Mid-market PE-backed deal volumes up 79 per cent over H1 2020
Private equity-backed M&A deal volumes were up 79 per cent compared to H1 2020 – their highest H1 level since 2014, according to DC Advisory's latest European Private Equity Mid-Market Monitor.
The favourable M&A environment across the continent can largely be attributed to the economic recovery, which has been accelerated by the Covid-19 vaccination rollout.
The technology and business & tech-enabled services sectors continue to lead the way in transaction volumes – accounting for 49 per cent of the region’s total Q2 2021 deal count.
Valuations for tech-enabled businesses remain at a premium, particularly for ERP software and IT services companies that have proven resilient during the downturn. We believe continued consumer and business demand for e-commerce, cloud, cybersecurity and SaaS implementation platforms will only bolster future valuations in the space.
Inflation concerns have arisen amidst a demand surge for goods and services as European economies move away from pandemic restrictions, supply chain backlogs and labour shortages are being experienced across many sectors.
European fundraising in H1 2021 remained buoyant, with levels of dry powder continuing to be at a record high.
However, whilst European fundraising remained active, first-time fund counts are heading towards their lowest level in a decade, indicating that challenges remain for less-established fund managers, as LPs continue to allocate capital to managers with prior relationships that have proven track records. That said, looking forward to H2 2021 we might expect first-time fund counts to improve as travel opens up and LPs begin to search for new GPs that have developed niche strategies, and/or are well placed to capitalise on the post-Covid market.
An increased focus on ESG considerations for investors is coming to the fore. We expect that deal financing may be more difficult for investments that are not regarded as ESG friendly, and that valuations may be materially impacted by ESG limitations.
We expect that European M&A activity will remain bullish as the economic recovery in the region gains momentum and GPs continue to deploy extensive levels of dry power.
Private equity-backed M&A activity in the UK in H1 2021, driven by pent up sponsor demand for deals, continued to build on the positive momentum experienced towards of the end of 2020, with transaction volumes accounting for 30 per cent of Europe’s total deal count for the first half of the year.
However, whilst the number of UK M&A transactions reached their highest Q2 level in 2021 since 2015, the rate of deal making slowed in comparison to Q1 2021. This decrease in deal activity can likely be attributed to the fact that many businesses touted to come to market in Q2 did not, with private owners and sponsor-backers opting to delay sale processes until Autumn.
Delayed exit activity is attributed to sponsors wanting to allow more time post-lockdown for portfolio assets to gain better visibility on earnings, and to establish a post-lockdown trading window of sufficient length. Additionally, private owners and sponsors delayed exits to ensure their own sale processes would not become ‘lost’ in a congested M&A market of the type seen in Q1 2021.
The technology and business & tech-enabled services sectors again accounted for the vast majority of the UK’s total deal activity in Q2 2021 (57 per cent). High levels of dry power and tense competition for quality tech-enabled assets continues, drawing record valuations with an increase in the number of deals being completed on a pre-emptive basis. In many instances, however, the price expectations held by the sellers of tech-enabled assets are deemed unrealistic, and we are instead seeing more processes fall over as a consequence.
As the UK’s single biggest foreign investor, US sponsors are increasingly looking to deploy capital in the UK to take advantage of lower valuations and cultural similarities. US sponsors now account for a larger share of UK-based PE-backed deals, increasing from 18 per cent in 2020 to 21 per cent in 2021. Meanwhile, the UK sponsor share of UK-based deals has fallen from 72 per cent to 67 per cent across the same period. We expect this positive trend to continue into H2 2021 and believe it to be an encouraging sign for the domestic M&A market as well as the UK economy, which continues to grow in confidence following the successful roll-out of the Covid-19 vaccine.
It is clear that the UK M&A market has shaken off the uncertainty of the past year and is open for business. High levels of dry powder, favourable debt conditions, continued uncertainly around Capital Gains Tax changes, as well as a sizeable deal pipeline, makes the outlook for UK-based H2 2021 deal activity a positive one. Still, expectations should be held with cautious optimism as the prevalence of Covid-19 could yet stifle dealmakers’ plans as the UK moves into the winter months.