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May 2013 
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Private Equity Investment In Europe |
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Matt Atkins, February 2013 |
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As the European crisis continues with few signs of recovery on the horizon, private equity (PE) buyout activity has dropped. European investments, however, can still provide significant returns and a number of firms are taking advantage of the economic climate. With many European companies struggling to refinance debt as banks pull back and the continent’s capital markets remaining largely closed, PE firms can fill the gap, raising debt funds to deploy in a cash-starved market. Those firms bold enough to enter the European market must, however, be prepared for challenges along the way.
Trends
PE investment and fundraising has unquestionably suffered since the global financial crisis, more so in the years since the onset of the sovereign debt crisis. Since 2009, a number of patterns have emerged in the PE space. “The biggest trend is that there is simply less of everything,” says Karsten Langer, a partner at The Riverside Company and a past chairman of the EVCA. “De-leveraging, regulation and investor cautiousness have reduced the availability of capital, and slow growth in Europe has driven more capital to other global regions. The sovereign debt crisis and the threat of a collapsing euro made a challenging situation even worse. Additionally, both LPs and GPs have become much more selective. GPs are being even more cautious as buyers while LPs have become much more careful and demanding investors.”
2012 saw PE buyout activity in the region slump to its lowest level since 2009. According to Dealogic figures, the total value and volume of European buyouts for the year came in at just 705 deals worth a combined $53.6bn – down from the 772 deals of 2011 which were valued at $65.7bn. The year, however, was also one of contrasting themes. While overall deal value and volume fell, a shift toward larger deals emerged. By October, 10 buyouts totalling €1bn or more had been completed, the largest of which was the €1.8bn buyout of BSN Medical. This trend was countered, however, by a slowdown in deals in the lower to mid-market.
PE exits have also suffered. IPOs have had a hard time in Europe since the financial crisis, and flotations of PE backed businesses even more so. In addition, the European environment has hindered the sale of companies between PE firms, which can account for up to half of PE exits annually. That said, some large disposals did take place in 2012, notably KKR’s sale of a 45 percent stake of pharmacy group Alliance Boots to the company’s US rival Walgreen.
On the fundraising front, funds raised more capital during the first three quarters of 2012 compared with the same period in 2011. According to Dow Jones, PE firms raised $47.8bn across 118 funds – a 20 percent increase in capital raised. Yet many funds failed to meet expectations – something of a running theme as the eurocrisis has progressed. “As capital has become scarcer, fundraising has become even more competitive, with many funds failing to close or closing below their target size,” explains Hugh Naylor, Head of Private Equity at Trinity International LLP. “That said, top performing funds, certain specialists and those that have generated a loyal LP base continue to raise funds successfully. The time taken to raise a fund has increased and LPs have gained traction in negotiating the more egregious fund terms with particular pressure on management fees. Sponsors need to be more creative – whether in offering incentives to key, early investors or defining their funds – and developing and maintaining ongoing contact with LPs has become even more paramount.” However, with PE activity stymied, firms that fail to put their money to work may be forced to release clients from their commitments after a given time, resulting in lost fees and making future fundraising more difficult.
New opportunities
Despite the challenges there are opportunities for PE investors, and multiple openings exist to generate solid returns in the coming years. Europe is the largest single market in the world and a leading region in terms of innovation, education, and other measures. For those willing to accept some risk, the continent’s economic turmoil has revealed new avenues for investment. Entrepreneurs and businesses still need funding for growth, and PE can provide much-needed capital and expertise, either through traditional equity investments, or by raising dedicated debt funds. With the role of banks more subdued than in the past, and the reliance on capital markets and alternative lenders increasing, today’s economic landscape presents investors with a unique opportunity, explains Mr Langer. “This reshaping of banks’ lending portfolios creates an opportunity to buy whole portfolios of loans to good mid-market companies, which benefits all parties: banks achieve lower leverage ratios to meet stricter regulatory requirements, companies get a new lender with an interest in helping to fund the company’s growth, and the new lenders get an opportunity to invest in good companies on attractive terms. Many of the world’s largest companies were created during times of economic difficulty. PE investors find those that are able to thrive in these times and help them be even more successful.”
Unsurprisingly, perhaps, investors have tended to gravitate towards businesses with a stable demand in the healthier economies of northern Europe, including Germany and France, though regulatory uncertainty and the demonisation of PE in the media has dampened enthusiasm. Many buyout groups are channelling money into previously less popular regions like Scandinavia, which are now viewed as relatively healthy, but wherever there exists strong, cash-generative businesses, the competition is intense.
In Central Europe, PE firms have remained confident and dealmaking has continued. October saw Advent International win a bidding battle for Polish retailer EKO, taking a 97.98 stake in a public-to-private deal. The same month saw Mid Europa Partners announce the acquisition of laboratory diagnostics company Alpha Medical, before buying vitamins, minerals and dietary supplements manufacturer Walmark in December. In addition, Abris Capital Partners was active in Poland and Romania, closing deals in the financial services industry.
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