UK and Germany lead European buyout market as large deals fuel recovery and multiples increase

European private equity is reawakening following a quiet six months after the UK’s EU Referendum last summer. Overall buyout value has recovered, growing by more than a third between H2 2016 and H1 2017 to reach €35.8bn for the first half of this year, according to provisional H1 data from the CMBOR at Imperial College Business School, sponsored by Equistone Partners Europe and Investec Specialist Bank.

• Total European deal values rebound by more than a third from €26.2bn in H2 2016 to €35.8bn in H1 2017 as market calms following Brexit aftermath
• UK sees values recover from €5.5bn in H2 2016 to €9.4bn in H1 2017 following a strong Q1 as mega-deals make a comeback
• Germany hot on UK’s heels, with both accounting for roughly one quarter of total capital deployed in H1
• Entry multiples increase for mid-market as declining deal opportunities see sponsors pay up for quality assets
• Exit market remains robust – €52.4bn generated by divestments in H1, with UK accounting for €22bn and Germany €10bn

Though the value increase is encouraging, it doesn’t tell the whole story: much of this recovery is accounted for by eleven mega-deals (deals valued at €1bn+) across Europe in H1 2017, already surpassing the ten completed in the whole of 2016, whereas the overall volume slid gently from 310 deals in H2 2016 to 303 in the first half of this year. “The overall European activity level is encouraging. Interestingly it is the mid-market, typically the driving force of European buyout activity, that has contracted. This is unsurprising given uncertainty around the surprise Referendum result last year and, more recently, national elections which may have caused business owners to adopt a wait-and-see approach. This scarcity of assets and a compelling trade bid on many auctions means there is upward pressure on entry multiples as sponsors look to back quality businesses as they raise fresh funds,” says Callum Bell, Head of Corporate & Acquisition Finance at Investec.

The silver lining to increasing prices is that private equity firms are generating strong returns on deals largely done during the post-recession vintage: €52.4bn was generated by private equity sellers in the first half of the year across 208 exits, up from €49.2bn generated in the second half of 2016 across 205 transactions. “Europe remains an attractive environment for private equity firms to exit investments, underpinned by trade buyers’ strong appetite for assets,” explains Christiian Marriott, Partner at Equistone Partners Europe. “The relative weakness of the euro and sterling has encouraged international strategic buyers, often private equity-backed, to target companies being sold by Europe’s buyout houses.”

Germany has stood out in terms of deal value, neck-and-neck with the UK for H1 2017 (recording €8.5bn in deal value against the UK’s €9.4bn) and the overall market leader for Q2 2017 with €5.6bn of buyouts, against just €1.8bn for the UK. In fact, the second quarter this year saw the UK’s activity level on a par with Q4 2016 for value and the lowest since 2009 in terms of volume.

“The UK and Germany saw seven mega-deals between them in the first half of this year, but the UK’s three were all in Q1. The long-awaited hype over the German market may at last be materialising, as it’s not just a case of large deals skewing numbers, but also a larger number of mid-market deals too. Last year saw 95 buyouts done there, the highest number since 2008, with 2017 on track to approach that volume again,” says Bell.

France had a strong showing in Q2, recording 24 buyouts, including two mega-deals of its own, worth an impressive combined value of €5.3bn – second only to Germany in terms of quarterly totals (Q2 2017 Germany: €5.6bn). “We are very encouraged by prospects in the French market, particularly following the result of its presidential election. The numbers are already strong and there is a strong pipeline emerging for the remainder of 2017,” says Marriott.

Highlights

The European exit market remains very strong, with 2017 on course to exceed last year’s €100bn total. Investors in European private equity have enjoyed record years of distributions as 2014, 2015 and 2016 all recorded €100bn+ of exit proceeds. Only twice previously had European deals generated such numbers (2006: €111.7bn; 2007: €123.6bn) with subsequent years recording between €13bn and €86bn until 2014. The first half of this year has already seen €52.4bn realised. The UK was the clear leader here, accounting for €22.1bn of all European exits, with Germany a distant second ending the half on €10.3bn. To put it in perspective, the UK realised €28.5bn for the whole of 2016, while Germany recorded €10.7bn – just marginally more than for just half of this year. The largest exit completed in H1 2017 was a UK deal - CVC’s €7.5bn sale of Formula One to trade buyer Liberty Media, offering a full realisation following an 11-year investment period. Germany accounted for the next three-largest sales by private equity firms: BSN Medical, Mauser and Xella. Interestingly, secondary buyouts comprise a smaller proportion of the exit routes in the UK than previously, with sales to trade buyers gaining ground. Trade sales accounted for 63% of exit value in the UK in 2016 and 72% in the first half of this year, and climbed from 47% of exit value in Europe in 2016 to 57% in H1 2017.

Fewer deals belie the recovery in buyout values as a scarcity of assets sees mid-market contract and prices rise. Though the amount of capital deployed has grown between the second half of last year and first half of 2017, this is largely accounted for by the return of mega-deals rather than a wider-spread recovery. In fact, average deal values are among the highest on record in the UK and across Continental Europe. A smaller number of vendors putting their businesses on the block has meant that deal-hungry GPs – many with freshly raised capital – are focusing on a decreasing number of deal opportunities. This has the unwelcome side effect of upwards pricing pressure. Deals in the €10-100m EV bracket saw average entry EBITDA multiples increase from 9.5x last year to 10.4x for the first six months of this year - actually higher than the average entry multiples for larger deals (€100m+), which decreased gently from 10.8x to 10.3x over the same period.

The UK remains Europe’s largest private equity market – but only just – with Germany a very close second. The UK, which has historically led the European buyout market in value terms, accounted for 26% of European deal value in H1, with €9.4bn clocked up, up markedly from €5.5bn in the second half of last year. Germany was marginally behind, recording €8.5bn, up from €5bn in H2 2016. The two countries hosted seven mega-deals between them: Xella (€2bn; Germany), Gfk (€1.6bn; Germany), Parkdean Resorts (€1.6bn; UK), Calvin Capital (€1.2bn; UK), NewDay (€1.2bn; UK), Hensoldt (€1.1bn; Germany), Solvay Acetow (€1bn; Germany). But it was truly a half of two quarters, with the UK peaking in Q1 and Germany in Q2: German activity totalled €5.6bn against just €1.8bn for the UK over the last three months of H1 2017. Notably, France also had a very strong Q2, with €5.3bn recorded over the three months, up from €1.4bn in Q1. Much of this was accounted for by OT-Morpho, a €2.4bn deal, and Cerba Healthcare, a €1.8bn deal.

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 June 21 2017.

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.