PitchBook blog

Your resource for all things PitchBook
international-vesting-headerv2.png
M&A

What are the benefits and risks of international dealmaking?

While international investments and deals continue to drive economic growth, they come with unique risks and rewards for investors.

Amid evolving economic conditions, private market professionals worldwide are hedging against volatility by investing in foreign markets and technologies. While the potential for profitability is there, international investing and dealmaking are unique strategies ripe with differentiated opportunities and considerations.

In this article, we’ll dive into the fundamentals of international investing and dealmaking, prominent international transactions in 2022, and some of the top benefits and risks that investors juggle when approaching their own international investments and deals.

What is international investing?

International investing is the process of investing in assets outside of one’s “home” market using stocks, bonds, and international mutual funds or ETFs (exchange-traded funds). For venture capital firms, investing internationally opens the door to the potential of high-growth startups. VCs can tap into less competitive markets and gain staggering returns in an IPO event. Access to foreign companies futher allows investors to buy lucrative products at a lower rate and step into increased returns as a primary stakeholder.

What is international dealmaking?

International dealmaking covers a range of partnerships beyond mergers and acquisitions (M&A). These ventures include any transaction that involves the exchange of assets, goods, or intellectual property between parties in different countries. By acquiring a company with operations in multiple countries, VC and PE firms can expand their presence in a growing industry or region.

3 prominent international transactions from top firms in 2022

As mentioned above, 2022 closed with a small handful of successful international acquisitions. Those big-dollar deals included:

 

Top benefits of international investing and dealmaking

Investing in international asset classes and emerging tech markets can help dealmakers across private equity and venture capital achieve a range of financial and strategic goals—from portfolio diversification to sector-specific acumen. While growing your presence beyond domestic shores always comes with risks, when planned and executed properly, the returns can be well worth it.

Top benefits of international investments

Portfolio diversification
As markets fluctuate in the short term, international investments seek to limit risk through investing in foreign market cycles and industries that may outperform their domestic counterparts. While more volatile than domestic markets, international markets represent a large portion of the investment landscape outside of the US and often allow dealmakers to tap into emerging opportunities.

Hedging against volatility
Utilizing financial instruments between countries and sectors can help investors offset the impact of a downturn. One way to hedge against foreign investment risk is through a currency overlay where an investor works with a specialist firm to mitigate the potential of foreign currency fluctuations. Often utilized by institutional investors such as endowment funds and sovereign wealth funds, currencies are “overlaid” by a money manager, who works to insulate exposure to currency risk when markets shift.

Access to new talent
Working with top talent is crucial for firms such as KKR and Carlyle, who know that maintaining a competitive advantage means partnering with top-tier wealth managers. By globally sourcing partnerships, firms can tap into the most profitable investment opportunities and establish market leadership in a developing territory. This strategy has enabled firms to expand their assets under management (AUM) and increase fees while establishing new business lines.

Top benefits of international dealmaking

Synergy and value creation
The key rule of synergy is that the value and performance of a transaction must exceed the amount paid. For example, if company A acquires company B for $30 million, the value of the transaction must exceed that premium bid for the stakeholders. Realizing deal synergy spans various forms and has become increasingly attractive, especially for companies interested in emerging technology sectors.

Intellectual property and patent rights
With the most recent artificial intelligence breakthroughs, acquiring intellectual property (IP) or patent rights has become a good way for corporates and firms to gain a competitive advantage. In acquiring IP, a company is not constrained to spend time and resources on creating those capabilities internally.

ESG and Impact Investing
Amid growing consumer-led pushback for transparency, prioritizing environmental, social, and governance (ESG) can support an enterprise in navigating climate change commitments, human rights laws and other regulatory requirements. By embedding ESG frameworks from traceability to ethical practices in the supply chain, acquirers can create long-term value for their portfolios while contributing to the local economy.

What risks are associated with international investing and dealmaking?

An international portfolio investment or foreign partnership can easily become complicated and costly. These events often present opaque challenges, such as regulatory hurdles and cultural and language barriers. Investors must have a solid understanding of the country’s legal system and corporate tax laws, as well as government oversight and potential for economic instability. Most importantly, the success of a foreign partnership hinges upon the ability to stay ahead of changes that can impact an investment’s value.

Top risks of international investments

Currency exchange
A top concern for investors is exposure to currency risk, which occurs when exchange rates between foreign and domestic currencies alter. If a US-based investor buys a stock designated in euros, and the euro depreciates, that investor’s assets will decline. Conversely, the investment can grow when the euro appreciates against the dollar.

Exchange rate risks are often abated through currency swaps where the parties involved exchange payments of the two currencies to protect against potential depreciations. The investor receives cash flow in their domestic currency rate when the contract is established.

Liquidity risk
There’s always a risk that a company could go bankrupt before investors receive a payout, whether in an international portfolio investment or with domestic stock. As it’s especially difficult to understand political conditions and or anticipate issues with a company’s product that may impact liquidity or repayment, investors must conduct thorough due diligence on the company and borrower.

International fees
Transaction and brokerage fees, including international taxes, can reduce overall returns. For this reason, many investors turn to US-registered mutual funds, which offer exposure to global markets with relatively low fees. Other avenues include American Depository Receipts (ADRs), which represent the stock of a non-US company trading in the US. ADRs allow investors to gain exposure to international markets without dealing with foreign currency.

Top challenges of international dealmaking

Regulatory risks
Faced with a tightened regulatory and credit landscape, some cash-flushed corporate teams are continuing acquisition activity. This restrictive landscape is especially prevalent in big tech M&A where top regulators are taking a strict approach to consolidation. Corporate dev teams may need to submit an anti-trust regulatory filing and could experience extended timelines between initiating and closing deals, which brings up further hurdles on both the buy and sell side.

Due diligence practices
Critical diligence components include research on a target’s potential for growth, financial metrics, and past performance record. Acquirers and investors must conduct thorough legal due diligence to mitigate any potential surprises. Assembling a team of experts with industry knowledge who can ask the right questions at every deal phase goes a long way to either make or break a transaction.

Integration challenges
Top integration considerations include everything from financial reporting to combining brand identities. A thorough integration strategy is not only agile, which is especially important today, but optimizes buyer, seller, and customer value.

  • Cultural awareness: Combining two cultures through a merger means more than just considering the regulatory environment in that geography; it also means being sensitive to how different cultures work and communicate. Expertise in cultural norms and customs is a key component of successful partnerships.
  • Employee engagement: Managing human capital adds a layer of scrutiny critical to long-term success. For example, in Latin America, where energy and natural resources continue to attract foreign investors, acquirers need the right information and connections to understand the nuances of compensation, employee benefits, and labor laws. A recent survey report by the International Mergers & Acquisitions Alliance Institute found that international transactions with a central focus on HR expertise had a much higher success rates.

How to leverage PitchBook to expand your global reach

International investing is key to intelligently diversifying portfolios and gaining access to unique opportunities. By understanding financial instruments, fund strategies, and their own risk tolerance, investors and dealmakers can make informed decisions that drive long-term growth.

PitchBook resources for international investing and dealmaking

PitchBook’s due diligence resources, market intelligence, and financial data are designed to help investors and companies gain insight into the often-fragmented private market landscape. That includes international territories, investors, and companies in specific industries. From sourcing deals to understanding who the right investors are, here are tools that help extend your reach:

Tap into growing markets with PitchBook research

Gain insight into venture capital activity in Greater China
Discover key private capital players in the Nordic region
Delve into Europe’s private equity landscape
Q4 2022 Analyst Note: The State of Cross-Border M&A

Download PitchBook for deal sourcing guide.