Houlihan Lokey issues the Q4 2021 MidCapMonitor of European leveraged buyout financings
Houlihan Lokey, Inc. (NYSE:HLI), the global investment bank, today announced its Q4 2021 MidCapMonitor analysis of pan-European private equity (PE) sponsored debt financing activity across the UK, Germany, France, Benelux, and the Alpine and Nordic regions. The survey covers new financings (primary and secondary), refinancings/recapitalisations, and add-ons.
Pan-European unitranche financing activity during Q4 2021 continued to be very strong, with 143 transactions (and, compared to 135 in Q3 2021, was the strongest quarter since the firm started the MidCapMonitor in 2013). For the full year 2021, there were 486 completed PE-backed debt fund financings, an increase of 87% compared to 260 deals in 2020.
Deals Landscape and Market Share
Out of the 486 unitranche deals in 2021, the UK remains the most active unitranche market with 177 deals, followed by Germany with 97, France with 80, Benelux with 52 (of which the Netherlands made up 41), and the Nordic region with 41. For Q4 2021, compared to Q3 2021, Germany showed an increase of c. 50%, with the Nordic region at 40%, while the UK was down c. 25%.
Debt funds increased their market share versus bank lending across all the above key geographies in 2021 (UK, 71%; Germany, 63%; France, 45%; and Benelux, 68%).
Financing Purposes
During 2021, the ongoing trend towards add-on acquisitions funded by debt funds continued in Q4 with 50 deals closed, 35% of the total. Valuation multiples are high and driven by sponsors looking to create additional value through buy-and-build transactions and by strong debt fund appetite for such concepts. This had an impact on banks’ lending due to limited capacity for bolt-ons and hold constraints.
A significant number of refinancings/dividend recaps took place in Q4 2021—34 transactions representing c. 24% of the Q4 deal flow.
Sector Activity
Healthcare and software/technology were the most active sectors in 2020, and this trend has continued in 2021. In Germany, 57% of transactions were linked to these sectors.
“(The year) 2021 has demonstrated the upward trajectory of debt financing in the UK and Continental Europe. Since 2013, the pan-European unitranche debt market has significantly increased its market share compared to bank lending, with PE firms having capitalised on this market opportunity and continuing to deploy significant capital by region and sector. We are seeing the focus on healthcare, software, and more broadly across the manufacturing and the service sectors,” said Norbert Schmitz, managing director in Houlihan Lokey’s Capital Markets Group.
“In Germany, the very strong activity from Q3 2021 has continued into Q4 2021. Fifty-six transactions closed in Q4 2021, and a total of 161 closed in 2021—a 70% increase from 2020. This marks a record quarter as well as a new record year for sponsor-backed activities in Germany since we launched the MidCapMonitor in 2013,” added Mr. Schmitz.
Commenting on the UK, the most active market for unitranche financing, Simon Chambers, managing director for Houlihan Lokey’s Capital Markets Group, said, “The UK has always attracted significant PE funding, though 2021 has been a record year with 250 transactions closing during the year, double the number from 2020. The pipeline is still strong, with multiple companies coming to market with a view to capitalise on revamped trading post-Covid-19. However, we still see scope for increased activity due to record levels of dry powder.”
Outlook for Q1 2022
“The mid-market has adapted very quickly and continues to prove its resilience as the most active market, and record quarters in European unitranche activity for 2021 are testament to this fact. There is no shortage of high-quality assets, and we expect the strong activity to continue in Q1 2022 albeit at a slightly slower pace; however, we will continue to monitor the potential impact of geopolitical events on macro-economic activity. Debt funds continue to offer more attractive products [and] increased leverage, and individual funds have greater capacity than banks.
“Even though there is a particular focus on healthcare and software/technology assets, there are many other, less hyped sectors that are enjoying healthy demand—for example, in the industrial and manufacturing segment,” said Johannes Schmittat, managing director in Houlihan Lokey’s Capital Markets team.
