry remains cloudy amid a lingering lack of clarity around targets and subsidies.
In the latest RECAI, the UK has arrested a slide that had seen it fall from 4th place in 2013 down to an all-time low of 14th in October 2016.
The RECAI says that the UK investment environment is more settled than recent years, which were beset by subsidy cuts, but the future post-Brexit remains uncertain. While the UK is behind schedule to meet its 2020 EU renewables target, coal-fired power has declined significantly and even reached zero for a day on 21st April.
Ben Warren, EY’s Head of Energy Corporate Finance, says: “The UK’s reappearance in the RECAI top 10 is the result of other countries falling away – notably Brazil which cancelled a wind and solar auction in December - rather than any particularly encouraging resurgence.
“The UK continues to underwhelm investors who are waiting to see if future UK policy will support and encourage the renewable energy industry towards a subsidy-free environment, where consumers can benefit from the UK’s excellent natural resources for renewable energy.
“Investors are still waiting for clarity around the post-Brexit landscape. Question marks linger around renewable energy targets, subsidies and connections with mainland power markets. Unfortunately, the likelihood of getting complete answers to those questions before the UK exits the EU are slim.”
In April the UK kicked off the second round of renewable energy auctions for Contracts for Difference (CfD) subsidies. The Government plans to allocate £730m of annual funding over three rounds, including £290m in the current round.
Warren adds: “The CfD funding allocation is relatively modest and there is continued uncertainty around the outcome of the mechanism. In the absence of a buoyant CfD regime it’s difficult to see how the UK can force its way back among the front runners for renewable energy investment.”
Emerging offshore wind sector offers hope for future
This round of CfD auctions is open to “less established” technologies such as offshore wind, wave, tidal stream, geothermal and biomass with combined heat and power. Falling costs and advances in technology in the offshore wind industry now represent the UK’s best hopes for future investment, according to the RECAI.
Warren says: “The offshore wind sector is showing signs of creating a sustainable industry and driving down costs to provide more value for money for UK plc. The technology is becoming increasingly competitive and we are likely to see offshore wind emerge as the clear winner from this round of auctions.”
US drops to third place
The RECAI also saw China and India surpass the US, which fell to third in the index following a marked shift in US policy under the new administration.
The report identifies the US Government’s executive orders to rollback many of the past administration’s climate change policies, revive the US coal industry and review the US Clean Power Plan as key downward pressures on renewable investment attractiveness.
Warren says: “Movements in the index illustrate the influence of policy on renewable energy investment and development – both productive and detrimental. Supportive policy and a long-term vision are critical to achieving a clean energy future.”
In China, the National Energy Administration (NEA) announced in January 2017 that it will spend US$363b developing renewable power capacity by 2020. This investment will see renewables account for half of all new generating capacity and create 13 million jobs, according to the NEA plan.
India continued its upward trend in the index to second position with the Government’s program to build 175GW in renewable energy generation by 2022 and to have renewable energy account for 40% of installed capacity by 2040. The country has added more than 10GW of solar capacity in the last three years – starting from a low base of 2.6GW in 2014.
Warren says: “The renewable energy industry is beginning to break free of the shackles that have stalled progress in the past. More refined technology, lower costs and advances in battery storage are enabling more widespread investment and adoption of clean energy.”
Economically viable renewable energy alternatives coupled with security of supply concerns are encouraging more countries to support a clean energy future. Kazakhstan (37), Panama (38) and the Dominican Republic (39) have all entered the index for the first time.
For the complete top 40 ranking and insight on battery storage, offshore wind and rooftop solar developments, visit ey.com/recai.
(Source: EY)
Global IPO activity got off to a brisk start in the first quarter of 2017, led by market gains in Asia-Pacific and the US hosting the first two megadeals of the year. In the first three months of 2017, some 369 IPOs raised $33.7b, a 92% year-over-year increase in the global number of IPOs and a 146% increase in global proceeds. Moreover, Q1 2017 was the most active first quarter by global number of IPOs since Q1 2007 (with 399 IPOs raising $47.5b). These and other findings were published in the EY quarterly report, Global IPO Trends: Q1 2017.
Dr. Martin Steinbach, EY Global and EY EMEIA IPO Leader, says: "This is a promising start to global IPO activity this year. In the face of sustained global economic uncertainty, the first quarter of this year has set the stage for accelerated growth in 2017. Economic fundamentals are improving in the major developed economies. Equity index performance and valuations are trending upward, with several major indices reaching all-time highs. Concurrently, volatility is low, underpinning positive IPO sentiment, which is also supported by the successful US listing of a large technology unicorn."
