European buyout market weathers UK drop-off and gears up for next deal window

25-Jun-2019

The European private equity market in the first half of 2019 has fallen short of recent years’ outstanding activity levels, primarily due to a Brexit chill, but looks set to benefit from pent-up demand in the coming months, according to provisional half-year data from CMBOR at Imperial College Business School, sponsored by Equistone Partners Europe and Investec Corporate and Investment Banking.

The number of private equity-backed acquisitions in Europe has dropped to 275 with a total value of €38.8bn in H1 2019, compared with 419 with a total value of €54.4bn in H1 2018. While 2018 marked the high-water mark for activity by both volume and value since the financial crisis, the first half of 2019 saw activity decline, with the UK showing the most pronounced drop. There, deal values fell year-on-year from €11.6bn (£10.1bn) to €6.9bn (£6.0bn) and only 4 of the 40 biggest buyouts across Europe in H1 2019 took place in what has historically been the continent’s largest private equity market.

Mid-market resilient while megadeals show promise

However, there were also multiple indicators of the European market’s enduring strength and depth. Continental European buyouts valued between €50m and €500m - the foundation of the mid-market - dipped only slightly in volume from the prior half year (from 58 to 52), and rose in terms of aggregate value, from €7.6bn to €8.3bn. An influx of ‘megadeals’ valued at over €1bn appears imminent, with 11 pending (ranging from being under offer to awaiting approval), including an EQT-led consortium’s prospective €9.0bn acquisition of Nestlé Skin Health and Apax Partners and Warburg Pincus’s £2.6bn take-private of Inmarsat.

Despite a fall in value, the UK retained its status as Europe’s most active buyout market with 70 deals over the period. Over 85% of these were valued at £50m or less, underlining the expanded role of private equity in supporting the growth of the next generation of British businesses.

“We saw that the EU referendum result had a cooling effect on buyout levels in 2016, only to be followed by two record years for the post-crisis period, firstly in the UK and then across Europe. It’s unsurprising that the formal departure date and subsequent delay have proved to be the next ‘crunch point’, prompting dealmakers to either push deals over the line late last year or hold off in the short term,” commented Christian Hess, private equity client group head at Investec. “None of this should obscure the sustained depth of the European private equity industry. A strong pipeline, ready supply of attractively priced equity and debt capital, high levels of pent-up demand and the long-term secular growth of the market are all highly encouraging signs.”

Continental Europe – a mixed performance

After enjoying an extremely strong 2018 in which it was narrowly pipped to the post in the final days of the year, the Netherlands ranked first in Europe by value for H1 2019, with 31 buyouts valued at €7.2bn – including three of the continent’s seven biggest buyouts this year. Meanwhile, France has witnessed a drop-off in buyout volumes and value from an impressive 2018, down year-on-year from 69 deals valued at €11.4bn to 43 valued at €5.5bn. However, it led the continent for private equity vendors, with its €13.8bn across 28 exits accounting for over 40% of value across the continent and comprising six of the largest 10 exits. In Germany, buyouts ticked up from the preceding six months to 34 deals valued at €3.6bn, up from €2.1bn.

Christiian Marriott, partner and head of investor relations at Equistone Partners Europe, said: “Recent high levels of buyout activity in France have demonstrated how a more pro-business, economically liberal environment has taken root in the past couple of years. Despite a slight fall in buyout volume and value this year, it remains a market about which a diverse mix of investors are extremely optimistic. The recent succession of high-value French exits exemplifies the competitive M&A environment and the confidence of corporate acquirers, and we expect private equity investors to remain active. The Netherlands also continues to attract sponsor interest, in both large-cap buyouts, as well as its ecosystem of entrepreneurial mid-sized businesses.”

Exits fall, public to privates rise

France notwithstanding, there has been a marked fall in private equity exits in Europe, down to 153 deals valued at €32.5bn this year. This follows a five-year bull run in which exit values passed the €100bn threshold from 2013 to 2017 and clocked in at €99.9bn last year. With 2018 the first year since 2009 that the total value of new investments across Europe exceeded that of exits, demand for private equity investments continues to surpass the supply of sponsor-backed companies for sale. This is reflected in the decline in secondary buyouts (SBOs) as a source of new deals: 76 SBOs valued at €14.9bn accounted for 38% of European deal value in H1 2019, compared with 45% in H1 2018. By contrast, public-to-private deals (PTPs) increased in volume (up from seven to nine) and as a proportion of total deal value (from 16% to 21%, at €8.2bn) year-on-year.

“Private equity has made a concerted effort to harvest portfolios in recent years but now appears to be leaning towards holding onto quality remaining assets. On the buy-side, investors have responded by looking for potential buyout opportunities outside of secondary deals, including in partnership with entrepreneurs and through PTPs,” explained Christian Hess. Pointing to a comparable rise in the proportion of deals sourced from foreign and local divestments by corporates (with 43 buyouts valued at €11bn in H1 2019), Christiian Marriott added: “This reweighting towards primary deals has been developing for some time now, driven by both pricing considerations and declining supply of SBOs. So far this year we’ve seen this trend manifest itself in part through a pick-up in corporate carve-out activity.”