Duff & Phelps Upside - Summer 2016

1Duff & Phelps I Upside Summer 2016
Getting the Most Out
of Your Suppliers
Page 10
The Changing Face of the
European Debt Market
Page 14
Duff&PhelpsUpsideSummer2016
Upside
Summer 2016

1 Duff & Phelps I Upside Summer 2016
1. Welcome
2. Businesses Must Embrace the Vote to Leave the EU
4. Tackling Our Sweet Tooth: The Impact on British Business
6. The Failed Seasons
8 Turnaround Management Association Event Wrap-Up: Retail
Sector Turnaround Challenges and General Outlook
10. Getting the Most Out of Your Suppliers
12. M&A Trends and Aerospace Supply Chain
14. The Changing Face of the European Debt Market
18. The Pressure is Unrelenting: A Review of the Care Sector Crisis
20. Dirty Business
22. Transfer Pricing Review Spring 2016
26 UK Asset Managers: Act Now on Transfer Pricing and Anti-
Avoidance Tax Legislation
28. The Global Regulatory Outlook for 2016
30. No Quick Fix on Valuation
33. The Time is NOW: Extending the Women’s Network
34. Duff & Phelps Services
Contents

Welcome
Welcome to our Summer edition of Upside.
We have passed the half year mark and June is
one for the history books – the impact of the EU
Referendum vote resonates across the globe. Duff &
Phelps has assigned a task force led by Yann Magnan,
our European Valuations Leader to understand the
situation as it develops and to offer our clients the
advice and support at each step of the way. You can
read further views from our leaders in this publication
and on www.duffandphelps.co.uk.
The leave vote aside, this year has been setting quite a
pace for Duff & Phelps in the U.K. and Ireland.
Highlights
This year Duff & Phelps’ Valuation Advisory and Compliance
Consulting practices shared the award for Best Overall
Advisory Firm at the HFM European Hedge Fund Services
Awards, and the Transfer Pricing team won International Tax
Practice of the Year. We also congratulate Dominic Wreford
and Steve Cornmell, both managing directors in the UK global
Disputes and Investigations practice, for being recognised
among the world’s leading forensic accountants and digital
forensic experts in the Who’s Who Legal Investigations 2016.
News
Our Restructuring Advisory practice were appointed as
administrator of BHS, and more recently, for Margate’s’
Dreamland. Our M&A practice has also completed notable
deals such as advising Chamonix Private Equity on its sale of
Mettis Aerospace and LDC on its acquisition of Magicard from
Ultra Electronics. Our Disputes and Investigations practice
launched a global task force to assist clients with navigating
the challenges faced as a result of the Panama Papers leak.
Later in this publication you can read a summary of Duff &
Phelps’ 2016 Global Regulatory Outlook, published by our
Compliance and Regulatory Consulting team, which provides
insight from 193 senior executives on the impact of regulation
on the financial services sector.
Earlier in the year, you will have hopefully seen the pocket
guide for Directors we published in association with the
Institute of Directors called ‘Be Prepared’ to serve as an
introduction on how directors can navigate the pressures of
the boardroom.
In other news from across the Irish Sea, Duff & Phelps Ireland
continues to grow with the acquisition of Corporate Finance
Ireland, strengthening our presence in the corporate finance
and real estate advisory space.
We would like to take the opportunity to introduce and
welcome our new team members
•• Steve Cornmell, Managing Director, Disputes
and Investigations, London
•• Manish Das, Managing Director, Complex Asset Solutions,
London
•• Ken Goldsbrough, Managing Director, Debt Advisory,
London
•• Victoria Richards, Director, Disputes and Investigations,
London
•• Luke Mooney, Director, Corporate Finance, Dublin
•• Brian Cooney, Director, Corporate Finance, Dublin
In further news related to our Restructuring business, the firm is
pleased to welcome back Paul Clark, David Whitehouse and
David Grier, with Paul and David W. resuming their posts as
leaders of the U.K. restructuring practice.
Duff & Phelps’ more than 2,000 professionals are present in
over 20 countries and 70 offices globally. The Shard is our
European headquarters and is the largest office within the Duff
& Phelps network, with over 250 professionals offering
expertise across five core service lines, including Valuations
(including Transfer Pricing and Tax Services), Restructuring
Advisory, M&A, Disputes and Investigations and Compliance
and Regulatory Consulting.
We hope you enjoy this issue of Upside and that you find the
articles useful and informative. As always, we want to thank you
– our clients and peers, for entrusting Duff & Phelps to help
guide you through complex, important decisions for your
business.
Jacob Silverman , President
Bob Bartell, Global Head of Corporate Finance
Yann Magnan, European Valuations Leader

David Whitehouse
Businesses Must Embrace the
Vote to Leave the EU
As Darwin has been quoted ‘It is not the strongest of the species that
survive, nor the most intelligent, but the one most responsive to change’.
This concept still resonates with the business world today as much as it
did with the generation understanding the evolutionary framework when
it was first heard over a century ago.
The events of June 23 threw the UK into disarray. Businesses
around the world will be impacted by the result of the EU
referendum vote but those that can adapt and respond to the
changed environment will prosper.
When/if Article 50 is served, the UK will begin negotiations
with the EU to exit and at this point businesses should begin
down a path, if they’ve not already, to adapt for the next phase
in their evolution.
Change will not be instantaneous. There will be a period of
negotiations to determine the nation’s fate of which we are
still uncertain. There are a couple of familiar scenarios already
in place including the Norwegian style agreement, where the
UK could become a member of the European Economic Area
(EEA) allowing a level of free trade, or there is the Swiss
model, where the UK would neither be a member of the EU
nor the EEA, but have a number of free trade agreements
allowing the flow of certain goods into the EU. Alternatively,
there could be something completely new as a result of the
negotiations. Either way, businesses must be prepared.
It is likely that businesses have delayed making any significant
decisions on acquisitions or investments due to the
uncertainty surrounding the next phase following the exit vote
and the political fluctuations that have trailed. However, is now
the time to begin thinking about the structure of your
business, whatever the outcome? The answer has to be a
resounding yes. It is important that British businesses have a
plan in place as the UK negotiates an exit agreement, even
though these negotiations may continue for many years.
While we wait for clarity relating to the UK’s trade profile with
the EU, what must remain front of mind during this period is
financing. Keeping abreast of increased costs of foreign
exchange and volatility with interest rates pertaining to the
pound Sterling, Euro and U.S. Dollar exposures is essential.
The vote result may create problems with existing financing
arrangements e.g. weaker trading performance leading to
covenant issues, so a negotiation with existing lender(s) or
exploration of refinancing options will be a worthwhile
exercise. Working in partnership with a debt advisor, with
significant transaction experience and close relationships with
banks and alternative lenders, will be important. There is an
opportunity to make more commercially astute acquisitions
after which raising flexible financing quickly can be
considered. Duff & Phelps is already advising a number of
companies with foreign exchange risk because of their trade
profile.
On a more personal note, we are delighted to be back leading
the Duff & Phelps restructuring practice at a time when our
clients need us more than ever. We would like to take this
opportunity to thank you, our clients and our colleagues, for
the enormous amount of support you have offered us over the
last 18 months. We are relishing the opportunity to move
forward and return to client work at such an interesting and
challenging time for UK corporates.
UPSIDE
Paul Clark
Paul Clark
Co-Head of UK Restructuring, London
+44 (0) 20 7089 4710
paul.clark@duffandphelps.com
David Whitehouse
Co-Head of UK Restructuring, Manchester
+44 (0) 161 827 9002
david.whitehouse@duffandhelps.com