Asia-Pacific dominates global IPOs
Asia-Pacific, led by Greater China, once again dominated global IPO activity in Q1 2017, accounting for 70% of the global number of IPOs and 48% by global proceeds. Greater China exchanges were the busiest, hosting 182 IPOs, with the Shenzhen and Shanghai exchanges being most active and accounting for 20% (73 IPOs) and 19% (70) of the global number of IPOs respectively. However, activity was spread across the region with a healthy set of listings on public markets in Japan (27), Australia (23), Southeast Asia (14) and South Korea (12). In the short-term, Greater China, and by extension Asia-Pacific, is expected to continue its dominance of the global IPO market as the China Securities Regulatory Commission (CSRC) is anticipated to clear an extensive backlog of listings by increasing the pace of IPO approvals throughout this year.
Ringo Choi, EY Asia-Pacific IPO Leader, says: "IPO activity in Asia-Pacific has been powering ahead due to the region's relative insulation from political uncertainty elsewhere in the world, ample liquidity in emerging markets and strengthening investor sentiment on the back of reduced volatility and steady stock market gains. While IPO activity is likely to increase on Mainland China and selected ASEAN exchanges during the second and third quarters, there may be a slowdown in new listings in other markets. Hence, this region may see a temporary drop in activity, but is expected to rebound in the final quarter of the year."
EMEIA IPO activity affected by geopolitical uncertainty
With growing geopolitical uncertainty, activity in the EMEIA region increased slightly by 8.5% YOY, ranking second behind Asia-Pacific by number of IPOs in Q1 2017, and accounting for 21% and 15% of global number of IPOs and proceeds respectively. Bolsa de Madrid, London Main and AIM, and Bombay Main Market and SME were the three most active markets by proceeds. India and the UK were the most active regional markets with 26 and 12 IPOs respectively, followed by Saudi Arabia, which listed seven deals on its new platform, "Nomu – Parallel Market," an alternative equity market with lighter listing requirements.
Steinbach says: "IPO activity in EMEIA was affected by heightened geopolitical uncertainty ahead of upcoming national elections and the build-up to the UK's declaration of Article 50, formalizing its intentions to exit the European Union. However, investor and business sentiment in EMEIA is rising as we continue to see regional equity indices at all-time highs, a growing IPO pipeline, a solid reporting season to date and strong economic fundamentals throughout the region. The key for companies looking to accelerate their growth this year while uncertainty stabilizes is to preserve optionality with a multitrack strategy approach."
US market returns to form
US IPO activity got off to a strong start in 2017, easily surpassing Q1 2016 levels in terms of both IPO numbers and proceeds. IPO proceeds for Q1 2017 are the highest since Q2 2015 (72 IPOs raising $14.3b). The quarter saw a total of 24 IPOs raising $10.8b, an increase of 1,380% in terms of proceeds and 200% by volume on Q1 2016. During Q1 2017, the US accounted for four of the top ten deals globally. The NYSE led IPO proceeds globally this quarter due its hosting of the only two $1b plus megadeals.
Jackie Kelley, EY Americas IPO Markets Leader, says: "The first quarter of 2017 was one of the strongest for the US IPO market and established a solid runway for more deals for the remainder of the year. This positive performance should attract more tech and unicorns to the public markets and further open the door for other sectors such as retail, energy, and real estate. With the market currently insulated from the political uncertainty, more companies are expected to enter the filing process."
2017 outlook is upbeat, despite mixed signals
The reaction to geopolitical events in the financial markets has been far more positive than many had predicted. Pent-up demand for public offerings suggests global IPOs will continue to rise in 2017, with pipelines full, particularly in Asia-Pacific.
Steinbach concludes: "Overall, global IPO markets had the best start with the highest first quarter by global number of IPOs since 2007. The upswing is buoyed by a strong desire for investors to generate returns and the positive momentum from a strong IPO activity in the fourth quarter 2016. However, ongoing uncertainty continues to define the global conversation, in spite of the market rallies seen in many main market indices after respective US presidential and Brexit votes."
(Source: EY)
Next up we spoke to Alok Chugh - Partner with EY’s Middle East practice, which is based in Kuwait. He leads the EY Kuwait tax practice and Government and Public Sector tax practice for EY Middle East. Alok has lived and worked in Kuwait for over 23 years and has been involved in a number of consulting assignments (including cross-border planning, application of double tax treaties and the efficient handling of tax and commercial affairs) for project due diligence, business paper preparation or review, and structuring operational activities).
Could you tell us a bit about the hottest topics being discussed in Kuwait in relation to tax at the moment?
