Ireland attracted unprecedented attention from overseas investors last year, keen to root out overachieving but undervalued businesses. Good cash flow businesses across the spectrum, from manufacturing and engineering to financial services, healthcare and tech, are in demand.
"Private equity has stood up and taken note of the fact that there are some really good businesses here, run by good entrepreneurs who have taken them to a particular size but for whom there is a fear factor involved in going any further," says Paddy Dillon, head of corporate finance at Grant Thornton.
Their hesitance about undertaking a transformational growth plan makes sense. If your business is the only asset you have taking on 20 extra people to sell across Europe or sinking millions into expanding the factory is a risk, he says.
It’s a risk private equity is more than willing to take for the right business, however, which enables Irish entrepreneurs to cash in some chips before doubling down on growth.
Though much has been made of the “wall of cash” currently available to invest, the term does a disservice to what is actually driving current M&A activity.
“It’s not just because there is money out there trying to find a home. It’s the bank of very good companies we have here,” says Dillon.
Ireland is a relatively immature market compared with the UK, one where family firms in particular have resisted private equity. That is changing.
“Last year was our busiest ever in Grant Thornton Corporate Finance. We expect it to be the same again this year,” he adds.
It won’t all be plain sailing, however. “One of the biggest clouds now is cost increases. Energy price hikes in particular is going to affect a lot of businesses, as is the issue of skills shortages. That said, there are lots of good deals being done and all of the ingredients are still there.”
The global outlook of Irish businesses is attractive to international investors, points out Katharine Byrne, corporate finance partner at BDO Ireland. So too is the fact that Irish businesses typically stand at the lower end of the valuation spectrum, offering good potential for return on investment.
More than 70 per cent of transactions which took place here last year were inbound, she adds, up one third on the previous year.
"We are seeing specialist private equity funds coming in who are very focused on sub-sectors," says Byrne. "Ireland, along with places like Israel and Germany, is a hub of activity in the early-stage space."
Brexit has been an accelerant. "We've seen a lot of Brexit bounce, where organisations moving goods around need an Irish or a European entity," says colleague Kevin Doyle, tax partner international tax at BDO Ireland.
Interest rates may be set to rise but neither is unduly worried about the impact that will have on deal flow.
“It might change valuation perspectives but the issue we see is that there are not enough opportunities being brought to them,” says Byrne, who says it’s something she hears repeatedly from PE firms.
International demand for Irish businesses reflects the strength of the opportunities Ireland offers overseas across multiple asset classes and industries, says Máire O’Neill, partner in William Fry’s corporate department.
The Irish regulator’s welcomed approach to new European rules on FDI screening is a potential driver too. “The new European rules due to come into force this year will give Ireland’s regulatory authorities more power to screen FDI,” says O’Neill.
“Most notably the Irish regulatory regime is widely expected to be more benign compared to that seen in other jurisdictions, with rules largely focused on information sharing rather than provision for increased intervention or more demanding competition/anti-trust tests. This will hopefully be attractive to overseas investors who are keen to deploy large amounts of capital.”
That helps to assuage fears that the current activity was but a Brexit blip.
“While Brexit has undoubtedly had a positive impact on the level of FDI coming into Ireland, it looks like it is here to stay. Unlike previously Ireland no longer has to compete with the UK when international investors look at acquisitions to scale into Europe. Increased interest from private equity firms which was initially motivated in part by Brexit has been consistent over the last 18 months, and there is little to indicate this trend will decline any time soon,” says O’Neill.
However, appropriate planning and infrastructure solutions remain essential to winning FDI into the future. “A renewed focus on investment in training and upskilling and environmental sustainability is under way to support FDI and the wider economy, amid technological and green transformations,” she says.
"More generally, of course, markets have obviously become unsettled with wider economic uncertainty resulting from the invasion of Ukraine and the resulting impact on oil and gas prices, as well as other supplies which will be limited as a result, so we will have to see how things play out amid the crisis."
Up until now Ireland has been able to waive a low corporation tax rate of 12.5 per cent on trading income.
"While Ireland, as part of the OECD's Pillar Two plan, has agreed to implement a 15 per cent corporation tax rate for multinational entities with annual revenues in excess of €750 million, tax has never been the only factor in relation to international investment here," says James Keane, tax manager at Huawei Ireland.
“There has been notable media commentary that this rate change, a key pillar of FDI for nearly 18 years, is a potential blow to Ireland’s competitiveness. But the increased corporation tax rate should not deter overseas investment and is still far below the average rate among European OECD countries of around 22 per cent. For example, the UK currently taxes trading profits at the rate of 19 per cent, rising to 25 per cent from 2023,” he says.
If anything the policy change brings clarity and certainty to a debate that has gone on for too long, he adds.
“The Government’s ultimate decisiveness on the matter is underpinned by Ireland’s track record of success in attracting inward investment over many years. The rate change does not affect the other factors that make Ireland an extremely attractive location for overseas investment – such as access to the EU market, a highly-educated English-speaking workforce and its growing international leadership in digital.”
He cites Huawei by way of example. “We have continued our investment in Ireland by committing to create another 110 jobs by the end of 2022, meaning that we will have added over 310 jobs in the period from 2019 to 2022,” says Keane.
Tax always needed to be put in context. “It is part of our offering but it is not our whole offering. Talent, consistency, stability, advantageous government policies and infrastructure all have a substantial role too,” says Maire O’Neill.
The flow of investment in the last 12 months has been substantial and many of the decisions which were made by overseas investors to set up and grow here were done so in full knowledge that Ireland would likely sign up to the global OECD pact, she says.
“We expect that investments such as these will continue in 2022 and beyond. Our experience from working with clients on their international tax structuring is that the relatively small increase in the headline tax rate from 12.5 per cent to 15 per cent has not discouraged multinationals considering Ireland as a base for expansion,” says O’Neill.
“If anything we have seen increased activity in terms of companies looking at their international tax structure now that there is more certainty around the global minimum tax rate and Ireland’s approach to the proposed changes.”
Indeed, the way the Government negotiated has turned out to be “the best way we could have come on board”, reckons Kevin Doyle of BDO. The €750 million turnover threshold plays to Ireland’s strengths.
“Historically where Ireland has done really well at attracting FDI is at the headcount of up to 30, which then mushrooms up to 100. A lot of those will be below the threshold and so pay 12.5 per cent . There are still lots of them in that small to medium and medium to large category,” says Doyle.
Over the threshold the consistency that now exists means Ireland will take an increased tax on operators over the threshold – a bonus.