Climate - Value of European private equity investments falls to a four year low

The second quarter of 2003 has seen the value of European private equity transactions fall to a four year low, according to figures just published in the Initiative Europe Q2 2003 Barometer, produced in association with Candover. The total value of private equity transactions completed in the second quarter of 2003 stood at only EUR 10.8bn, the lowest quarterly value recorded since the second quarter of 1999. This is also the second quarterly fall in the value of European private equity transactions recorded in a row, reversing the trend witnessed throughout 2002, which recorded quarter-on-quarter increases in the total value of the market. A substantial fall in the value of private equity backed buyouts was the driving factor behind the fall in the value of the market, with only a handful of larger transactions known to have completed in the second quarter of the year.

A small increase was recorded in the number of transactions completed. 246 European private equity deals were known to have completed in the second quarter of 2003, a rise of some 13% on the 217 recorded in the first quarter of the year. This will give European private equity and venture capital houses some cheer, particularly given that all areas of the market - buyout transactions, early-stage deals and growth capital financings - registered an increase in deal activity. However, the volume of transactions completed in the second quarter of 2003 still remains well below that recorded throughout 2002. Whilst investors may have hoped that the relatively speedy resolution of the conflict in Iraq would lead to an upswing in deal completions, this does not seem to be the case. Transactions are still taking a long time to come to fruition, whilst continuing economic uncertainty is resulting in investors still being extremely circumspect about new investment opportunities.

The European private equity backed buyout market has remained relatively sluggish in the second quarter of the year. The market has failed to maintain the momentum it had built up throughout 2002, which had recorded quarter-on-quarter increases in both volume and value. In particular, the final quarter of 2002 saw both the number of completed transactions and the total value of the market reach their highest total for some time. Although a small increase in the number of transactions was recorded in the second quarter of 2003 - from 84 in the first quarter to 89 in the second quarter - the value of private equity backed buyouts fell, the second quarter-on-quarter decrease in total deal value seen since the fourth quarter of 2002. The EUR 9.5bn total value of buyout transactions in the second quarter of 2003 is the second lowest quarterly total deal value recorded since the beginning of 2002. The major reason has been a lack of larger deals. Only one EUR 1bn+ transaction was recorded in the second quarter - the £860m (EUR 1.2bn) buyout of UK packaging business Linpac by Montagu Private Equity. This contrasts with the position in the first quarter of 2003, which saw seven transactions completed at either a recorded or estimated deal value above EUR 1bn.

Nonetheless, many investors remain upbeat about the prospects for the buyout market and expect something of an upswing in the second half of the year. Pipelines would certainly support this. A number of sizable transactions are currently at various stages in the pipeline, and several are expected to complete later in the year. Amongst these are Candover and Cinven's EUR 1bn+ purchase of BertelsmannSpringer, the German-based global academic publisher which is to be merged with Kluwer Academic Publishers; the transaction is expected to complete in early autumn.

Other transactions are further from completion, but include some potentially huge deals. Amongst these are: SEAT, a two-stage transaction led by BC Partners, CVC Capital Partners, Permira and Investitori Associati that may reach EUR 5bn+ in value, making it Europe's largest leveraged buyout; the mooted public-to-private of retailer Debenhams, which involves bids from Permira and Texas Pacific/CVC Capital Partners; and the proposed sale of the Scottish & Newcastle pub estate, which has attracted interest from a large number of buyout houses, including Terra Firma, KKR, CVC Capital Partners, BC Partners, Cinven and Permira.

The bulk of private equity backed buyouts continue to be completed with deal values lower than EUR 160m, with some 84% of buyouts completed in the second quarter of 2003 having a deal value of EUR 160m or less. This deal size category, however, has seen its relative importance fluctuate somewhat. By contrast, deals in the EUR 160m to EUR 1.65bn category steadily increased in relative significance throughout 2002, with the final quarter of the year seeing almost one-quarter of all buyouts falling into this range. As corporations continue to restructure in the face of increased global competition, economic difficulties and mounting debt burdens, dealflow in this size category is likely to remain robust. The largest transactions (those with deal values above EUR 1.65bn), although grabbing the headlines, are still rare, and have accounted for no more than 4% of any quarter's total buyout volume since the beginning of 2002.