At the moment, there are some very important and bold regulatory changes in Kuwait. Some of the hottest topics for discussions are:
- Value Added Tax: All the 6 countries in the Gulf Cooperation Council (GCC) have signed the Master framework Agreement for implementation of Value Added Tax (VAT) in the GCC. Based on our understanding from discussions with the government officials, the 5% GCC VAT shall be applicable on goods and services by 2018.
- Tax Registration Number and update forms: Recently, the Ministry of Finance has set up a Tax Development Follow-Up Unit (TDFU) within the Department of Inspection and Tax Claims (DIT). The TDFU is setup as a set towards the e-filing module. The TDFU has issued new registration forms that needs to be submitted by all the taxpayers. The department shall use the information in the forms to create their centralized database of taxpayers. Further, all the taxpayers are issued a Tax Registration Number (TRN), which is mandatory to be mentioned on all the correspondence with the DIT.
- New Tax Card Further, the TDFU has started issuing Tax Cards to every company valid for each year and should be renewed on a yearly basis valid for another one year. Tax Cards are compulsory and is now mandate for every company to enter into a contract in Kuwait.
- Business Profit Tax: Kuwait is looking to introduce the New Business Profit Taxes. Based on our understanding, all Kuwaiti and foreign companies operating in Kuwait may be subject to 10% business profit tax under the proposed Business Profit Tax (BPT) law. The BPT is yet to be approved by the Kuwait Parliament. However, considering the recent developments in the GCC relating to the introduction of Value Added Tax (VAT), it is our current understanding that BPT is not likely to be approved before 2019.
What do you anticipate for the sector in 2017? Do you believe that there is potential for any significant legislative developments in the next twelve months? In what ways would these affect Ernst & Young?
The VAT law is expected to be implemented by January 2018. Accordingly, the businesses have only 10 months to prepare for the VAT implementation and ensure the contracts have been amended to that effect and the IT systems are updated to ensure compliance with the laws. It affects EY in the way that we, as consultants need to be ready with our teams of professionals, for pre and post implementation phase of VAT. Considering the integrated model that we operate in, as a global firm, it gives us an edge in the market. In this respect, we have already mobilized our team of experts in the indirect taxes from around the world and we are already assisting many of our clients with the first phase of VAT impact assessment, assisting them in reviewing their contracts and IT system as part of VAT readiness.
Have there been any recent regulatory changes or interesting developments?
The Kuwaiti authorities are working on implementation of the economic diversification strategy. This task has become quite pressing, taking into account the current financial position of Kuwait. A number of fiscal and regulatory reforms being implemented aim at reducing the economic burdens of doing business in Kuwait. The two new regimes: Kuwait Direct Investment Promotion Law and Institutionalized Public – Private Partnerships may contribute to this process both in terms of attracting foreign investment in to the country and for diversification of economy.
You joined Ernst & Young in 1994 - how would you evaluate your role and its impact thus far?
Within a couple of years of my joining the firm, I realized the business prospect for our practice to grow and for my career professionally. With the support of the management, I was able to grow to an Executive quickly and then eventually, I became a Partner in 2008. Over the years, our tax practice has grown to a strong team of 46 professionals, with a market size of 65%- 70% of the tax practice in the country.
When you first joined EY, what were your goals in driving change within the company? How have these evolved in the past 23 years?
As I mentioned, when I joined EY, I realized the potential in the market for our practice. I was certain that we would go through changes in the way our clients would require our support and the manner in which we would serve our clients.
I have learnt and experienced that it is important for any organization to continue to learn and adapt itself to the change in the market. As they say, “to improve is to change, to be perfect is to change often”. Given that we are part of the professional world, we need to anticipate the changes outside the organization and be prepared internally ahead of those changes.
Gerard Gallagher, MENA Advisory Leader, EY
If the GCC countries were to catch up to the average OECD level of diversification, the region could see additional gains of up to $17.7 billion (€15.9 billion), according to EY’s latest report, ‘Growth Drivers 2 report: Digging beneath the surface - Is it time to rethink diversification in the GCC?’ The report, which uses a tracker to look at the levels of diversification across the GCC and how to speed up progress, was launched at the Economist event, ‘Future of Work: Middle East’.
“Dependence on oil and growing youth unemployment are the GCC’s biggest economic challenges. With recent oil price volatility, diversification has returned to the top of the GCC agenda; it’s an opportunity worth $17.7 billion (€15.9 billion). To put that into context, it is more than three-quarters of the entire flow of foreign direct investment to the GCC region for 2013,” said Gerard Gallagher, MENA Advisory Leader, EY.
