EMEA remained an attractive destination for global private equity (PE) firms in 2014, according to S&P Capital IQ, a leading provider of multi-asset class research, data and analytics.
In the most recent issue of its EMEA Private Equity Market Snapshot report, S&P Capital IQ provides an in-depth analysis of the market and comprehensive data giving a top down view of the sector, providing a comparison to the previous year. The report also outlines emerging trends in the financial and technology sectors and in the German Mittelstand.
With 4517 new investments totalling EUR108.4bn in 2014, there was a 15.5% decrease in capital invested in EMEA by global PE firms and a 6% decrease in deal count compared to a particularly healthy 2013.
However, despite the decrease compared with 2013, the amount of capital invested in 2014 was 0.2% higher than the annual average since 2008, showing that 2014 was still a solid year and EMEA remains an attractive destination for global PE firms.
Capital invested in EMEA-based financial sector targets saw an increase of 29% from 2013 while the number of new deals increased by 15%, following the market availability of non-performing loan portfolios from recapitalisation efforts of larger players. Increased investor interest around the significant innovation potential from disruptive start-ups in this sector could also have been another notable factor leading to this increase.
2014 saw the lowest number of new investments into German target companies since 2010, with the number of entry and exit deals decreasing consistently from 2013 – and notably a dramatic 71% decrease in capital realised from German target companies from 2013.The report further highlights the macro-economic factors behind this, such as trade sanctions with Russia and the economic slowdown in China which both directly affect Germany’s industrial exports.
“Weaker overall performance in 2014 highlights the competitive environment faced by EMEA PE firms in 2014,” says Silvina Aldeco-Martinez, Managing Director at S&P Capital IQ. “However, whilst investment activity did not reach the level of 2013, EMEA remained attractive to global private equity firms with 2014 entry volume 0.2% higher than the annual average since 2008, and 2014 exits realising EUR138bn of invested capital.”
The latest issue of the quarterly report further reveals the significant growth of investments in the financial sector, with EUR33.2bn invested – an increase of 29% compared to 2013. Looking more closely at the data, S&P Capital IQ saw a 41% increase in the number of investments into consumer finance companies in conjunction with a 36% increase in deal count for specialised finance companies. The data also shows palpable activity in acquisitions of loan portfolios following the market availability of non-performing loan portfolios from recapitalisation efforts of larger players. For example, over the course of 2014, the top 10 largest EMEA loan portfolio acquisitions by private equity investors represented some EUR6.8bn of invested capital.
Venture capital (VC) firms have also shown interest in the financial sector, with 15 VC funds targeting financial sector assets launching in the past 3 years and six funds reaching a first close in 2014. The majority of these funds are targeting financial technology start-ups.
Another key driver of interest in the financial sector is that it offers one of the last untouched areas for significant innovation from disruptive startups. For example, historically, the financial sector represents one of the smallest sectors for EMEA venture capital with only 2% of all deals since 2007 made in the sector. However, the ability of small start-up firms to use technology, speed and scale has been noticed by investors who are increasingly betting on targets in the sector.
This quarter’s report also reveals that 2014 saw the lowest number of new investments into German target companies since 2010 and was the first year that the number of entry deals and aggregate capital deployed declined on the previous year. A similar trend was observed on the exit side with only 162 deals in 2014, a decrease of 20% from 202 in 2013. Capital realised from German target companies also decreased in 2014 by an astonishing 71% to EUR7.6bn from EUR26.6bn in 2013.
“Industrials has consistently been a top three sector for private equity investment in Germany over the last 10 years,” says Silvina Aldeco-Martinez. “Yet, it is notable how a number of factors have created heightened uncertainty for the growth prospects of German industrial target companies over the shorter term, primarily due to the sector’s reliance on exports as a major source of revenue. These factors include the ongoing trade sanctions with Russia, a traditionally strong trading partner with Germany, as well as the economic slowdown in China, a strong importer of German goods.”
However, as suggested by both broker research analysts’ earnings estimates available on the S&P Capital IQ platform and Standard & Poor’s Ratings Services*, on a medium-to-long term basis the fundamental strength of Germany and its industrial sector is expected to hold. Indeed, according to S&P Capital IQ it remains unlikely that Germany will cease to be a long term destination for private equity firms globally.
S&P Capital IQ’s EMEA Private Equity Market Snapshot is a quarterly report providing an in-depth analysis of the market and highlighting some of the latest emerging trends. In the appendix of each issue is a data pack which provides a top-down view of the market compared to its position at the same point in time last year. Included in the data pack are charts showing transaction numbers and volumes among EMEA-based PE and venture capital (VC) targets, transaction volumes and deal counts undertaken by EMEA-based PE firms and VCs, and sector-level multiples for private equity and the region's broader merger and acquisition market.