The regional distribution of buyout transactions remains relatively steady, with the UK & Ireland accounting for the largest proportion of buyouts. France remains the Continental European leader, and in the second quarter of 2003 34% of buyouts involved a French-based company, a significant increase on that recorded in the first quarter.

Restructuring amongst corporations remains the largest source of buyout dealflow in Europe. Some 43% of all buyout transactions completed in the second quarter involved a disposal by a corporate (either local or foreign), an increase on the proportion recorded in the first quarter of (38%). Disposals from family-owned businesses, a mainstay of many buyout houses, appear to be in decline, representing only 23% of all deals in the second quarter of 2003, down from 28% in the first quarter. The tough exit environment means that a significant proportion of buyout dealflow continues to come from institutional vendors, as private equity houses look to exit from transactions and provide returns back to their limited partners by selling to another financial sponsor.

The data shows that growth capital transactions have been hit the hardest by the downturn, recording five quarter-on-quarter falls in both deal volume and (with the exception of the third quarter of 2002) deal value since the beginning of 2002. This trend, however, has now been stopped, with the second quarter of 2003 recording a small rise in both the volume and value of completed growth capital transactions. 101 growth capital deals were completed in the second quarter of 2003 at a total value of almost EUR 1.1bn, a 19% increase in deal volume and a 92% increase in deal value over that recorded in the first quarter of 2003. The largest growth capital transaction recorded in the second quarter of was the 8210m refinancing of Codere, a Spanish provider of gaming and casinos facilities. The transaction involved mezzanine arranged by Intermediate Capital Group and CSFB and senior debt facilities provided by Bank of Scotland.

The venture capital segment of the market is beginning to show signs of a sustained improvement in its fortunes. The number of completed early-stage transactions rose for the third quarter in a row in the second quarter of 2003, with the 56 completed transactions representing the second largest quarterly deal volume in this segment of the market since the beginning of 2002. The value of early-stage transactions also rose in the second quarter over that seen the previous quarter.

Although it would perhaps be premature to state with certainty that a recovery in early-stage investment is underway, deal volumes in this area of the market have remained relatively steady and have risen more than they have fallen since the beginning of 2002. Certainly the data would suggest that the worst fallout from the bursting of the technology bubble is over for Europe's venture capital community. As with previous quarters, the biotechnology sector continues to be attractive to venture capitalists, with the two largest early-stage transactions in the second quarter of 2003 both being biotechnology deals.

France was the most active market in the second quarter of the year, outstripping the UK & Ireland. Some 34% of all European private equity transactions completed in the second quarter involved French companies, compared to only 30% that involved companies based in the UK or Ireland. This is a significant increase in the proportion of the market accounted for by France, with only 26% of deals completed in the first quarter of 2003 involving French companies.

This is an excerpt from the Initiative Europe Q2 2003 Barometer produced by Initiative Europe in association with Candover. The Barometer provides a quarterly overview of venture capital and private equity activity in Europe. All statistics are produced on the basis of validated data collected by Initiative Europe. The Initiative Europe Q2 2003 Barometer is FREE and can be downloaded as a PDF from our redesigned websites. Visit either www.initiative-europe.com or the online archive of Deutsche...unquote†at www.deutscheunquote.com and go to PRESS RELEASES where you will find the Initiative Europe Q2 2003 Barometer and a range of other information on the European private equity market available for easy download.

For more information please contact: Nicholas Gordon, senior research analyst, Email: nicholas.gordon@initiative-europe.com; Tel: +44 1737 784 204.

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