3Duff & Phelps I Upside Summer 2016 3Duff & Phelps I Upside Summer 2016

Michael Weaver
Tackling Our Sweet Tooth: The Impact
on British Business
The sugar tax introduced by Chancellor George Osborne might not be
perfect, but it has certainly focused attention on the UK’s sickly-sweet
love affair with sugar, forcing businesses to assess their own operations
and to consider their long-term strategies as they ponder how the value
of their business could be impacted.
In March, the Chancellor’s crosshairs settled on drinks
manufacturers and during his budget speech he pulled the
trigger. The new tax targets those producing drinks with over
5g of sugar per 100ml. There is then a second tax tier for
drinks with over 8g of sugar per 100ml.
But many industry practitioners and commentators have
picked holes in the proposed tax that is due to come into
force in 2018. Why, they ask, are fruit juices and milk-based
drinks exempt, when many contain similar levels of sugar?
Won’t the tax hit the poorest in society who are the biggest
consumers of the drinks that have been singled out? Why
have foods and confectionary with high-sugar content
escaped the chancellor’s attention?
We are still waiting to hear the exact level at which the tax will
be set and what companies it will apply to. The government
has said the smallest firms will be exempt, but there are no
details on exactly where the axe will fall.
And so for drinks manufacturers there is a lot of uncertainty
over the potential change in customer behaviour that the tax
will drive and how it will alter the ongoing cost of doing
business.
The impact of this uncertainty was seen the moment the news
of the tax fell from George Osborne’s lips as in the minutes
afterwards shares in AG Barr dropped by 4.5% while those in
Britvic fell by 2.4%.
Nor is it just drinks manufacturers that will be affected. There
are also the sugar producers that supply the manufacturers,
and the on-and-off trade businesses that sell their drinks.
These firms might not have to pay the sugar tax, but they
could see a drop in the value of their businesses off the back
of it.
Whether publicly listed or not, the sugar tax will reduce
company profits and cashflows. For drinks manufacturers and
associated businesses with debt to service this could mean
reconsidering their facilities and/or covenants.
Beyond the changing company valuations, the negative public
sentiment towards high-sugar products is driving a cultural
change that all companies in the food and beverage sectors
will have to stay ahead of if they want to stay in business. In
particular, they should think about the potential effect of this
changing sentiment on the value of their brand.
The drinks industry has already done a lot to recognise and
react to changing public opinion, and last year the British
Drinks Association announced a calorie reduction goal of
20% by 2020.
On average its members have already reduced the sugar
content of their drinks by 13.6% since 2012. Many soft drinks
firms have diversified their operations and either acquired
businesses with low-sugar product lines or developed new
products for themselves. The drive towards further
diversification and different product lines will speed up in the
years to come.
Companies making these low-sugar lines will be more
attractive to commercial suitors in the months and years
ahead, enabling them to command higher multiples for their
businesses.
Similarly there is a growing appetite for sweetener products
as manufacturers explore how they can replace sugar with
similar tasting alternatives. This sugar replacement strategy
is not without risk, and the beverage market is littered with
examples of changed recipes that have gone wrong and
actually reduced sales.
But those that get the taste right will benefit from the swing
towards low-sugar options. According to the British Drinks
Association, 57% of soft drinks now sold in the UK are low
and no calorie, including nearly 49% of all carbonates.
For those developing and manufacturing sweetener products,
the move away from sugar will underpin future demand.
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But not all consumers will want to move to low-sugar options.
To counter the price increase created by the sugar tax they
might move from branded drinks to less expensive private
label alternatives. If they do, is there an opportunity for
manufacturers to make and supply more of these private label
products?
Firms need to consider how quickly they can diversify into
new product lines and new geographical territories and
whether they should do this organically or through merger
and acquisition.
No market ever stands still for long and the evolving public
opinion towards high-sugar products was already forcing
change in the food and beverage sectors. The sugar tax
accelerates that pace of change and puts pressure on firms to
respond more rapidly.
Michael Weaver
Head of UK and Middle East Valuation Advisory, London
+44 (0) 20 7089 4773
michael.weaver@duffandphelps.com
Companies making these low-
sugar lines will be more attractive
to commercial suitors in the
months and years ahead, enabling
them to command higher
multiples for their businesses.

Philip Duffy
The Failed Seasons
Fashion retailers in the UK are counting the costs of overstocked
warehouses and falling sales, putting further pressure on cash flows.
With the UK experiencing warmer winters and cooler, wetter
summers over the past few years, fashion retailers have seen
a drop in sales earlier in the season as customers’ purchasing
behaviour has followed the weather pattern. The aid of online
shopping and retailers’ improved delivery capabilities have also
influenced customers to delay their new season shopping
until far later in the season, leaving fashion retailers with
warehouses full of unsold stock.
Late season shopping has meant that stores are choosing to
delay displays until later in the season and are left holding
excess stock. This disrupts sales for the rest of the year and
means that many are forced to utilise the heavily promoted
sales such as Black Friday and Boxing Day. Whilst these sales
do boost foot traffic and revenue, products are offered at a
heavily discounted rate, leading to a loss of full price margin
sales and a reduction in profits.
As trading statements for the 2015 winter season have been
released, many retailers who fell short of expectations have
pointed to unseasonably warm winter weather as the cause of
poor sales. Next plc, one of the UK’s leading fashion retailers,
blamed the unusually warm weather in November and
December 2015 for its poor fourth quarter performance.
Overall, there was a fall in sales of clothing and footwear of
4.62% in the UK in December 2015 compared with
December 2014. At the same time, the average UK daytime
temperature was 4.4 Degrees Celsius in December 2014
compared with 7.9 Degrees Celsius in December 2015.
The poor autumn / winter clothing sales for 2015, caused by
the milder winter, have been further impacted by cold and wet
weather in early 2016 delaying sales of spring / summer
clothing and further dampening profits. In the three months
from December 2015 to February 2016 clothing sales have
plunged 3.4%.
With an overstocked warehouse and shrinking price margin,
some high-street retailers are turning to off-price retailers,
such as TK Maxx, to help solve their surplus stock problems.
These companies take advantage of overruns, canceled
orders, and forecasting mistakes made by their full-price retail
sector counterparts, and purchase the excess inventory at a
20%-60% discount. Off-price retailers offer an immediate
solution to offload last season’s stock in bulk. This approach
eases cash flow pressures in the short term, allowing retailers
to reduce losses and purchase next season’s stock.
A combination of both the stock purchasing model used and
the difficulties faced by full-price fashion retailers, due to the
recent failed seasons, has allowed for the growth of off-price
retailers during the last few years as retailers turn to off-price
retailers for a solution to their expensive stock holding
problem. Off-price retailers are now seen as competition to
the full-price retailer, particularly in the U.S.
The bulk sale of stock to off-price retailers is a sensible
approach but it is certainly not a long-term solution given the
drastic reduction in margin. Fashion forecasters can no longer
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rely on the historical trend patterns of previous years to
predict sales and are having to take risks to adjust buying
plans and merchandise to prevent future losses.
We are increasingly seeing fashion retailers adjust their
buying practices to purchase fewer quantities of stock at the
start of the season and instead restock shipments to coincide
with demand. In order for this to be effective, fashion retailers
must ensure robust supply chain management to be agile and
responsive.
Whilst there are a certain set of repeating trends within the
fashion retail industry, recent changes in weather have played
a part in both sales and pricing. The recent decline in sales
margin due to unseasonal weather adds further pressure on
fashion retailers, who already have to account for the cost of
the national living wage, pensions and increasing store
running expenses. However, a forward thinking and strategic
review of the supply chain and a more strategic approach to
driving sales of seasonal merchandise, could help prevent
these issues ahead of the next season.
Philip Duffy
Managing Director, Restructuring Advisory, Manchester
+44 (0) 161 827 9003
philip.duffy@duffandphelps.com
UPSIDE

Turnaround Management
Association Event Wrap-Up: Retail Sector
Turnaround Challenges and General Outlook
In April 2016, Duff & Phelps and the TMA hosted a panel discussion on the
challenges of the retail industry in the UK market place.
Moderated by Ken Goldsbrough, Managing Director in the
Duff & Phelps M&A practice, the panel included Chris
Emmott, Investment Director at Hilco Capital, Bea Pearson,
Chief Operating Officer at BDTP Advisory Limited, and Phil
Duffy, Managing Director at Duff & Phelps.
Since the launch of the internet in 1997, we have seen a shift in
how retailers can reach and sell to consumers. From email
marketing to buying online, retailers have to compete not only on
the high street but also fight for digital real estate. ‘Bricks vs clicks’
is not a new term and the panellists discussed the effects they’ve
seen it can have on brands, products, pricing, and real estate in
the retail industry.
Unsurprisingly, the panel discussed the importance of protecting
the brand and getting the right mix of cost, geographies, and use
of online media and online channels. It’s proven that having a
multi-channel operating model can work but it’s important to
balance and align investment in the website as well as the stores.
Cutting costs like reducing staff numbers will affect the overall
customer service, having a long term effect on the reputation of
the business, and reducing production costs will reduce the
integrity of the product. Phil Duffy, from Duff & Phelps said, “often
financial advisors can be perceived to come in and cut costs,
however, reducing costs may get you over a certain financial
hurdle, but long term it will damage the brand”.
The panel discussed at length the importance of knowing your
product, knowing your market, and knowing how they fit together.
It was noted specifically in the media industry how changes in
technology repeatedly affected the product offering: from vinyl to
cassette, to CD, and now to digital files which can be purchased
over the web without having to enter a store. Diversifying your
product range is important if the offering isn’t keeping up with
market demands, but you should always consider the pricing,
margins and buying structures. Chris Emmott from Hilco Capital,
relayed a story whereby a company was operating a model where
unsold products could be traded back to the originator, alas the
company changed products to one which didn’t support the same
model and unfortunately the company was left in financial strife.
Shifting from a product range and pricing structure that you know
works is risky and should be mitigated by seeking sound advice.
The question is, if everything is moving to a digital platform, will
high streets still exist? Do we still need to invest in retail stores?
The conclusion is ultimately yes, for a couple of reasons. Some
products simply can’t be online – for example, you can’t get your
keys cut online. Some products don’t sell as well online –wedding
dresses, light bulbs and cleaning products for instance. Of course,
we can and often do use the internet to research price
comparisons and can now buy a lot of things online; nonetheless
you can’t ignore the power of impulse buying or trying and testing
a product in store. Again, the importance of building a trusted
brand and products ties into having stores available for consumers
to engage with. Location strategy and terms of lease are
important. Phil Duffy noted that some retailers are bound to a
35-year lease, which can be very difficult to get out of should that
store not be making any money. One way to resolve a store
portfolio issue is to use the available methods of CVA or
administration, enabling a negotiation with landlords to reduce
rents.
In the end, it’s all about understanding your market, once you’ve
got that right the rest should follow. As Beanre Pearson from
BDTP Advisory said, “believe in yourself and your story, otherwise
you won’t be able to sell to your market. Understand your
customer, understand the market, and understand what the
product means in that space.”
Ken Goldsbrough
Managing Director, Debt Advisory, London
+44 (0) 20 7089 4890
ken.goldsbrough@duffandphelps.com
Philip Duffy
+44 (0) 161 827 9003
philip.duffy@duffandphelps.com
UPSIDE
Philip DuffyKen Goldsbrough