The EY Diversification Tracker, which benchmarks the GCC countries both globally and against each other, provides a standardised basis for assessing the degree to which economies have moved away from dependence on oil. It focuses on three aspects — export complexity, the share of the non-oil sector and private versus public sector spending — which have been combined to give a percentage of diversification relative to the highest global performer.
The report identifies a ‘sweet spot’ where regional strengths, economic impact and nationals’ employment preferences meet, allowing all three factors to be achieved.
After a particularly strong close for the US IPO markets in 2014, the first quarter of 2015 took a sharp turn with only 38 deals, which raised a total of $5.62 billion (€5.2 billion), according to EY’s Global IPO 2015 Q1 report.
While the first quarter is traditionally slow, this is a drop of 46.5% in the number of deals and a 53% drop in capital raised from Q1 2014. Historically, the US market led the global IPO markets, but for one of the first quarters, it lands behind Asia-Pacific and EMEIA. However, EY forecasts that, with healthy US economic conditions and a backlog of companies looking to exit, the 2015 IPO market should shape up to be a strong year.
A total of 291 companies made initial public offerings in 2014, which was the best year for IPOs in over a decade. 2015 started at a later and different pace, as the first deal wasn’t even offered until January 16. “Quite simply, the pipeline ran dry in 1Q15,” said Jackie Kelley, EY Global and Americas IPO Leader “Deals that were originally slated for 2015 were pushed out in Q4, 2014, during favorable conditions. This was a response to the October volatility.”
March looked set to be a stronger month for IPOs with at least 15 deals being offered, up from the 10 in February. The most recent filings also saw deals worth $100 million and above (€93 million) entering the pipeline.
The energy and power sector led the way, accounting for approximately 25% of the proceeds, followed by healthcare (21%) and technology (18%).
The largest player on the US exchanges was an MLP offering from Columbia Pipeline Partners LP, which raised $1.24 billion (€1.15 billion). When compared with the larger ticket IPOs in 2014 such as Alibaba, which raised $25 billion (€23.2 billion), or Synchrony Financial, which raised $2.95 billion (€2.7 billion), there was no considerable IPO player this quarter. This is on trend with the average deal size continuing to decline, EY stated.
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EY also highlighted the growing pipeline of PE and VC backed deals. VC-backed offerings represented 42% of all the deals.
“The economic health of the U.S. can’t be denied with unemployment falling to 5.5% this month, a six year low,” said Kelley. “While there is heavy anticipation of how the Federal Reserve will address interest rates in June, strong investor confidence matched with even stronger company earnings has helped the markets remain resilient to volatility.”
In the first TTC/EY Tax Reform Business Barometer survey of 2015, leading tax professionals foresee a 52% chance that the US will see tax reform by the end of 2017. The Barometer periodically assesses business tax professionals’ views on the prospects for and key aspects of federal tax reform.
According to the survey, 59% of respondents predict that the reform will focus on business or corporate tax only (including income individual income from pass-through entities) – a reversal from the previous 50-70% likelihood of comprehensive tax reform in during 2013 and 2014.
Most respondents (61%) expect tax reform will be revenue-neutral, which is generally consistent with the most recent Barometer from October 2014, but represents a significant shift from most prior Barometers whereby 50% to 60% of respondents expected tax reform to raise revenue.
Anticipation of US reform sits well below the 60% likelihood of global income taxation changes led by the OECD Base Erosion and Profit Sharing (BEPS) project, which in turn is expected to influence US tax policy. For example, 57% think the US will adopt new rules in transfer pricing while 44% think Subpart F (controlled foreign corporation rules) will be influenced.
“These two tax reform efforts may influence each other, but are not likely to move in lock-step, so businesses need to keep their watchful eye on both movements,” said Lynda Walker, Executive Director of The Tax Council.
Respondents say there’s a 50-50 chance that the House Ways and Means and Senate Finance Committee Chairs will release a specific tax reform plan this year, but only 10% likelihood that either body will pass legislation this year.
“Even without enactment this year or next, various foundational steps can be expected to continue. As this process accelerates, input by the business community will become increasingly important,” said Robert Carroll, National Director of the Quantitative Economics and Statistics (QUEST) practice of Ernst & Young LLP and a member of the EY Center for Tax Policy.
In preparation, some 63% of respondents are already modelling the potential effect of federal tax reform on their organisations’ tax liability.
“Steps where companies should be vigilant include hearings, debates, chairmen’s drafts, committee legislation and additional tax plans and proposals,” Carroll added. “It’s useful to the debate that the Obama Administration has included additional details in some areas as part of its FY 2016 Budget, as 43% of those surveyed think it would help move the tax reform process forward.”
