Statistical slide

(This article is taken from Private Equity Europe, the pan-European publication from the publishers of unquote")

In the past month, unquote" has published finalised data for both Q4 and full year 2008, with the statistics revealing an expected sharp decline in buyout activity across the continent amidst an increasingly fraught macro-economic climate. According to the latest quarterly unquote" Private Equity Barometer, produced in association with Candover, the total value of European private equity-backed acquisitions fell by 61% in the final three months of 2008 from Q3's already modest €17bn to €7bn - the lowest quarterly total since Q2 1997 (see chart). Similarly, preliminary full year 2008 buyout statistics, due to be published in March in the European Buyout Review, produced in association with Bridgepoint, show that the value of buyouts over the year as a whole also fell by 61%, from 2007's record €185bn to €73bn - the lowest figure recorded for five years.

Gravitating down
Given that the declines were driven primarily by a continued drying up of debt, it is unsurprising that the top end of the market witnessed the largest falls overall. This was most evident in Q4, when the banking sector was almost paralysed following the September collapse of US investment banking giant Lehman Brothers. Indeed, only one deal worth in excess of €1bn was completed over the course of the final three months of the year - the Magnum Capital-led acquisition of Portuguese renewable energy utility Enersis. This drop-off is mirrored in the full year data, which shows 71% and 77% declines in the volume and value of such deals from the 42 worth €92bn seen in 2007 to just 12 worth €21bn.

There were also steep falls in the upper mid-market ranges over the course of the year, with deals valued at between €250m-1bn dropping by 47% and 52% in terms of volume and value respectively during 2008. "The issue of sourcing leverage for buyouts is no longer confined exclusively to the upper end of the market but is now affecting even moderately sized deals," confirms Emanuel Eftimiu, European research manager at Incisive Media. Indeed, the lower mid-market range, covering buyouts valued at between €50-250m, fared only slightly better and still suffered significant slides of 39% and 40% to end the year on 175 deals with a collective value of just over €18bn.

And the problems with financing even began to take their toll on the erstwhile resilient small-cap value ranges over the course of the year, though the falls recorded were modest by comparison to the larger size brackets. Overall there were 335 buyouts worth less than €50m in 2008 with an aggregated value of €7.6bn - representing drops of 13% and 9% respectively. The €25-50m range maintained the steadiest investment statistics over the twelve months, with transaction numbers down by just 3% from 162 to 157, while total value dropped by around 5% from €5.4bn to €5.2bn. "Small-cap deals require comparatively little leverage and are usually backed by regional banks, which has certainly cushioned the impact of the credit crunch," comments Eftimiu, "it remains to be seen whether lower mid-market firms will change their strategy in the coming years to operate in this area in order to secure deals, particularly as asset values are set to decline further."

South for the winter
That the UK has arguably been the hardest hit market in Europe by the reverberations in the global banking sector is evidenced by the regional breakdown, which displays steep declines over the year with volume and value dropping by 33% and 68%. Despite this the 166 deals worth €23bn still represented the most active investment statistics in Europe, with market shares of 29% and 32% respectively. In Q4, however, as several of the nation's banking institutions edged ever-closer to complete collapse, the country witnessed dramatic falls, with buyout volume seeing a decline of almost two thirds from 36 deals to just 13 while value recorded a remarkable 93% drop from €4.4bn to a mere €338m. This meant that the market was only the third most active by volume and the second least by value during the three month period.

Indeed, large declines were witnessed across the traditionally dominant Northern European markets over the course of the year. France saw one of the largest drops in activity, which fell by more than 50% from 205 deals to just 100, and a similar slide in value from €23bn to €11bn. The DACH region, which had enjoyed a remarkable surge in 2007, saw a fairly modest fall in volume of 23% from 134 deals to 103, and a substantial slump in value of 70% from almost €38bn to around €12.5bn. This, though, was largely the result of a return to form for the Austrian market following a disproportionately large 2007 in terms of value, as well as a significant decline in Germany.

The Southern European region also witnessed a decline in value in 2008, largely as a result of substantial drops in the Spanish market, which is suffering amidst a dramatic slump in the country's real estate-biased economy. However, the 74% drop in Spain only led to a 20% overall decline across the region, while despite the country seeing a 55% drop in volume the area actually witnessed an overall increase of 2%. These anomalies are largely due to the Italian market, which bucked the wider European trend and saw a 48% and 13% increase in volume and value respectively (see chart). "The Italian market has evidently come of age with deal activity increasing for the fifth consecutive year. Italian private equity continues to be driven by domestic players that have clearly thrived in the past few years and continue to get deals done," notes Eftimiu. In addition to that, Portugal also performed well, with the €1bn+ Enersis deal prompting 338% uptick in value, while activity remained consistent with 2007 on eight deals.

The year ahead
The statistics overall show that 2008 has been a difficult year for the European buyout market, particularly at the recently dominant top-end of the value spectrum and, perhaps as a result of this, within the established Northern European countries. This is further emphasised by the fall in secondary buyouts, the lifeblood of the asset class in value terms in recent years, which accounted for almost half of all capital invested in 2007 but less than a third in 2008, largely due to a 71% fall in the quarter when just 11 such deals occurred. With debt scarce, these transactions which rely on increasing entry multiples to prompt a desire to sell, are likely to continue to remain rare.

Indeed, smaller deals in general are likely to continue to take centre stage in 2009. "Vendor price expectations have started to come down in 2008 and owner managers should therefore remain the main source for dealflow. Although most owner-managers will be reluctant to sell their business at a depreciated value, the gloomy economic outlook will put this in perspective," asserts Eftimiu. Already the proportion of all buyouts represented by deals sourced from family and private sellers has risen in 2008 to its highest in the last five years at close to 50%, despite drops of 26% and 54% in Q4 and the year as a whole respectively. In fact, as a result of the greater resilience of small-cap transactions, in activity terms 2008 recorded only half as large a drop as that seen in value terms, with the 578 deals reflecting a year-on-year slide of around 30%.

And with attractive investment opportunities expected to rise in the coming 12 months as a result of a rise in distressed sales and acquisitions of undervalued listed assets, volume may continue to remain fairly steady. Indeed, these trends have already begun to emerge, with 2008 seeing corporate spin-off and public-to-private transactions decline by a much smaller degree in activity terms compared to other vendor types, with both falling by approximately 13%. Tellingly, with de-listings being driven by large declines in stock price and corporate sales being prompted by increasing levels of distress and subsequent non-core asset disposals, the value of these categories saw much more pronounced declines of 50% and 60% respectively.

To pre-order a copy of the European Buyout Review 2009, please contact Michael Wilkinson (+44 207 004 7442)

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