Ken Goldsbrough
Managing Director at Duff & Phelps in the Mergers
and Acquisitions practice, specialising in debt advisory
and capital raising. Ken has significant experience in
investment banking specialising in corporate lending,
leveraged finance, and debt capital markets. He has
extensive networks with financial sponsors, banks,
funds and corporates. Prior experience includes roles at
Greenhill & Co as Head of European Debt Advisory, GE
Capital, Barclays and Paribas, where he was Head of UK
Corporate Banking and Chairman of the Trustees of the
Paribas Limited Pension Fund. He holds an M.A. in modern
history from the University of Oxford and is a qualified
member of the Chartered Institute of Bankers.
Philip Duffy
Managing Director in the Restructuring Advisory practice
at Duff & Phelps. He has more than 20 years’ experience
in the corporate recovery market and has significant
experience advising clients in complex situations,
including those with multijurisdictional issues. Phil's sector
expertise includes retail, travel, sport and manufacturing.
Selected appointments include BHS, USC, and several
undisclosed multisite retailers resulting in the saving of
many thousands of jobs as well as protecting stakeholders’
interests. Phil is a Chartered Accountant and a licensed
UK Insolvency Practitioner.
Beanre Pearson
Chief Operating Officer at BDTP Advisory Limited and
Former COO of the £122m turnover multi-channel DIY
and homewares retailer Robert Dyas. BDTP provides
business assessment, operational review and strategy
implementation amongst many other offerings. At Robert
Dyas Holdings Ltd, she was responsible for devising and
delivering a multi-channel retail strategy, developing a
strong management structure, re-defining the trading and
commercial proposition and helping grow a strong brand
profile to increase market share.
Chris Emmott
Investment Director at Hilco. Chris has worked on some
of the largest cross-border restructuring and turnaround
projects of recent years, together with numerous crisis
management and business stabilisation roles. Whilst
at Hilco, Chris was involved in numerous high-profile
restructuring projects, including MFI, The Pier and
Burleigh Pottery. Currently sitting on the boards of Hilco
investments including Denby Holdings, Kraus Group and
HMV Canada, Chris has extensive expertise across the
retail, engineering, automotive and manufacturing sectors.
Our Expert Panelists

UPSIDE
Getting the Most out of Your Suppliers
No matter which industry a business operates in, the level of service provided
by suppliers is key to a company’s performance and bottom line. However, it
is easy to overlook the management of long-term supplier contracts, in
particular in relation to the supply of goods and services which are secondary
to the core activities of the business.
Contracts with suppliers for items such as reprographic, postal,
courier, taxi and travel services are rarely at the forefront of
management’s agenda, particularly where such contracts have
been in place for a number of years. Without management
oversight, changes in business practice and technology can
leave companies losing value as a result of outdated
specifications, high prices and poor service.
A recent forensic audit of a supplier contract for mailroom
services identified that staff numbers specified in the contract
were no longer appropriate. Staffing levels peaked in the
morning and evening to deal with mail delivery and collection.
With vast reductions in recent years in the volume of business
correspondence sent by post and an increase in courier
deliveries throughout the day, the shift patterns did not reflect
the needs of the business. However, under the terms of the
contract the supplier maintained the specified staffing levels, at
the expense of the company, in order to comply with the
contract and meet its Key Performance Indicators (KPIs).
Further performance issues identified relate to the treatment of
incoming packages. The mailroom contract required all
incoming items to be X-rayed but this could not be complied
with due to the large volume of incoming items, lack of trained
staff and inadequate equipment. This was of key concern to the
business due to perceived increased threats to security.
A similar review of a contract for reprographic services
identified that specifications for printers and copiers no longer
met the needs of the business. For example, the units provided
and copy prices were based on the assumption that the
majority of printing would be mono, whereas in fact most
printing was colour, resulting in very high copy prices and
frequent breakdowns of overused colour machines with mono
machines sitting idle.
Contracts that allow suppliers to meet their KPIs, entitling them
to additional fees despite inadequate performance, are also not
uncommon. In one case, this was due to the KPIs not reflecting
the needs and priorities of the business. For example, a key KPI
in a contract for reprographic services specified that an
engineer would attend a reported printer fault within 24 hours,
but not the period within which the machine should be fixed,
resulting in lengthy repair times.
We have also seen instances where mechanisms under a
contract to allow management to monitor performance have not
been utilised (e.g. regular meetings with the supplier and audit
rights of reported performance data). As a result, management
was unaware of many of the performance issues until staff
complaints were escalated.
Control of supplier costs can also be difficult where supplier
invoices are approved by finance staff who often have no
oversight of reported performance and complaints, typically the
remit of facilities management. As a result, any financial
penalties entitled to under the contract may not be recovered.
Supplier contracts can also be subject to fraud or corruption.
For example, a contract for the purchase and management of
advertising space specified the range of profits that could be
earned by the supplier and that any volume discounts and
rebates earned had to be passed back to the company. The
supplier sub-contracted the delivery of the contract to a
wholly-owned subsidiary and retained the excess profits and
rebates within the group. This was only remedied following a
tip-off and a forensic audit of the contract.
Victoria Richards
Control of supplier costs can also
be difficult where supplier invoices
are approved by finance staff who
often have no oversight of reported
performance and complaints, typically
the remit of facilities management.
Supplier contracts can also be subject to
fraud or corruption.

Regular reviews of long term supplier contracts are highly
recommended in order to ensure optimal service at competitive
rates. Duff & Phelps tailors our forensic audits to address
specific issues raised by our clients, but generally recommend
the following steps to manage your long term supplier
relationships:
•• Regular reviews of the terms of the contract and KPIs to
ensure they continue to meet the needs of the business
•• Informal audits of reported performance and checks
against KPIs
•• Checks of amounts invoiced to contractual rates and
reported performance
•• Regular benchmarking of contract costs to ensure pricing
remains competitive
•• Regular discussions with staff to identify problems with
suppliers
•• Regular discussions with suppliers to address problems
or to enable improvements.
Where problems do arise, a forensic audit can be used to
quickly identify the key issues and required resolution. A report
from an independent third party is a useful tool to use as a
basis for renegotiation of a contract and for internal use to
improve management of the contract.
Victoria Richards
Director, Disputes and Investigations, London
+44 (0) 20 7089 4930
victoria.richards@duffandphelps.com
UPSIDE

M&A Trends
and Aerospace
Supply Chain
This article was first published
on 1 April 2016 in Aerospace
Manufacturing magazine.
The A320neo (‘new engine option’
or ‘NEO’) is in many ways Airbus’
new flagship programme, arguably
displacing the A380’s status, and
represents a key revenue driver for
Airbus into 2020 and beyond. As
the workhorse of the Airbus stable,
the A320neo platform has been
incredibly successful with orders as
of 31st January 2016 totalling 3,357,
representing 70% of all of the 4,764
A320ceo (‘current engine option’ or
‘CEO’) orders ever made.
The success of the A320neo has been driven by its
significant efficiency improvements, resulting in 14% lower
cash operating costs and 20% less fuel burn compared
to the CEO, as well as reduced engine noise and lower
carbon emissions (more than 3,600T annually per aircraft).
Furthermore, it has 95% parts & spares commonality with
the existing A320ceo aircraft meaning that most of the
existing supply chain manufacturers are able to service both
lines, and for the purchasers of the aircrafts simplifying
the replacement cycle. Therefore, Tier 1 or Tier 2 suppliers
already serving the production or maintenance of the CEO
benefit from a further strengthened NewGen order book
pipeline.
This strength and continuity in the supply chain is reinforced
by growing market dynamics. The global commercial
aerospace sector is expected to maintain its significant
revenue and earnings growth for years to come, underpinned
by the surge in passenger travel, especially within the
Middle-East and Asia-Pacific regions. Strong consumer
demand supports continued investment in the aerospace
industry and this is evidenced by Revenue Passenger
Kilometres (RPKs1
) roughly doubling in the last 15 years on
a global level. Future forecasts suggest the same growth
over the next cycle. The ongoing high demand for new
planes and the 7 to 8-year backlog of production has further
forced Airbus to increase the monthly production rate of the
Single Aisle Family aircraft to rate 60 by mid-2019, from
rate 46.
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Dafydd Evans
However, Airbus does not have a monopoly on the single
aisle market and faces stiff competition from Boeing’s
single-aisle B737-Max. The model shares similar
characteristics as the A320neo in being fuel efficient and
more environmentally friendly but is yet to match the order
volume of the A320neo. Orders for the B737-Max amount
to just over 2,500 to date vs 3,357 for the A320neo. This is
primarily due to the faster timing and release of its aircrafts
by Airbus. Airbus successfully delivered the first A320neo
in January 2016, stealing a march on Boeing’s production
of the B737-Max, which is only expected to have the first
scheduled delivery in H1 2017. Multiple sources indicate
the A320neo boasts approximately 60% market share.
Whether Airbus can defend its market share once the B737-
Max enters full production rate will remain to be seen but
either way key suppliers for Airbus will benefit significantly
through increased orders of its components and products as
production ramps up to rate 60.
1
Product of number of paying passengers with distance travelled