As at December, 2014 had seen 288 IPOs on US exchanges, amounting to $95.2 billion (€80.8 billion), a 54% increase in capital over 2013, according to the latest EY Global IPO Trends: 2014 Q4 report.
While 2013 saw a revival of IPOs in the US, 2014 was even more exceptional, according to EY. As of December, the number of listings was at its highest point since 2000 and a 27% increase over 2013.
While Q4 saw a pause in the markets after the Alibaba listing, IPO investments still remained strong throughout the end of the year given the lack of alternative investment options and low interest rates. In addition, with stock markets trending higher, IPOs outperformed market indices. Companies that listed on US exchanges in 2014 saw average year-to-date returns of 27.8%, compared to the S&P 500 at 12.2%.
“Concerns this is a 2000-like bubble are overplayed,” said Jackie Kelley, EY Global and Americas IPO Leader. “Companies coming to the public markets are well-led, well-priced and have a good story to tell. Their stocks tend to outperform the market attracting solid investor interest.”
Global IPO activity also gained momentum with 1,206 IPOs, which raised $256.5 billion (€218 billion). “This was the best year for IPOs since 2011,” said Ms. Kelley.
In addition, PE- and VC-backed exits were the most significant driver of US IPO activity. A total of $68.2 billion (€58 billion) was raised via 181 financial-sponsored IPOs and accounted for 72% of US IPOs by value and 63% by number.
The success of the Alibaba listing encouraged more cross-border activity, with the majority coming from Europe (26), China (16) and Israel (12). Cross-border activity still remains strong in the US, which accounts for 52% of cross-border deals globally by number and 80% by capital raised throughout 2014.
“In 2014, the US attracted more cross-border IPOs than any other region and its stock exchanges led the world in terms of deals and capital raised. In addition to strong IPO valuations on foreign listings, the growing familiarity with US accounting regulations, the overall strength of the US markets and the access to capital are likely to encourage more cross-border IPOs on US exchanges in 2015,” said Ms. Kelley. In addition, the US hosted more foreign IPOs in 2014 than any other market, with 67 IPOs raising $40.8 billion (€34.6 billion).
This year looks set to be another strong trading year, according to EY. The firm reported that there is a pipeline of 100 companies ready to list in 2015, of which 60 are expected to go public and raise around $22 billion (€18.6 billion) in Q1 2015.
Private equity-backed initial public offerings remained a popular exit route in 2014, according to data published by the Centre for Management Buy-out Research (CMBOR), sponsored by EY and Equistone Partners Europe Limited. New deal activity by volume was higher than 2013, while value rose for the second successive year.
While 2014 did not see any deals above €5 billion, the €1 billion+ market saw sharp growth with 11 deals closing last year – comfortably surpassing 2013 figures.
The €100 million to €250 million bracket also saw growth to report its highest value and volume levels since 2008, while the €250 million to €500 million segment also reached the highest value since 2008.
“2014 was a particularly strong year for the mid-market, which has seen the highest level of deal activity since before the financial crisis. However, this activity has predominantly been led by the exit market; with a huge amount of dry powder ready for deployment across the mid-market buyout funds, the challenge for 2015 will be investing in the right assets at a fair valuation,” said Christiian Marriott, Investor Relations Partner at Equistone Partners Europe Limited.
Total deal values in 2014 reached €61.3 billion – above 2013’s €58.7 billion figure. Deal numbers were also higher: 613 for 2014 versus 562 in 2013. The UK accounted for €18.6 billion followed by Germany’s €11.2 billion and France’s €7.7 billion.
UK buyout value equalled £14.9 billion in 2014 compared to £15.1 billion in 2013.
Sachin Date, EY’s Private Equity Leader for Europe, Middle East, India and Africa (EMEIA) said: “PE-backed IPOs are at a record high since 1998 with 43 PE-backed IPOs worth €44 billion closing in 2014, as financial sponsors continue to capitalise on strong valuations. 2014 also recorded 188 trade sales in exit value terms (€32.2 billion) – the highest since 2011 – and 170 secondary buyouts. 2014 saw the highest value of refinancings ever recorded and has more than doubled since 2012 to the tune of €51.7 billion.
The exit value of above €101 billion is the highest since 2007 and this is only the third time it has crossed the €100 billion mark.
Going into 2015, the European private equity market is expected to steadily improve in line with progress made in the last two years. The pending deal pipeline is around €20 billion in the first few months of 2015.
