Private equity puts dry powder to work as industry shifts into buying mode

Europe’s private equity industry has shifted into buying mode, deploying large pools of capital while delaying exits, according to provisional full-year data from the CMBOR at Imperial College Business School, sponsored by Equistone Partners Europe and Investec Corporate and Investment Banking.

The cumulative value of European buyouts passed EUR100 billion for a joint-record third consecutive year in 2019. This was counterbalanced by a sharp drop in exits, with cumulative values falling from EUR105 billion to EUR68 billion (the lowest figure since 2012, ending a run of five straight years of >EUR100 billion in total exits) and volumes from 437 to 301 (the lowest figure since 2010). This was predominantly a result of a 76 per cent drop in UK exits by value, from EUR29.5 billion in 2018 to EUR7.2 billion in 2019. It was reflected in a drop in the number and halving in the value of secondary buy-outs (from 227 valued at EUR50.5 billion in 2018 to 149 valued at EUR26.7 billion in 2019), as private equity managers became more likely to hold on to assets.
“This represents a significant shift in the market. The pendulum has definitively swung away from the dynamic of the last few years of private equity taking advantage of a great exit environment and distributing more cash to investors than they were able to deploy,” says Christiian Marriott, Partner and Head of Investor Relations at Equistone Partners Europe. “The drop in PE-owned assets coming to market is partly due to the funds being opportunistic in the last few years and harvesting the winners in their portfolios. But it is also driven in part by a valuation gap: with volatile public markets and significant macro headwinds around Brexit and global trade wars creating disconnects in pricing expectations between buyers and vendors, particularly in secondary deals between private equity firms.”
Meanwhile, the UK has consolidated its position as Europe’s largest private equity market by deal value by a comfortable margin in the face of challenging conditions, with a particularly strong Q4 which accounted for more than half of 2019’s total value (GBP12.8 billion of GBP22.9 billion). Despite a year of political uncertainty, with a general election and ongoing confusion around Brexit, a slew of large deals meant that the UK recorded a small year-on-year increase in deal value against a backdrop of Europe’s other major economies falling off the record pace they set in 2018.
The UK’s overall success was driven by P2P transactions, which made up the four largest deals, with an aggregate value of GBP10.7 billion - almost half of the UK’s total for the year. These transactions propping up the larger end of UK deal activity were funded by US and global buyout houses – investing, in certain cases, alongside non-traditional pools of capital, such as Blackstone and the LEGO family investment vehicle KIRKBI’s joint GBP4.8 billion take-private of Merlin Entertainment.
“The change in mix of capital deployment this year highlights the flexibility and agility of the PE mandate of financial sponsors: public-to-private transactions have been a significant success story for the UK in 2019, bringing in huge pools of capital from global buyers,” says Christian Hess, Private Equity Client Group Head at Investec. “There are two factors behind this trend: on the one hand, public company valuations have declined, and in combination with a cheap pound, UK companies look attractive to global investors. On the other hand, traditional private equity processes such as auctions have become so competitive that buyers are more willing to look elsewhere for value.”
By contrast, the volume of buyouts in the UK mid-market (deals valued between GBP50 million and GBP500 million) has halved year-on-year, from 51 to 26. Marriott added: “Whereas international capital has flowed into buyouts of large, global, formerly publicly traded companies, deal activity in the UK mid-market has showed signs of pricing in Brexit risk. While economic dislocation may have slowed deal flow and restricted supply overall, the positive aspect is that this has created opportunities for experienced local investors who know the market.”
Outside of the UK, the DACH region proved resilient, with Swiss large-cap mega-deals (most notably the EUR9.4 billion buyout of Nestle’s skin health business, Europe’s largest deal this year) more than making up for the decline in Austria (EUR3.7 billion in 2018 to EUR16 million in 2019) and a slight dip in Germany (EUR12.9 billion in 2018 to EUR10.3 billion in 2019).
While a lack of the EUR1 billion-plus megadeals which drove the country’s success in 2018 meant that cumulative deal values in the Netherlands fell from EUR23.7 billion to EUR12.4 billion, a record volume of 71 transactions underlined the continued evolution of the Dutch market. France, meanwhile, bucked the Europe-wide trend of deployment outstripping exits, with the EUR21.3 billion in cumulative exit value from 49 deals more than twice that of any other country.  Buyouts, by contrast, fell markedly year-on-year, from 124 valued at EUR22.2 billion in 2018 to 81 valued at EUR9.8 billion in 2019.
2019 saw the most technology, media and telecoms (TMT) activity in a decade, as 131 transactions pushed total value up to EUR21.1 billion from EUR14.7 billion, overtaking manufacturing, which fell from EUR28.8 billion in 2018 to EUR17.2 billion in 2019.
Healthcare deal volumes also edged higher, with 61 deals worth a combined total of EUR16 billion in 2019, higher than any year since 2010.