Whilst suppliers rightly mitigate risk by supplying across
both Airbus and Boeing platforms, those that have
exposure to the A320neo have been more attractive M&A
candidates over the last 12 months. Moreover, we have
seen that amongst one of the biggest drivers of valuation
in M&A processes in the sector is the platform mix. In
contrast it could be argued that those supplying relatively
less successful platforms such as the A380, or having a
greater exposure to legacy programmes, are likely to be less
attractive candidates.
Aircraft engine suppliers, fuselage and airframe components
suppliers have been the most attractive acquisition targets
because they play a critical role in the production cycle.
Mettis Aerospace, sold at the end of February this year
to mid-market private equity firm Stirling Square Capital
Partners, is one such example. Aeromet International’s
saleto Privet Capital is another. Both businesses supply
flight components to the A320neo platform, and under
new ownership are implementing ambitious growth plans.
Private equity has taken an increasingly active interest in the
sector, competing against more established trade acquirers.
This has not only led to increased valuations in the sector,
but also supported increased consolidation as independent
aerospace companies become scarcer and the requirement
for a more diversified platform mix strengthens.
It is worth noting that Chinese acquirers completed 46
western commercial aerospace deals in 2015 compared
to 28 in 2014 with the majority of Chinese interest coming
from private and state-owned corporates. While a rapidly
growing domestic aerospace market has supported this
trend, another major reason for their interest is the large
offset incentives from Chinese or Chinese-owned suppliers.
Western aircraft OEMs often agree to purchase components
in China in return for aircraft orders from the region. For
Chinese acquirers there are potentially significant revenue
synergies to be achieved through the acquisition of
European companies. Increased Chinese acquisitive activity
is therefore expected to continue in 2016.
This rapid consolidation of the A320neo supply chain
and other platforms signals the promise of growth in the
market and speaks to the long-term potential investors and
corporates see within the sector. Duff & Phelps expects the
consolidation to continue, as Airbus & other OEMs demand
financially stronger, integrated suppliers capable of servicing
increased aircraft delivery rates.
Dafydd Evans
Managing Director, M&A Advisory, London
+44 (0) 20 7089 4850
dafydd.evans@duffandphelps.com
UPSIDE

The Changing Face of the European
Debt Market
Private equity sponsors and mid-market private companies are increasingly
turning to non-bank lenders to finance acquisitions, growth and
recapitalisations. This article examines some of the drivers of this trend and a
few of the further changes we might expect as this market develops.
The large banks have faced many headwinds since the global
financial crash of 2007-2008. Beset by tougher regulations,
higher capital requirements, higher compliance costs, LIBOR
and mis-selling scandals and negative public sentiment, it is
perhaps not surprising that the risk culture has changed in
many of these institutions. Banks that aggressively chased
transaction mandates pre-2007 now adopt a more cautious
approach, and many have pulled back from activities like
leveraged finance. Arguably, there has also been some
de-skilling at the banks as many people have left due to
downsizing, and a lot of those people moved into the advisory or
credit fund sector.
The space vacated by the banks has been filled by a new breed
of alternative lenders (credit funds or direct lenders) who have
raised money specifically for mid-market leveraged finance
transactions. Most of this money has been raised from pension
funds, insurance companies, sovereign wealth funds,
endowments and family offices. It is effectively a new asset
class or a new sub-set of the fixed income market. In a low
interest rate environment where yields on government and
investment grade corporate bonds are tiny or even negative,
senior secured leveraged finance debt begins to look like an
interesting place to invest money.
Who are these credit funds or direct lenders? They are asset
managers, usually part of bigger groups including private equity
sponsors; many are U.S. in origin but there are an increasing
number of European firms entering this space. Names would
include Alcentra, Ares, Bain Capital Credit, Bluebay, GSO,
HayFin, Permira Debt Managers and many more. There are
now over 70 active direct lenders in Europe and new ones
cropping up every month. Anecdotally, more than half of
mid-market private equity transactions are now being financed
by direct lenders rather than banks. The trend is continuing as
the European market becomes more like the U.S. market
where non-bank lending makes up approximately 80% of the
leveraged finance market.
Another term readers may have heard is “unitranche,” the
principal product offering of the credit funds. In some senses it
is nothing more than senior secured debt. The term unitranche
originated as meaning a blend of senior and mezzanine funds in
one simple tranche avoiding some of the complexities of a
multi-tranche structure e.g. negotiating the intercreditor terms.
So why has this happened? Why are more borrowers turning
to credit funds rather than traditional bank sources of
financing? There are a number of factors at play. As we have
already noted, it was partly in response to the non-availability
of bank financing immediately post-credit crunch and the need
to find alternative sources. But in truth, many banks have
returned to the leveraged finance market and typically offer
slightly cheaper funding than the alternative lenders, so the
question remains – why have many borrowers turned to the
unitranche providers?
UPSIDE
Ken Goldsbrough

UPSIDE
Speed
The credit funds can move very quickly; they are
unbureaucratic with short lines of communication and they
tend to be experienced people with a deep understanding
of credit risk.
Leverage
The funds can be more aggressive on quantum of debt.
Inherent in the unitranche concept is the idea that the debt
incorporates an element of stretch or junior debt, i.e. greater
than normal senior leverage. In practice, this is not always
the case but it can be a competitive advantage of the funds.
One Stop Shop
Banks will typically hold £20-25 million on their own balance
sheets in mid-market leveraged finance transactions.
Consequently, for larger deals, either a club deal approach
or an underwritten transaction is needed. Club deals can be
cumbersome to arrange and terms will reflect the lowest
common denominator. Underwritten deals, especially in
more skittish markets, require wider ‘flex’ terms where fees,
margins and even structural deal features can be amended
in favour of the lenders if the deal does not sell well in
syndication. By contrast, the funds can hold large amounts,
in some cases several hundred million pounds or Euros,
removing the need for club or syndication and thus giving
a sponsor confidence of speed and certainty which can be
critical, e.g. in auction situations.
Transparency
Unlike the banks with a hierarchical credit committee
structure, the individuals at the credit funds typically have a
clear idea of what they can deliver, so there are no surprises.
Many sponsors have become fatigued by banks promising
one thing but then coming back with less favourable terms
after going to a credit committee.
Flexibility
The direct lenders normally prefer a non-amortising
structure whereas banks sometimes need regular
repayments. A bullet structure can be attractive to borrowers
who want to re-invest cashflows in capex or acquisitions
to grow the business. Moreover, the credit funds can be
flexible and innovative around covenants and other terms
and conditions. They do not adopt a box-ticking approach
which has become evident at some banks. And finally they
can be flexible around information – they will do the work
themselves rather than needing pre-cooked due diligence
reports from a Big Four professional services firm or brand
name strategy consultancy.
Partnership Approach
In the early days of the development of the credit fund
sector, an often heard question was, “yes, but can you trust
them? If my business has a wobble, won’t they take the
keys in a heartbeat?” This is a viewpoint that is rarely heard
these days. The sector is more established and borrowers
understand that funds want to deploy capital, make their
returns and get their money back. Like all lenders, the credit
funds will ultimately have recourse to their legal rights in
case of need but they will be very concerned to work with
borrowers collaboratively to head off difficulties where
possible. In reality, there is more of a partnership approach
and funds have additional finance readily available to fund
growth and acquisitions.

But let’s say a word for the beleaguered banks. Many banks
have now recovered from the downturn and are actively
lending again. The big advantage of the banks is price. The
cost of bank debt is typically lower than the credit funds
although the premium has probably narrowed to around 200
basis points all-in. For borrowers it is a case of trading off
price against some of the non-price factors mentioned above
– speed, transparency, certainty, etc. And on many deals,
banks and credit funds are collaborating. It can make sense
for banks to do the revolving credit usually needed in a
transaction and the first one or turns of leverage in the capital
stack, with the funds supplying the balance of the financing
need. In this way, banks and funds are positioning themselves
where they are most comfortable on the risk/reward curve.
So what future trends can we expect to see in this space? The
first thing I would say is that the credit funds are here to stay.
This is not a temporary phenomenon caused by the ‘crash’
where we will return to the bank-dominated financial sector we
had in Europe before 2007. In fact, I believe the fund market
will continue to develop as it has done in North America, and
there are new entrants continually joining the party. Secondly,
we will see the credit funds doing bigger deals. Already some of
the bigger funds can do transactions of £300m+ and the
smaller funds can club together to do larger transactions. In this
way, the funds will take market share from the lower end of the
high-yield bond market (which regularly opens and closes and
is a volatile market) and the ‘large-cap’ syndicated loan market.
Another trend might be increasing cooperation between ABL
(receivables) lenders and unitranche providers. A combined
ABL structure with a unitranche term loan behind it can be a
flexible and cost-effective structure in the right circumstances
and although the intercreditor terms remain a challenging
discussion, progress is being made in this area.
Finally, how can a financial sponsor or borrower navigate this
new debt environment? There are a myriad of funds to choose
from so how do you choose between a fund or bank deal? This
is where a professional, experienced debt advisor can add
significant value and explains why more and more transactions
involve debt advisors. A good debt advisor has significant
contacts with the banks and credit funds and can run a
competitive process to obtain the best market terms available
for the sponsor or borrower. The debt advisor is aware of
current market terms and currently there is a lot of competition
between the funds to deploy capital, so a good advisor can
create some competitive tension to drive a better deal for their
client.
UPSIDE
Ken Goldsbrough
+44 (0) 20 7089 4890

