European private equity activity falls amidst post-Brexit dearth of mega-deals

The slowdown in deal activity ahead of the EU Referendum in June continued after the surprise outcome, with year-on-year activity down 38% from €89.7bn in 2015 to €55.7bn in 2016, according to the latest data published by the Centre for Management Buyout Research (CMBOR), sponsored by Equistone Partners Europe Limited and Investec Specialist Bank.

• Total European deal values drop from €89.7bn in 2015 to €55.7bn in 2016 as mega-deals (enterprise value ≥ €1bn) free-fall from 20 worth €38.7bn to 10 worth just €12.8bn over same period
• Exits remain robust – 2016 value third-highest over the last decade
• Mid-market resilient in many countries, including France, Italy, Spain
• Private sellers top other private equity houses as favourite hunting ground for deal doers in the second half

The fall was more marked in the UK, where activity plummeted from €28.7bn last year to €12.5bn this year, the lowest level of buyout activity since 2009. For the whole of Europe the drop was most marked in the mega-deal space, with a strong 2015 recording €38.7bn across 20 deals followed by a much weaker 2016 with just €12.8bn accounted for by 10 deals.

“The Referendum outcome has clearly had a material impact on the buyout market, the UK in particular, with the numbers reflecting a significant decline in mega-deals in the wake of the Brexit vote,” says Christiian Marriott, Partner at Equistone Partners Europe. “That said, in Europe generally there are pockets of encouraging news, particularly in parts of the mid-market where a number of countries have recorded increases in activity levels. This shows private equity’s ability to persevere and keep putting capital to work despite a challenging macro-economic backdrop.”

Indeed deals in the mid-market (enterprise value below €500m) were fairly robust, with the €10-25m space actually recording an uptick of 26% (from €1.4bn across 79 deals to €1.7bn across 97 deals). The €50-100m and €100-250m spaces were up gently year-on-year as well, to €4.7bn (64 deals) and €8.8bn (57 deals), respectively.

“The mid-market has been fairly consistent. There remains a willingness to do quality deals, but not at any cost and that is encouraging,” says Callum Bell, Head of Corporate & Acquisition Finance at Investec. “There are some high prices being paid, with leverage topping out at record levels, so sponsors have been using additional equity to win deals. This underlines sponsors’ belief in the growth prospects of those targets. Historically some of the best deals have been done in down markets and with hefty equity cushions.”

Fundraising suggests next year may see activity resume. In addition to a number of mid-market firms raising fresh pools of capital, four large buyout funds raised €33bn between them in 2016 to back large deals. CMBOR already has nine pencilled in for possible 2017 completion, worth a combined €18.5bn if they come to fruition.

“The market could pick up next year as the dust settles on recent surprise election results and a number of larger GPs have fresh funds to deploy,” Marriott says.  “But equally there will be elections across the continent’s largest economies which could lead to some vendors taking a wait-and-see approach.”

Highlights

Exits remain very strong, with 2016 the third-highest year over the last decade in terms of exit value. The year followed the decade’s two strongest for exits (2014 and 2015), with €91bn recorded as a healthy appetite from trade buyers helped GPs harvest their deals. Just two of the year’s top ten exits by value went to other PE houses; another two were flotations. The remaining six went to trade buyers, highlighting the allure of private equity-backed businesses to acquisition-hungry firms in Europe and abroad. Examples of sizeable sales to foreign trade buyers were the €1.3bn sale by KKR of Sandro, Maje, Claudie Pierlot in France to trade buyer Shandong Ruyi in China as well as the €1.1bn sale by Terra Firma – after a 12-year hold period – of Odeon to AMC Theatres in the US.

Mid-market GPs sourced most of their deals through private vendors in H2 2016 – even more so than in H1. These tended to make up the small- and mid-market buyouts: In Europe, private sources account for nearly half the volume of deals but just a fifth of the value. In the UK these figures stand at roughly half the volume and a third of the value. Secondary buyouts – another perennially popular hunting ground for GPs – has recorded the opposite: nearly half the value of deals (in both Europe and the UK) though a much lower proportion of the total number of deals (just over a quarter of volume in the UK and nearly a third in Europe). These stats suggest larger deals are more likely to come from other private equity houses.

The UK remains Europe’s largest market – but only just – with other countries catching up. The UK clocked up €12.5bn of buyouts in 2016, down markedly on 2015’s €28.7bn. That puts the country marginally above France, which accounted for €11bn this year, flat on last year’s €11.5bn, showing remarkable robustness in this country in a challenging year. Germany’s mid-market had a strong year, with total market volume up nearly 10% to 88 deals worth €5.9bn. The real surprises came from Italy and Spain, each of which have seen rising activity three years in a row, ending 2016 on €7.4bn (Italy) and €3.6bn (Spain) – the highest activity levels since 2007 and 2011 respectively. Italy accounted for three of Europe’s ten-largest buyouts of 2016 (Teamsystem, Sisal, Artsana); Spain clocked up one (H0telbeds).

The Financial Services sector has nearly fallen off the radar. Financial services, previously a much-loved sector of private equity, fell dramatically in Europe, from €8bn across 51 deals in 2015 to just €765m across 25 deals in 2016.  Manufacturing, TMT and business/support services lead Europe, with manufacturing deals accounting for roughly 30% of the number of buyouts, followed by TMT, which accounted for roughly 17%. Each accounted for a fifth of value. Business and support services are more popular in the UK than in the rest of Europe. They accounted for more than a fifth (21%) of deals in that sector in the UK and a third (34%) of value. In Europe, on the other hand, they accounted for just over 13% of volume and value.

Notes to editors:
 
About CMBOR - Methodology
The data compiled by CMBOR summarises trends in buyouts across Europe (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Czech Republic, Hungary, Poland, Romania and Turkey and the UK). Data cut-off date: the data in this press release is for deals completed by December 5 2016.

CMBOR defines buyouts as over 50% of shares changing ownership with management or private equity, or both having a controlling stake upon deal completion. Equity funding must primarily be from private equity funds and the bought-out company must have its own financing structure, e.g., MBO/MBI.