Investor influx drives southern European multiples upwards

Amedeo Goria
03 July 2017

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Historically perceived as a land of cheaper opportunities, southern Europe is witnessing growing entry multiples as it lures more international deal-makers seeking to deploy dry powder and expand their geographical reach. Amedeo Goria reports

As Europe sweltered under a heatwave at the start of summer 2017, so too did fund managers, as average multiples to acquire businesses continued to heat up. As shown in the latest unquote" and Clearwater International Multiples Heatmap, EV/EBITDA average multiples across Europe clustered between 9.8x and 10.7x in Q1 2017. The research highlights the highest increase is taking place in the southern Europe region, which saw averages rise from 8.6x in Q1 2016 to 10.9x in Q1 2017. The figure was higher than the 9.5x EBITDA entry multiple seen in the UK & Ireland, though below the 11.2x in the DACH region and 11.8x in the Nordic countries.

The trend is particularly evident in Italy, as several private equity fund managers recently discussed at Italian Private Capital Market, an event co-organised by EY and Italian private equity association AIFI in June. During the event, EY partner and head of private equity for the Mediterranean area Enrico Silva pointed out that, against a backdrop of ongoing uncertainty, fund managers raised $653.5bn globally in 2016, reaching a historical post-crisis high, just 4.9% short of the $686.1bn peak reached in 2007.

In the last few years, several private equity funds, such as German GPs, have started looking at Italy as a target geography. The German private equity market is challenging. There are few [potential] assets compared to the size of the private equity industry" – Enrico Silva, EY

Furthermore, the global firepower in GPs' hands reached $1.41tn in 2016, growing to $1.47tn during the first four months of 2017, Silva adds. "If we look at the appreciation of the US dollar against the euro in the last decade, we understand why Europe is becoming more attractive for US-based funds," says Silva.

However, according to Silva, global buyout activity peaked in 2015 with $422.8bn in aggregate value across more than 400 transactions. This declined in 2016 with less than 350 deals closed and only $339.3bn deployed, a figure that is also below the $362.7bn injected in 2014. "These numbers showcase an increasing difficulty for investors to find the right opportunity," says Silva.

The main reason for this challenge is multiples inflation, according to Silva. "Funds struggle to find attractive investment opportunities without paying high double-digit entry multiples on a global scale. Moreover, GPs are now facing increasing competition from strategic investors, such as large corporates and sovereign investment funds, which can pay higher prices and have a longer investment perspective." This is leading fund managers to broaden their geographical investment criteria to reach better opportunities, he adds.

Voyage to Italy
EY has witnessed a surge of GPs turning to the bel paese as part of their investment strategies in recent years. In 2012, fund managers with a remit to invest in Italy raised an aggregate of $7bn in commitments, while four years later this figure had reached $21.4bn, marking a 32.1% CAGR, says the EY partner.

According to unquote" data, international sponsors dominated the Italian buyout space for deals valued at more than €50m between 2013-2016. Last year, international deal-makers led 20 transactions totalling €9.5bn, while domestic investors led 13 deals with €3.2bn of capital deployed.

Says Silva: "In the last few years, several private equity funds, such as German GPs, have started looking at Italy as a target geography. The German private equity market is challenging. There are few [potential] assets compared to the size of the private equity industry. Therefore, local GPs had to find other markets in which to deploy their capital." Northern Italy in particular is taking advantage of this, he says, due to its similarities to the German entrepreneurial and economic environment.

This trend has contributed to Italy's average entry multiples rising from 7.3x in 2012 to 10.9x in Q1 2017. The figure is supported by those showcased by EY during the event. The firm found multiples in the consumer goods sector rose from 6.2x in 2013 to 12.7x in 2016; while between 2014 and 2016 the industrial products space saw a rise from 6.3x to 7.5x and the healthcare and social services segment saw an increase from 7.1x to 7.5x. "Other sectors also followed this general trends," says Siva. "However, despite a general increase, entry multiples still remain more attractive in Italy than in more established markets across Europe."