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internationally, Duff & Phelps’ global reach gives clients unrivalled
access to private debt and equity capital markets to help take your
business to the next level.
To learn more about Duff & Phelps, contact us www.duffandphelps.ie
M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Divi-
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The Pressure is Unrelenting:
A Review of the Care Sector Crisis
Southern Cross was a failing company. Many believe that we now have a
sector standing on the precipice of failure where a crisis is unavoidable
and the collapse of residential care could happen within the next five
years
For many, this is not an unexpected, overnight phenomenon.
The care sector has been the scene of a slow motion collapse
over several years, driven by the rising number of older people
requiring care, and a Chancellor focused on tightening the
public purse whilst care providers face increased compliance
pressures and inexorable rises in operational costs. Many
operators are already at breaking point.
That, of course, is not the full story. 2015 saw two ‘game
changing’ events with the postponement of Phase 2 of the
Care Act until 2020, including the reforms first published by
Dilnot, the Commission on Funding of Care and Support, in
2011, and the Chancellor’s announcement of the National
Living Wage in the Summer 2015 Budget, which was enacted
in April 2016.
The principal danger of Dilnot’s recommendations was the
fear of market destabilisation, caused by an erosion of the
cross-subsidy from private to public payers, post
implementation. This could have resulted in 25,000 care
home residents with modest assets shifting from private pay
into the ambit of council support as a result of the upper-asset
threshold increase to £118,000. Whilst this ‘payor shift’ would
have had the most impact in less affluent areas where
property prices are closer to the £118,000 threshold, as
private fees are typically 40% higher than like-for-like council
fees, it could have been the death knell for many operators
that cater to a mix of publicly and privately paid residents.
For now, the UK government has ‘kicked the can down the
street’, however the long term-funding issues of the care sector
remains unresolved. More importantly, without significant
government intervention between now and 2020 to reduce the
level of cross-subsidy, the sector will be faced with precisely the
same pressures and challenges in 2020/2021.
The decision to postpone the Dilnot recommendations was
undoubtedly influenced by the government’s commitment to
implement the National Living Wage in April 2016, with the
consensus being that the care sector could not absorb both
changes simultaneously. The National Living Wage was
announced in July 2015, therefore councils could argue that
operators were sufficiently forewarned to get their house in
order, by restructuring roles, managing resources more
efficiently, and/or increasing top-up fees, ahead of April 2016
For some, without additional funding being made available to
councils, the National Living Wage represents the final straw,
with expectations that its introduction will shave a further four
percentage points off the gross margins of those operators
with high exposure to public pay. These are the same operators
that have already spent several years fighting austerity,
rationing care, and restructuring resources in an attempt to ride
the storm out and survive sub-inflation fee uplifts.
Current capacity trends are already showing that for the first
time, lost capacity from closures exceeded that gained from
new openings. This is most prevalent in less affluent areas and
is being driven by falling operating margins. With further margin
erosion predicted by the imminent National Living Wage, the
doomsday scenario is sudden deteriorations in care, a wave of
home closures and council commissioners unable to make
placements, thus switching the burden back on the NHS at an
estimated cost of £3bn per annum.
UPSIDE
Sarah Bell Gary Hargreaves

UPSIDE
Sarah Bell
+44 (0) 161 827 9041
sarah.bell@duffandphelps.com
Gary Hargreaves
Vice President, Restructuring Advisory, Manchester
+44 (0)161 827 9042
gary.hargreaves@duffandphelps.com
In his November 2015 Spending Review, the Chancellor
announced that local councils would have the power to
increase council tax by up to 2% to help fund adult social care
– known as the 2% precept. The proposal has been discredited
and described as a missed opportunity, leaving the long-term
funding of the sector in an uncertain position. Estimates vary
widely as to what a full 2% precept would raise across all
councils. The majority of the 152 councils that can introduce
the 2% precept have now approved it, raising an estimated
£372m. However, this is against a backdrop of a £2.5bn cut in
revenue support grant funding from the government to run local
services in 2016-17. More importantly, cash issues exist now,
especially in less affluent areas, meaning the 2% precept will
raise the money in the wrong places and exacerbate regional
and local inequalities as those most in need are likely to
generate the least additional income.
Repeatedly being asked to work harder for less, with increased
compliance scrutiny, is not sustainable in any sector. The
economic reality for operators has been a prolonged period of
chronic underfunding, falling revenues and operational pressure
from rising costs. Phase 1 of the Care Act 2015 gave councils
a new duty to ensure the sustainability of the care service
market, however, there continues to be no central government
policy on fair fees, other than to say it is a matter for each
council, and no guidance is available as to what constitutes
‘sustainable fee levels’. The sector remains highly fragmented,
with no homogenous approach to fee setting or commissioning
strategies across councils in the UK.
Whilst the Chancellor has made more funding available via the
2% precept, the government is unlikely to ever impose
mandatory fee guidance on councils. The Chancellor needs to
eradicate the public deficit and does not want to subsidise
inefficiency by throwing a lifeline to failing, low-quality homes.
This would run counter to the focus on domiciliary care
alternatives, and it would be highly unusual for central
government to seek to exert such a level of control over the
purchasing activity of local councils.
Fee freezes are not the full story. Cash-strapped councils
manoeuvre eligibility criteria more or less stringently according
to the money available and the underlying level of demand. By
raising assessment thresholds, thousands of vulnerable people
have been denied places they would have had access to
several years ago. This not only increases vacancy rates by an
estimated 5%, but it also increases operator pressure as
residents now have a much higher dependency profile.
The general consensus is that the measures outlined in the
November 2015 Spending Review will not be sufficient to meet
the growing care needs of an ageing population. The gathering
momentum of austerity in public funding seen over the last five
years has resulted in the polarisation of publicly and privately
paid care. This polarisation has been driven by the typically high
levels of private pay seen in affluent areas, compared to those
less affluent areas where providers have a greater exposure to
public pay, at often inadequate fee rates. The cross-
subsidisation of state-funded residents by private payers is now
endemic in the sector, with the quantum usually substantial at
an average 40%+ private pay premium. It is unsurprising that
the manifestation of this polarisation is already reflected in the
pressure being placed on the profit margins reported by the
UK’s largest care operators. This two-tier system is gathering
unrelenting momentum. Those operators fortunate enough are
already looking to refocus their attention solely on the private-
payer market, rather than expose themselves to state funding.
It seems inevitable that the growing market polarisation will
contribute to the financial failure of some operators. Previously,
many of the smaller and financially weaker operators running
sub-standard assets have displayed a remarkable level of
resilience, due largely to an absence of alternative uses or
dramatically reduced asset values. How much longer they can
continue to generate acceptable levels of cashflows in the face
of an increased compliance burden, rising operating costs and
pressure from the National Living Wage, remains to be seen. If
many cannot, then those that remain will benefit from the
overall capacity loss at a local level. Some level of
modernisation within the sector feels necessary.
With national capacity reducing for the first time in a decade, it
may presage a general ‘shakeout’ of capacity where the
non-viable stock (small scale homes with poor physical layout)
exits the market, which has hindered sector modernisation and
undermined the profitability of the remainder. That said, with the
churn rate running between 1% and 2% of overall capacity, it
will be several decades before the sector is fully modernised
and for the ‘future-proofed’ stock to replace the overhang of the
traditional sub-standard homes.
The pressure on operators is unrelenting. Social care has been
in retreat now for some time. The critical difference is that the
industry is now losing its appeal, both as a place to invest and
as a form of employment, and that is undoubtedly a dangerous
phase in its steady decline. Social care is in crisis and it is a
crisis that will rebound on the NHS, if not resolved. Operators
simply cannot continue to absorb sub-inflation fee uplifts,
increased operational costs, the National Living Wage,
increased eligibility criteria, increased user expectations, and
the chronic skills shortages whilst measuring up to greater
compliance scrutiny. Something has to give, and unfortunately
we are already seeing many operators who are considering
exiting the sector.
By raising assessment thresholds,
thousands of vulnerable people have
been denied places they would have had
access to several years ago.

Jimmy Saunders
Dirty Business
‘Where there’s muck, there’s brass’ goes the proverb about making money
from what is sometimes viewed as an unpleasant activity. Dealing with the
UK’s circa 200 million tonnes of waste has arguably fallen into this category,
but how does the old saying hold up?
On the face of it, an existing waste processing business can
appear attractive for a funder. High barriers to entry and
long term contracts, often combined with blue chip or local
authority customers, provide a stable and predictable revenue
stream. However, dig a little deeper and things are a lot less
clear.
The main influences on the sector have largely come from
European legislation designed to reduce landfill and improve
recycling rates amongst member states. One of these
measures was the Landfill Tax which was first introduced by
the government in 1996. From 1996 to 2007 the cost per
tonne increased from £7 to £24, and it now exceeds £84.
Whilst during the last couple of years we have seen only
inflationary increases, before that the tax stepped up sharply
for a number of years leaving many businesses in the sector
struggling or facing insolvency. The rapid increase in the
Landfill Tax has seen businesses look to divert away from
landfill as much as possible to other outlets.
One alternative has been the development of waste to energy
technology designed to use elements of waste to generate
heat, gas and power at a lower cost per tonne than the cost of
landfill disposal. As with many developing technologies, there
are inevitably start up challenges. We have seen a number of
businesses suffer from cash flow difficulties as a direct result
of technological ambition outstripping capability and funding.
In the UK, the current supply of waste is larger than demand
so around one million tonnes of waste a year gets sent
overseas to be used in waste starved power stations. That it
is cheaper to do this than deal with the waste domestically
cannot be commercially viable over the long term.
Notwithstanding vulnerability from foreign exchange rates and
the regulatory uncertainty of Brexit, the future of exporting
waste oversees could be very challenging in the longer term.
Many waste transfer stations operate mechanical and
biological sorting procedures to extract valuable materials.
Another output which has been hit hard by falling commodity
prices is metal and other recyclables. Extraction rates are
consistent, so the lower selling price directly impacts on the
bottom line of the business.
Further, because of the combustible nature of waste, waste
operations have historically represented a greater fire risk
than many other businesses and so insurance premiums and
excesses are high, if indeed available at all. From a funder’s
perspective, the value of any security must take into account
any liquidated damages counterclaims against the debtor
ledger; clean-up costs of any property before it can be sold;
and the potential that the business is closed down rather than
being sold as a going concern.
It should also be noted that the Environment Agency is a
major stakeholder in any waste operation and has the power
to suspend or terminate trading and prosecute individuals.
Remedial works and CAPEX can again tear into wafer thin
operating margins. As such, whilst waste and recycling
operations can appear a solid funding proposition, before you
get your hands dirty, think hard about the risks.
UPSIDE
Jimmy Saunders
Director, Restructuring Advisory, Manchester
+44 (0) 161 827 9014
jimmy.saunders@duffandphelps.com
One alternative has been the
development of waste to energy
technology designed to use elements of
waste to generate heat, gas and power
at a lower cost per tonne than the cost
of landfill disposal.’

