2020 Outlook: Southern Europe finishes 2010s on record high

Alessia Argentieri
21 February 2020

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After a positive 2018-2019 on both the investment and fundraising fronts, the Iberian and Italian markets are expected to remain rich in opportunities for PE in the coming months. Alessia Argentieri reports

Southern European private equity posted a strong finish to the decade, continuing its positive trend recorded in the past few years. Fundraising remained healthy and dealflow was rich in 2019, despite a decrease in value compared with the record figure of 2018. While some concerns remain, related to political instability and volatile macroeconomic indicators, activity seems dynamic and market sentiment appears positive for Q1 2020 and beyond.

According to Unquote Data, deal volume was the highest on record in 2019 with 174 buyouts, a noticeable increase from 146 deals recorded in 2018 and 134 in 2017, while the aggregate value decreased to €24.5bn from the €30.4bn posted in 2018. However, when compared with the less atypical figures reported in 2017 (aggregate value of €20.7bn) and 2016 (total EV of €21.0bn), the 2019 total is very healthy indeed.

The contraction in deal value compared to the previous year is attributable primarily to the decrease in mega-deals. On the contrary, the mid-market continued to perform very well, with 73 buyouts in the €50-250m space, compared with 60 in 2018.

"This reduction in average deal size is a consequence of the more conservative approach adopted by both corporate and financial sponsors in their investment strategies," says DC Advisory Italy CEO Alberto Vigo. "However, most Italian companies are small and mid-sized family-run businesses with high growth potential and remain on the radar of international investors."

The region recorded a strong performance on the sell-side as well, with 133 exits, of which 37 were SBOs, while the previous year saw 114 exits including 30 SBOs.

Fundraising was also very solid in 2019, with 12 final closes for a total of €7.5bn, more than double the €3.0bn raised across 11 closing in 2018. Among others, Investindustrial held a final closing for its seventh flagship fund on €3.75bn; Spanish GP ProA Capital closed its third buyout fund on €475m; and Italian mid-market specialist Xenon closed its seventh vehicle on €300m.

Jorge Canta, a partner at Cuatrecasas, says: "Despite the challenging climate that has been dominating the European private equity industry, the southern European market has been able to respond successfully by pursuing new strategies to meet the evolving investor priorities."

Exploring new strategies
A rising number of Italian and Spanish GPs pursued a multi-asset diversification strategy, by enlarging and differentiating their fund offerings with the launch of vehicles dedicated to private debt, special situations, credit recovery or non-performing loans.

The region also recorded a shift towards non-cyclical sectors able to offer consolidation opportunities; these can prosper even if the economic and political climate deteriorates.

Education and healthcare are generally non-cyclical, and prominent deals included CVC bying Universidad Alfonso X in a deal valued at around €1.1bn; ICG and Mériuex acquiring Doc Generici for €1.1bn; and Advent International's acquisition of Vitaldent from JB Capital Markets.

Furthermore, large buy-and-build platforms have become a common feature of the region's private equity landscape. This aggregation strategy has been effective in southern Europe's fragmented market at a time when multiples are exceptionally high.

Ambienta's Aromata acquired Italian food specialist IPAM and French natural ingredients producer Nactis with the aim of creating a platform focused on natural flavours and aromatic raw materials for the food industry. Meanwhile, Mandarin Capital bought Neronobile and bolted on Daroma to create an aggregation hub across the Italian coffee production sector.

Looking at the coming months, it is very likely that these trends will further strengthen and become even more widespread across the region, while buyout and fundraising activity are expected to continue at a fast pace.

"The industry is rich in dry powder, the cost of debt remains low and the southern European market provides interesting investment opportunities at attractive valuation multiples," says Vigo. "There is an array of high-quality, mid-sized companies with room for operational improvements and a need for fresh capital, which are likely to attract the interest of local and international funds in the coming months."