European buyout market weathers UK drop-off

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.

That’s 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 EUR38.8 billion in H1 2019, compared with 419 with a total value of EUR54.4 billion 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 EUR11.6 billion (GBP10.1 billion) to EUR6.9 billion (GBP6.0 billion) 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.
  
However, there were also multiple indicators of the European market’s enduring strength and depth. Continental European buyouts valued between EUR50 million and EUR500 million – 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 EUR7.6 billion to EUR8.3 billion. An influx of ‘megadeals’ valued at over EUR1 billion appears imminent, with 11 pending (ranging from being under offer to awaiting approval), including an EQT-led consortium’s prospective EUR9.0 billion acquisition of Nestlé Skin Health and Apax Partners and Warburg Pincus’s GBP2.6 billion 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 per cent of these were valued at GBP50 million 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,” says 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.”
  
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 EUR7.2 billion – 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 EUR11.4 billion to 43 valued at EUR5.5 billion. However, it led the continent for private equity vendors, with its EUR13.8 billion across 28 exits accounting for over 40 per cent 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 EUR3.6 billion, up from EUR2.1 billion.
 
Christiian Marriott, Partner and Head of Investor Relations at Equistone Partners Europe, says: “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.”
  
France notwithstanding, there has been a marked fall in private equity exits in Europe, down to 153 deals valued at EUR32.5 billion this year. This follows a five-year bull run in which exit values passed the EUR100 billion threshold from 2013 to 2017 and clocked in at EUR99.9 billion 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 EUR14.9 billion accounted for 38 per cent of European deal value in H1 2019, compared with 45 per cent 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 per cent to 21 per cent, at EUR8.2 billion) 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 EUR11 billion in H1 2019), Marriott adds: “This re-weighting 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.”

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