‘Where there’s
muck, there’s brass’

Transfer Pricing Review Spring 2016
Cbc Reporting Announcements – Exchange of Information Mechanism
This article was first published on 22 April 2016 in Tax Journal.
The major change of interest relates to the XML Schema mechanism released
by the OECD for the exchange of country by country information between tax
administrations. This exchange of information (and how it will be deployed) has
continued to be one of the main concerns multinational groups have about
post-BEPS transfer pricing compliance obligations.
On 12 April, the European Commission (EC) set out a
proposal to obligate companies in the EU with consolidated
turnover of 750m to report country by country (CbC)
information on their own company websites and on a public
business registry.
On 22 March 2016, the OECD published a standardised
electronic template for the automatic exchange of CbC
reports, referred to as the CbC XML Schema. This presents
competent authorities and tax administrations with an
electronic format for coding and standardising information
in the CbC report. The CbC XML Schema closely follows
the format of previous publications from the OECD on CbC
implementation (see the January 2016 transfer pricing
update), with some additional items:
•• If the reporting group has a tax identification number
(TIN) that is used by the tax administration in its
jurisdiction, the TIN is to be mandatorily provided.
Shiv Mahalingham
UPSIDE

•• The inclusion of the reporting group’s postal address
remains optional, although the OECD strongly
recommends that this information is provided.
•• Terms such as ‘stated capital’ remain undefined. In
the absence of further clarity, such terms should be
interpreted in a manner that is sensible and consistent
(e.g. with regard to accounting treatment).
•• The additional information element (table 3) permits a
brief explanation necessary for the understanding of the
compulsory information in tables 1 and 2.
•• Extensive guidance is provided on the ability and process
for making corrections.
•• The CbC XML Schema is designed for the automatic
exchange of reports between competent authorities.
(It is expected that tax administrations will be required
to translate CbC reports into the electronic CbC XML
Schema.) However, the OECD guidance also states:
‘The CbC Schema can also be relied upon by reporting
entities for transmitting the CbC report to their tax
administrations, provided the use of the CbC XML
Schema is mandated domestically.’ HMRC is planning to
introduce a portal where groups can register to file the
CbC report.
Recommended Actions
Groups that are aware of their filing requirements should
consider discussions with the tax administrations to explore
electronic filing mechanisms that may reduce compliance
burdens.
Groups that are unsure of their filing requirements should
ascertain whether, when and where they need to file; and
if there are obligations in more than one location, and/or
obligations created by a lag in the ultimate parent location
introducing the regulations when compared to surrogate
parent locations. For example, the IRS regulations to
implement CbC reporting are expected to be finalised by
30 June 2016, making the regulations effective for all tax
years beginning after that date. There will therefore be a
gap period between the US effective date on CbC reporting
(30 June 2016) and the OECD proposed effective date
(1 January 2016). As many foreign jurisdictions have
already implemented CbC reporting using the OECD’s
recommended effective date, US based multinational groups
face the reality that foreign jurisdictions may request their
CbC report during the gap period, despite there being no
formal requirement to file the US (at least in the interim
period). A similar lag exists for Japan, where the regulations
are relevant from April 2016.
UPSIDE

Budget day in the UK
On 16 March 2016, the UK’s Budget day occurred with
announcements (in addition to dropping the corporation
tax rate to 17% by April 2020) for the adoption of the
OECD’s revised, post-BEPS Transfer Pricing Guidelines into
UK legislation. (Note that Actions 8, 9 and 10 have been
referred to, but not Action 13.)
Recommended Actions
UK guidance must be construed in a manner that ensures
consistency with the OECD guidance. As such, this is merely
a formal announcement to confirm what multinationals groups
are already aware of through their ongoing compliance efforts.
Public CbC Filings in the EU
On 12 April, the EC set out a proposal to obligate companies
in the EU with consolidated turnover of €750m to report
CbC information on their own company websites and on
a public business registry. The public information would
be restricted to company operations within EU member
states with aggregate reporting for activities outside
of the EU (as well as for locations identified as havens
through a ‘blacklist’). It is also proposed that, where a non-
EU headquartered multinational has EU operations, this
reporting obligation will fall on the subsidiaries or branches
in the EU unless the non-EU parent chooses to report this
information for the group as a whole. The changes have
been proposed under a separate legal framework from tax
legislation (these changes would require majority approval
of 28 EU member states in the Council of Ministers,
instead of unanimous consent, which is required of all EU
tax legislation). Some member states (e.g. Germany) have
insisted that they would not back the legislation, as it may
endanger the competitiveness of EU companies and could
raise legal issues with other countries. The EC press release
confirms that ‘this proposal for a directive is now submitted
to the European Parliament and the Council of the EU and
the Commission hopes that this will be swiftly adopted in the
co-decision process. Once adopted, the new directive would
have to be transposed into national legislation by all EU
member states, within one year after the entry in force’.
Recommended Actions
Any multinational group above the €750m turnover
threshold with European operations may need to disclose
sensitive information relating to taxes paid in key operating
locations. A review of the 2015 footprint will be important
in assessing risk areas with the opportunity to commercially
restructure, downsize non-essential entities and/or update
policies where required. Minimising detection risk (i.e. the
risk that a transaction is selected for transfer pricing audit)
with a measured policy can be as important, if not more
important, than minimising adjustment risk (i.e. the risk that a
transaction is not arm’s length).
UPSIDE

Shiv Mahalingham
Managing Director, Transfer Pricing, London
+44 (0) 20 7089 4790
shiv.mahalingham@duffandphelps.com
UPSIDE
What to look out for in the next
few months
Consultation on profit split methods
As announced on 15 March, an OECD working party will
commence looking at the profit split method for pricing
related party transactions and, in particular, at:
•• selection of the most appropriate method;
•• highly integrated business operations;
•• unique and valuable contributions;
•• synergistic benefits;
•• profit splitting factors; and
•• use of the profit split method to determine the
transactional net margin method range and royalty
rates.
This is at the early stages but there is an opportunity for
interested parties to help to frame this important review.
Other items to watch
In addition, look out for more local country budget
statements adopting (and departing) from international
transfer pricing guidance.

UK Asset Managers: Act Now on Transfer
Pricing and Anti-Avoidance Tax Legislation
The transfer pricing policies adopted by multinationals has been
an area subject to increased scrutiny for a number of years.
However, U.K.-based investment managers are subject
to additional layers of regulation that pose a significantly
greater risk, not only at a corporate level but also at
an investor and personal level. Since April 2015, U.K.-
based asset managers have been within the scope of the
Diverted Profits Tax (DPT) and the Disguised Investment
Management Fee (DIMF) regimes, two pieces of anti-
avoidance legislation that pose their own unique set of
challenges but also have themes common to transfer pricing.
Transfer Pricing
In October 2015, the final recommendations of the OECD/
G20 Base Erosion and Profit Shifting (BEPS) project were
released. Starting in April 2016, the U.K. has begun adopting
a number of these recommendations into legislation.
Additionally, investment managers in the U.K. managing
an offshore trading fund typically need to adhere to the
conditions of the investment manager exemption (IME), a
longstanding piece of tax legislation designed for the asset
management industry that prevents the fund from being
taxed in the U.K. One of the conditions of the IME is that the
U.K. investment manager receives customary remuneration
– which requires investment managers to apply the OECD
transfer pricing guidelines.
Diverted Profits Tax
Known in the media as the “Google Tax”, DPT legislation is
intended to prevent the diversion of profits by multinational
groups using contrived arrangements that either lack
economic substance or avoid creating a U.K. permanent
establishment. Effective since April 2015, the Google Tax
imposes a 25% charge on “diverted profits.”
Taxpayers within the scope of the DPT regime are required
to notify HMRC within three months of the end of the
accounting period, requiring businesses to exercise
considerable judgement whether to make a notification to
HMRC or not. This is brought into sharp focus when the tax-
geared penalties for failure to notify are considered, along
with the fact that HMRC – not the taxpayer – calculates the
DPT charge.
Disguised Investment Management Fee
The DIMF is a specific piece of anti-avoidance legislation
and part of a package of legislative changes the sole focus
of which is U.K.-based investment managers. In common
with transfer pricing and DPT, DIMF focuses on how and
where fees arise.
A DIMF charge requires an individual to provide investment
management services directly or indirectly to a collective
investment scheme or certain managed accounts. The
legislation operates by re-characterising untaxed income
(essentially anything not taxed as trading or employment
income in the U.K.) arising to an individual as U.K. trading
income, subjecting it to income tax and national insurance
contribution. One of the key differentiators is that the DIMF
legislation applies at an individual level rather than at a
corporate level.
The regime has been in force since April 2015, and it has
targeted management fees and other amounts not linked
to the profitability of the fund. From April 2016, it will be
extended to performance fees and carried interest.
Common Themes
Both transfer pricing and DPT have small and medium sized
enterprise (SME) exemptions, but DIMF does not have an
equivalent protection. Nor for that matter does the IME.
To arrive at the correct tested figures for SME exemption
the turnover and balance sheet tests, a thorough analysis
of the group structure is required. Definitions of “linked”
and “partner enterprises” could inadvertently lead to fund
structures falling within the definition of the group, thus
removing the potential to rely on the exemption.
UPSIDE
Michael Beart

