European PE in 2017: Scaling new heights

When Unquote gathered a group of private equity professionals for its end-of-year roundtable last November, the terms "resilience" and "peak" were frequently referenced with regard to the industry's evolution in Europe throughout the course of 2017. Now that the Unquote research team has had the opportunity to collate and analyse the full numbers, it appears the sentiment was wholly warranted.

With 919 buyout transactions recorded for European assets in 2017, worth a collective enterprise value of €142bn, 2017 comfortably set a new post-crisis record. Buyout activity was markedly up on previous bumper years: nearly a fifth compared with the previous volume record of 771 deals set in 2016, and marks a 10% hike compared with the value record of €130bn seen in 2015.

"Deal sizes are definitely on the rise and we saw that across our own activity last year," says Phil Burns from corporate finance group Clearwater International. "This is not surprising when you see that funds managed by a number of private equity firms are growing from one vintage to the next, valuations are particularly high and so is debt availability."

Funds managed by a number of private equity firms are growing from one vintage to the next, valuations are particularly high and so is debt availability" – Phil Burns, Clearwater International

Top-line figures were undeniably healthy, but looking at the breakdown of activity in terms of value ranges reveals that the most robust upticks are not necessarily where one would expect them to be. Mega-buyouts (valued in excess of €1bn EV) were not more plentiful despite the vast amounts raised by players active in that space - volume now appears to have largely settled in the region of 20-25 transactions per year across Europe since 2014. But the record levels of dry powder, intense competition and very favourable leverage trends resulted in a new record of capital deployed at the top end of the market: aggregate value in the mega-buyout segment reached €54.6bn, a new record and a substantial 48% jump compared with 2016.

More impressively, just five mega-buyouts were responsible for nearly half of that value figure: KKR clinched the largest European buyout by some margin with the €6.8bn deal for Unilever Spreads, while other standouts included the protracted, but ultimately successful, €5.6bn buyout of Stada, and the investment from a consortium of investors led by Hg in Visma for NOK 45bn.

Small but mighty
The upper-mid-market and large-cap segments (buyouts with EVs between €250m-1bn), which are most often seen as the engine room of the European buyout landscape, actually stagnated in 2017, both in volume and value terms. It was not a slump by any means - buyouts fell from 92 valued at €43.5bn in 2016 to 87 deals worth a combined €43bn in 2017. With activity levels already at post-crisis highs in recent years, combined with the relative scarcity of top-flight assets in that range, it appears the market may have settled.

On the other hand, the small end of the market (buyouts valued at less than €50m) was particularly buoyant last year: volume jumped by a third year-on-year to 491 deals, with aggregate value following suit to reach €11.3bn.

This last statistic fits into the wider context when looking at the sourcing trends that emerged in 2017. In a development that will surely please LPs, primary deals sourced from family and private vendors registered a 30% uptick in volume terms last year, although the corresponding hike at the smaller end of the market, where these deals are prevalent, means aggregate value in that space largely stagnated.

Still on the primary side, 2017 was also the year that mega-take-privates made a spectacular return. The volume of these transactions – often seen as prohibitively costly and complex – has been stable around the 15-deal-a-year mark for some time now, but an impressive €13.8bn was deployed last year, triple the average seen over the previous four years. This was due in no small part to the aforementioned Stada bid, but also the multi-billion takeovers of Paysafe and Punch Taverns in the UK.

Throughout 2017, we continued to see high levels of competition in the market, with quality assets trading for near-record multiples" – Bilge Ogut, Partners Group

Looking at the amounts of capital deployed overall, however, reveals that recycled private equity money is here to stay. On the one hand, secondary buyout activity only increased by a modest 8% in volume terms year-on-year to reach 294 deals across Europe. But the prevalence of these types of deals in the mid-market and large-cap segment, added to continued pricing inflation, resulted in a further 22% increase to the aggregate value of European SBOs – more than half of the capital deployed last year (€78bn) was transacted between funds.

Another market development that continues to worry limited partners is entry multiple inflation – a trend that contributed to the jump in aggregate value recorded last year. "Throughout 2017, we continued to see high levels of competition in the market, with quality assets trading for near-record multiples," says Bilge Ogut, managing director for private equity in Europe at Partners Group. "We have heard the refrain in the market that '15 is new the 12,' referencing that the hallmark EV/EBITDA exit multiple has moved from 12x to 15x.

