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European buy and build activity reaches highest level since 2008

European buy and build activity in the first half of 2016 reached its highest level since 2008 with the largest number of deals in the UK and Ireland, according to Silverfleet Capital’s latest semi-annual European Buy & Build Monitor.

The Buy & Build Monitor, which tracks global add-on activity undertaken by European headquartered companies backed by private equity, identified a provisional total of 325 add-ons in the first half of 2016 compared to the 204 and 250 add-ons recorded in the first and second halves of 2015 respectively.
In the first half of this year the average disclosed value of add-ons was GBP53 million, up from the average of GBP45 million in the second half of 20152.
The findings show that add-ons by European private equity-backed companies have risen much faster than the buyout market, which has been almost flat. Historically the volume of add-on deals has been strongly correlated with the volume of private equity funded buyouts in Europe and has broadly tracked the trend in the mid-market M&A index.  
The two largest add-on acquisitions were both in financial services: Permira-backed Tilney Bestinvest acquired Palamon-backed Towry in a GBP600 million transaction, while Nordic Capital’s Norway-based Lindorff entered the Spanish property non-performing loans market by adding-on Centerbridge’s Aktua in a deal worth GBP246 million. 
The UK and Ireland was the most active buy and build region in Europe with 57 transactions in the ‘pre-Brexit’ first half of 2016. The biggest increase in Europe took place in the Nordic region, which saw 53 add-ons, almost double the 28 recorded in the second half of 2015. Sweden was by far the largest contributor to the Nordic figure with 25 add-ons followed by Denmark (14), Finland (eight) and Norway (six).
The largest drop in add-ons took place in Spain and Portugal with only seven transactions in the first half of 2016 compared to 20 in the second half of 2015 and 31 for the whole of last year. Outside Europe, North America continued to be the favourite target for add-ons with 22 deals recorded, over double the number for Asia Pacific (10). Despite having Latin America’s largest economy and hosting this year’s Olympic Games, only one add-on was completed in Brazil from a total of five in the entire region, a probable reflection of its current political and financial problems. 
Silverfleet partnered with a team from INSEAD to investigate the contribution made by add-on acquisitions to the growth of a business and the investment returns generated. 
Its research suggests that while multiple arbitrage is often greater for the add-ons than the original platform, it is however less significant than the add-ons’ potential for EBITDA growth. Less comfort should therefore be taken from any discount in terms of the entry multiple of an add-on. 
Neil MacDougall (pictured), managing partner of Silverfleet Capital, says: “The first six months of 2016 have seen a continued increase in buy and build activity both in terms of the number of deals completed and their average size. 
“In an increasingly expensive but flat buyout market, it’s clear that private equity firms are strongly encouraging their portfolio companies to make add-on acquisitions to help average down high entry prices, drive EBITDA growth and generate investment returns. The benign debt markets over the period no doubt helped to facilitate this increase.
“The UK has been a major contributor to buy and build activity so it will be interesting to see what impact the Brexit vote will have on add-on deal flow in the second half of this year.”

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