The requirement to exercise judgement is also common
to both the DPT and DIMF regimes. Whilst transfer pricing
has mandatory requirements with regard to maintaining
appropriate documentation, for DPT and DIMF the path to
evidence this judgement is not as clear.
Underpinning all three regimes is the entirely reasonable
proposition that activities undertaken in the U.K. are to be
taxed in the U.K. However DPT and DIMF both can focus
on the commercial decisions taken by taxpayers which, until
now, HMRC would quite rightly struggle to influence.
Action to Be Taken
The first step should be to get up to speed with the
legislation to determine how it could apply and whether
any of the exemptions or other exclusions are available.
For transfer pricing, existing policies should be reviewed to
determine if they are sustainable and whether the current
structure is still fit for purpose. For DPT, it is important to
determine the applicable HMRC notification date and make
the critical decision whether to make a notification or not,
documenting it accordingly. For DIMF, asset managers
should seek to identify potential issues particularly with
regard to remuneration structures and fee flows.
A plan of action should be developed at both the corporate
level and with the individuals impacted, as consultation may
be vital for achieving a consensus. Where the legislation
has a material impact and is inadequately covered in the
guidance, taxpayers may consider approaching HMRC to
confirm the position.
This article is a summary of an article written by Michael for
the Hedge Fund Law Report. To read the full article, please
visit: www.duffandphelps.co.uk/compliancetax
UPSIDE
Michael Beart
Director, Compliance and Regulatory Consulting, London
+44 (0) 20 7089 0888
michael.beart@duffandphelps.com

UPSIDE
Julian Korek
The Global Regulatory Outlook for 2016
Duff & Phelps published the results of our Global Regulatory
Outlook 2016, which gathers and analyses insights from 193
senior executives in the financial services industry regarding
the impact of regulation on the financial services sector.
The 2016 Outlook found that a majority of the C-Suite and
senior-level staff believe that regulation is having little or no
effect on stability and potentially making the industry less
stable. When asked if regulatory changes in recent years have
created adequate safeguards to prevent a future crash, only
6% of respondents answered in the affirmative. Of the
remainder, 37% said they had not, with 54% saying that new
rules offer only partial protection against another crisis.
Additionally, fewer than a third of respondents felt that new
regulation had improved investor and consumer confidence in
the industry. This is a more negative view than reported last
year, when 43% of those polled said confidence in the sector
had been boosted by regulation.
These findings may simply reflect the limitations of what
regulation can achieve. There are, after all, few guarantees with
financial markets. However, the depth and breadth of regulation
continues to expand, with new requirements on firms and new
areas brought within regulators’ remits.
Global coordination is unlikely to be
resolved in the foreseeable future, and
this will remain a challenge for firms.

Additional Key Insights from the Report
Global Agency Coordination
In addition to overall stability and consumer confidence,
respondents also expressed concern over a perceived lack of
coordination globally between regulators, with only 16% of
respondents agreeing that the industry is effectively getting to a
single global set of regulatory standards. Though there is still
concern over convergence, 42% acknowledged that this is
moving in the right direction.
Global coordination is unlikely to be resolved in the foreseeable
future, and this will remain a challenge for firms. Even with
transatlantic regulation outlining identical requirements, cultural
differences between regulators and their enforcement regimes
on each side would challenge any globally standardized
approach.
Corporate Culture Key to Avoid Regulatory Issues
While regulators’ inconsistency comes under scrutiny by
survey respondents, this is not a failing to which financial
services firms themselves are immune. Just under half (49%)
of respondents said that corporate culture was the most
important factor on governance to get right to avoid regulatory
issues. When asked what skills they would look to hire into
their compliance teams, the majority (38%) said technical
knowledge of regulations, followed by 15% who cited
leadership and team management skills.
If firms are truly to achieve a cultural change, it is hard to see
how this can be achieved without such skills, particularly on the
leadership front to drive change efforts.
Rising Costs
As the corpus of regulation increases, so too will the associated
costs, according to the survey’s respondents. 85% expect
regulations to increase their costs this year. Looking ahead,
20% expect them to have increased by 10% in five years’ time,
with a further 28% expecting them to rise by between 4% and
10%.
It is hard to reconcile the industry’s perceived lack of
confidence in regulation when the majority of industry
respondents expect regulatory compliance costs to increase
over the next year. However, compliance spending is justified by
the potential consequences and cost of failures, and firms
should see it as an opportunity to proactively build a positive
case for compliance. The compliance function can move from
being seen as a cost centre and “business prevention unit” to a
“value generator”.
However, the industry and regulators must ensure that
enforcement actions don’t simply become a fact of life, with the
costs passed automatically to customers. If this happens, the
entire point of delivering penalties will be lost.
Cybersecurity, Anti-Money Laundering and Culture
of Compliance Remain a Regulatory Priority
Cyber risks are an increasing focus for both firms and
regulators. Increasing attacks on financial services firms and
other industries have prompted cybersecurity regulations and
guidelines from the U.S. SEC and the Hong Kong SFC, among
others. It is not surprising then that respondents expect
cybersecurity to take its place as a top priority for regulators. In
total, 19% expect it to be the number one priority for regulators
in 2016, against 18% for AML and KYC requirements, and
15% for efforts to ensure a firm-wide culture of compliance.
These results for cybersecurity were largely driven by U.S.
respondents, where 35% expect regulators to prioritise their
focus on this area. In the UK, it was lower, at 12%, with
compliance culture (22%) expected to be the focus for
regulators – a reflection, perhaps, of the Senior Managers and
Certification Regimes being introduced for banks and likely the
wider industry.
UPSIDE
Julian Korek
Global Head of Compliance and Regulatory Consulting
+44 (0) 20 7089 0800
julian.korek@duffandphelps.com
expect regulations to increase
their costs this year
85%
ofsurvey
respondants

No Quick Fix on Valuation
In July 2013, two years after it hit the EU statute book, the Alternative
Investment Fund Managers Directive was transposed into UK law. Designed
to improve the administration, management and marketing of alternative
investment funds throughout the EU’s 28 member states, the Directive’s
investor protections present a series of potential compliance problems.
While those challenges are material, the slow pace of
transposition at a national level may have lulled some managers
into a false sense of security about the willingness of regulators
to take enforcement action against funds yet to take steps to
comply. This, however, could be a potentially very costly mistake,
as regulators are beginning to bare their teeth.
Indeed, the consequences of making insufficient provision on
valuation can be severe. Between 2013 and 2015, there were
a number of sanctions or settlement agreements between
investment managers and the French financial regulator, the
Autorité de Marchés Financiers, around valuation shortcomings.
Luxembourg’s Commission de Surveillance du Secteur
Financier (CSSF) and the UK’s FCA have adopted tough
standards for investment managers – particularly those who
have appointed management companies (ManCos).
Inadequacies in valuation processes could potentially result in
further action, especially after the FCA publishes the final
version of its consultation paper on valuation.
Valuation of assets poses a particular problem. The Directive
mandates several layers of conditions for legal valuation and
where legal complexity is great, the chances of being found
liable are high. For example, the EU legislators have aimed to
decrease conflicts of interests and increase transparency within
funds. Consequently, the Directive mandates that those valuing
assets must be functionally independent from portfolio
management, while all policies for valuation have to be
procedurally consistent, fully documented and tailored to each
asset within the fund.
The question of who is best qualified and placed to value the
assets within a fund is extensively addressed within the
Directive. Regulators can deem fund managers themselves
competent to value fund assets. However, according to strict
rules separating the valuation from the investment function,
putting in place sufficient governance around valuation is
impractical for many managers. Because ManCos, however, are
by definition separated from the investment function,
establishing independence isn’t the problem. The problem for
ManCos is in having the breadth and depth of professional
expertise to value all of the different types of financial
instruments and asset classes that their investment managers
may venture into. When the assets held by a fund are illiquid or
so called ‘hard-to-value’ level 3 assets, the problem is
dramatically amplified. Hiring external valuers may be an option.
This isn’t a quick fix, however, as the Directive is clear that
these hired hands must be professionally registered and have
strong valuation expertise. The underlying assumption
throughout these regulations is that only the best asset valuers
will do.
ManCos are often intricate vehicles that were growing in
popularity even prior to the Directive, as they offered funds a
platform for expansion into new territories without the
requirement for large local capital investment. With the advent
of the Directive, however, they have taken on a new purpose
– compliance with Article 15, which requires the risk
management functionaries to be separate from the people who
actually put money to work.
While ManCos don’t interfere with the day-to-day running of a
fund, they take a prominent role in corporate governance and
often take responsibility for asset valuation. This frequently
presents a potential compliance risk, as that valuation service
is often not sophisticated enough for the purposes of the
Directive. Furthermore, the responsibility for effective
valuations remains with the fund, even if it has delegated that
function to a ManCo. AIFMs can ill afford the reputational
damage amongst investors that even the mildest regulator
action can inflict. Consequently, putting unqualified ManCos in
charge of valuation, with no accompanying transfer of
responsibility, is a gamble not worth taking.
UPSIDE
Ryan McNelley
Valuation of assets poses a particular
problem. The Directive mandates several
layers of conditions for legal valuation
and where legal complexity is great, the
chances of being found liable are high.
Thorough initial and ongoing
operational due diligence when
using external valuers is key, as is
a deep understanding of the
nature of their services.