"One factor that has precipitated the pricing shift is the entrance of new participants into the direct private equity investment market. Sovereign wealth funds, GP-like LPs (for example, institutional LPs with an in-house direct investment practice) and long-dated core private equity funds have all recently emerged in the direct private equity market. The mandate of these new market participants is to identify and buy long-term category winners, for which they are often willing to accept lower than expected returns compared to traditional private equity managers."

Ogut goes on to add that experienced managers are now assuming in their base case that much of the expected return on account of EBITDA growth will likely be eroded by future multiple compression – and that, as a result, future private equity return expectations are comparably low in historical terms. But she also points out that managers with a focus on unlocking previously unrealised value, from sourcing to portfolio management, are still able to find compelling value in the market - in addition to the fact that private equity is still attractive relative to other asset classes.

Clearwater's Burns also offers a note of optimism, despite acknowledging the continued hike in valuations last year: "Prices will stay high, but we wouldn't expect them to go much higher in the coming months."

UK resilience
Broadly speaking, buyout activity increased across Europe last year, meaning that the geographical investment landscape that emerged in the previous year remained mostly unchanged. The key takeaway here, though, is the UK's return to prominence. The market was home to 215 buyouts last year, worth an aggregate €39.8bn – both comfortably exceeding any figure seen over the past five years. This was also the second largest year-on-year increase in volume terms (26%) behind that seen in CEE, and the 91% volume hike compared with 2016 eclipses all other regional increases.

"Brexit has not had the impact people may have feared initially, and does not seem to have made a significant dent in M&A activity," says Burns. "If anything, it has buoyed certain sectors due to the currency effect; industrials in particular enjoyed a solid 2017."

In addition to the resilience of the industrial sector noted by Burns, Unquote recorded some impressive jumps in both volume and value for support services and technology deals in the UK last year – suggesting the recovery went further than opportunistic plays for industrial assets made attractive by sterling's weakness. And a large part of the value increase came thanks to a market segment that initially appeared to struggle post-Brexit vote: the €500m-1bn large-cap space, where dealflow quadrupled to 13 deals last year.

Brexit has not had the impact people may have feared initially, and does not seem to have made a significant dent in M&A activity" – Phil Burns, Clearwater International

As a result, the UK jumped back to prominence in the wider context of European buyout activity, being home to 28% of capital deployed in the market. This is a marked increase from 17% in 2016, when the dearth of large-cap deals took a toll, and more in line with the levels seen in 2013-14, before the emergence of the DACH and France revivals.

Speaking of which, their contribution to the European buyout landscape, in relative terms, may have stagnated last year, but France and Germany continued to impress with strong dealflow – particularly in the former. With tailwinds in its sails on the back of a largely business-friendly presidential election result and satisfactory economic indicators, France was home to around 200 buyouts worth a collective €27.8bn, up by around one fifth year-on-year and almost double the levels recorded just four years ago.

Keep pouring
Buoyed by private equity's relative attractiveness and the ever-increasing amounts of institutional capital looking to find a home, fundraising by European buyout houses continued on its upward trend last year, albeit with a modest uptick: Unquote recorded 88 final closes for buyout funds in 2017, hauling in a collective €84bn.

The great winner in geographical terms was France, further highlighting its market's ongoing private equity renaissance: the country was home to 17 fund closes last year, although the impact of a significant Ardian close in 2016 and a stronger showing by mid-market players last year mean aggregate commitments did not climb as strongly.

Meanwhile, the UK continued to attract the brunt of institutional capital, with 32 funds crossing the line and raising an aggregate €52.8bn, although it must be noted that a significant portion of this will go towards financing deals on the continent as well in the coming years.

The past 12 months have given buyout players across Europe reason to cheer - although one might argue that their ability to continue deploying significant amounts of capital also hinged on a willingness to settle on new standards for pricing levels, with the inevitable question over future performance. With around €150bn of fresh capital replenishing European private equity coffers in the past two years alone (and bearing in mind a number of vehicles raised prior to that still enjoy a healthy amount of dry powder), these concerns are not likely to be assuaged for some time.

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