UPSIDE
Ryan McNelley
Managing Director, Alternative Assets Advisory, London
+44 (0) 20 7089 4822
ryan.mcnelley@duffandphelps.com
Those managing an alternative investment fund face both an
opportunity and a threat from the Directive. The ability to
market throughout Europe is an opportunity many funds will
understandably wish to seize. But before they proceed,
managers must ensure that they properly comply with the
Directive’s regulations.
Thorough initial and ongoing operational due diligence when
using external valuers is key, as is a deep understanding of the
nature of their services. Acting on qualified advice, investment
managers and ManCos must decide whether they are
competent to undertake valuations themselves, with the support
of an independent valuation opinion, or whether they are more
suited to a conventional external valuation team. Whichever
route they take, they must be able to demonstrate to both
investors and regulators that they have taken the decision with
compliance, rather than cost or convenience, in mind. The
ramifications if they cannot could be grave.
[1]
AMF website, Interview given in September 2015
- See more at: http://www.duffandphelps.com/insights/publications/
alternative-asset/valuation-a-hidden-risk-for-managers-and-
investors#sthash.dVm3Vay4.dpuf

EIGHTH ANNUAL EUROPEAN
ALTERNATIVE INVESTMENTS
CONFERENCE
Location: The Landmark Hotel, 222 Marylebone Road, London, NW1 6JQ
www.duffandphelps.co.uk
Save the Date:
Tuesday, 8 November 2016
Join us for our Eighth Annual European Alternative Investments
Conference in London on 8 November 2016.
Duff & Phelps’ Alternative Asset Advisory and Compliance and Regulatory
Consulting teams are developing an exciting agenda, which will bring together
experts on valuation, compliance and regulatory to share perspectives and
examine the issues impacting the alternative investment community in Europe.
Register at events@duffandphelps.com

The Time is NOW: Extending
the Women’s Network
On 3 March 2016 Duff & Phelps launched the London branch of the firm’s
Network of Women with an inaugural event for 50 colleagues at The Shard.
Women’s networks have become more and more prevalent in
the financial services sector as a way to remedy the historic
male dominance of the field. It would be a great achievement
for the existence of such networks to be obsolete in the
future, but the current facts and figures clearly provide
evidence of their absolute necessity in today's business world.
With 47% of the UK workforce now being women, should
there be a concern over a 3% gender disparity? Perhaps
not. However if we turn a closer eye to the financial sector,
figures reveal that women working full time earn 55% less
annual average gross salary than their male colleagues.1
2017 mandatory gender pay gap reporting together with not-
so-high-profile, but equally important, concerns over sexual
discrimination, work-life balance, and childcare, are all issues
that women’s networks aim to raise greater awareness around
and provide solutions for in the future.
The Duff & Phelps Network of Women Committee in London
is planning a series of internal and client events for 2016.
The network is keen to support other businesses with similar
goals of achieving greater diversity in the work place. We
would welcome any contact from clients who are interested
in getting involved.
UPSIDE
Rebecca Fuller
1]
Parliamentary Briefing on Improving Gender Pay Transparency, Equality & Human Rights Commission, 2010 – See more at: http://gender.bitc.org.uk/research-
insight/WomenWorkFactsheet#sthash.qsNuzSKS.dpuf
Rebecca Fuller
Director, Fixed Asset Management Insurance Solutions, London
+44 (0) 20 7778 0807
rebecca.fuller@duffandphelps.com

Restructuring Advisory
Duff & Phelps’ global restructuring team advises
companies, financial sponsors, lenders, creditors and other
stakeholders involved in challenging situations and
distressed transactions.
For decades, our practice has forged longstanding working
relationships with the most active stakeholders and
investors in the distressed community. Our team includes
more than 400 restructuring and insolvency professionals
in the U.S., Canada, Cayman Islands and Europe.
DUFF & PHELPS SERVICES
Paul Clark
Co-Head of UK Restructuring, London
+44 (0) 20 7089 4710
paul.clark@duffandphelps.com
David Whitehouse
Co-Head of UK Restructuring, Manchester
+44 (0) 161 827 9002
david.whitehouse@duffandhelps.com
Compliance and Regulatory
Consulting
Duff & Phelps provides a comprehensive range of
compliance regulatory services to the global financial
services industry.
As a trusted partner for clients, we deliver on time, within
budget and to the highest quality standards, always striving
to exceed expectations. We operate with a non silo
approach as one united team to offer a global solution to
our clients, who value the clear communication and
exemplary service they receive from the start.
Julian Korek
Global Head of Compliance and Regulatory Consulting
+44 (0) 20 7089 0800
julian.korek@duffandphelps.com
Michael Weaver
Head of UK and Middle East Valuation Advisory
+44 (0) 20 7089 4773
michael.weaver@duffandphelps.com
Valuation Advisory
When companies require an objective and independent
assessment of value, they look to Duff & Phelps.
Duff & Phelps finance and accounting expertise, combined
with the use and development of sophisticated business
valuation methodologies, can fulfill even the most complex
financial reporting and tax requirements. We constantly
monitor changing regulations and consistently provide input
to the Financial Accounting Standards Board and the
International Accounting Standards Board as they develop
implementation guidance and new financial reporting rules
with valuation implications.
Mathias Schumacher
Managing Director, Valuation Advisory, London
+44 (0) 20 7089 4720
mathias.schumacher@duffandphelps.com

DUFF & PHELPS SERVICES
Nick Matthews
Head of UK Disputes and Investigations
+44 (0) 20 7089 4813
nicholas.matthews@duffandphelps.com
Disputes and Investigations
When facing disputes where litigation is a possibility or
even a reality, attorneys and their clients rely on Duff &
Phelps’ seasoned experts.
Our global team leverages technical and industry expertise
to clarify facts, quantify damages and communicate findings
clearly, concisely and objectively.
Our dispute consulting services are designed to assist
clients through all phases of litigation, arbitration, mediation
and trial. We also offer computer forensic, fraud and
investigative services for regulatory proceedings, internal
investigations and litigation.
M&A Advisory and Debt Advisory
Duff & Phelps has a long and proven history of providing
independent financial and strategic advice.
Our M&A Advisory team has advised public corporations,
financial sponsors, family-owned businesses and other
middle market companies in hundreds of sell-side and
acquisition advisory transactions.
Drawing upon our firm-wide resources to deliver the best
possible solution for our clients, our senior staff actively
leads all facets of the transaction through completion.
Henry Wells,
Head of UK M&A Advisory
+44 (0 )20 7089 4876
henry.wells@duffandphelps.com
Ken Goldsbrough
+44 (0) 20 7089 4890

36 Duff & Phelps I Upside Summer 201636 Duff & Phelps I Upside Summer 2016
UPSIDE
What happens when you combine complex data with
human insight? When the certainty of the numbers is
mixed with the skepticism of a trusted partner? When
what you want to hear is tempered by what you need
to know? Diligence becomes scrutiny. Facts become
insights. And customers become lifelong partners. At
Duff & Phelps, our combination of technical analysis
and industry expertise is the difference that enhances
value, helps our clients build businesses and gives
them peace of mind when making important decisions.
Our disciplined thought process helps us dig deep
to challenge assumptions. And we strengthen our
analysis through years of real-world application.
In the end, it’s all about one thing:
powering sound decisions.

37Duff & Phelps I Upside Summer 2016 37Duff & Phelps I Upside Summer 2016

For more information about our global
locations and services, please visit:
www.duffandphelps.co.uk
London
The Shard
32 London Bridge Street
London SE1 9SG
+44 (0)207 089 4700
Manchester
The Chancery
58 Spring Gardens
Manchester M2 1EW
+44 (0) 161 827 9000
Birmingham
35 Newhall Street
Birmingham B3 3PU
+44 (0) 121 214 1120
Dublin
Molyneux House
Bride Street
Dublin D08 C8CN, Ireland
+353 (0) 1 472 0700
Longford
2 Church Street
Longford
Co Longford, Ireland
+353 (0) 43 334 4600
About Duff & Phelps
Duff & Phelps is the premier global valuation and corporate finance advisor with expertise in complex valuation, dispute
and legal management consulting, M&A, restructuring, and compliance and regulatory consulting. The firm’s more than
2,000 employees serve a diverse range of clients from offices around the world.
M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps
Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory
and capital raising advisory services are provided in a number of European countries through Duff & Phelps Securities
Ltd, UK, which includes branches in Ireland and Germany. Duff & Phelps Securities Ltd, UK, is regulated by the Financial
Conduct Authority.
Copyright © 2016 Duff & Phelps, LLC. All rights reserved.

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