Continental drift: A look back at 2014's buyout activity so far

With increased investor appetite, several successful fundraises and credit lines open once again, the classic European buyout model looked set for a renaissance. Yet H1 2014 statistics paint a modest picture of an increasingly competitive market and strategy drift.

Since the start of 2013, 19 buyout funds that include Europe in their investment remit have held a final close in excess of €1bn, raising a staggering €388bn in total. Buyout funds larger than €1bn focused solely on Europe raised across the same period totalled €33.3bn, according to unquote" data. GPs have clearly cashed up coffers to put to work on the continent.

Says George Anson, managing director at HarbourVest Partners: "Positive trends are generally there – the lines are going from bottom left to top right in terms of economic growth, market growth, exits and valuations."

And yet, despite the uptick in sentiment, the support of active credit markets and very borrower-friendly terms, the number of buyouts in Europe has fallen slightly compared with 2013. The first three months of the year saw the number of buyouts in Europe drop to 110, down from 120 in the previous quarter. More drastic, though, was the fall in value, with transactions totalling just €14bn – that's €7.3bn less than the previous quarter. Q2 saw a recovery on both metrics with 126 buyouts worth a total of €21.1bn recorded in Europe. However, the recovery was not enough to see growth in the first half of the year on H2 2013 figures, with four fewer buyouts recorded in H1 2014 compared to the previous half year.

"Compared to the US, European pricing on an EBITDA multiple or debt-EBITDA multiple has always been more attractive and yet the availability and terms on the debt have been pretty much the same in Europe and the US. So you would like to think that Europe still represents good value, but it has not translated into deal statistics," says Anson. A cleft is emerging between showy sentiment and modest reality.

Competing for dealflow
A standout feature of the year so far has been the number of exits via flotation: it seems institutional investors have recovered from the Debenhams debacle and appetite for private equity-backed IPOs has been strong. According to unquote" data, in H1 2013, IPOs accounted for just 3% of European exits. This proportion rose more than five-fold to reach 16% of all European exits in the first half of 2014. A look through the flotation hall of fame lists a number of assets that would perhaps have fallen to private equity hands in a secondary transaction.

Kicked off by ECI's Bargain Booze at the tail end of last year, IPOs came thick and fast in 2014. Notable transactions saw KKR list Pets At Home at a market cap of ￡1.2bn and British discount retailer B&M Retail, backed by Clayton Dubilier & Rice, price shares for its London Stock Exchange flotation at 270 pence apiece, giving the company a market cap of ￡2.7bn. In France, catering business Elior raised €847m in its IPO on the Euronext Paris, giving it a market cap of €2.4bn, while Carlyle-backed Applus Services floated in Spain with a market capitalisation of €1.9bn. A new competitor has emerged, taking dealflow from under the noses of private equity players seeking to put freshly raised capital to work.

"The market we have been in for the past six to nine months shows that you can exit any which way you like. If you have a substantial asset at the moment, you can exit by IPO, trade sale and buyout. So the buyout market has become much more fiercely competitive against other forms of exit," says David Ascott, private equity partner at Grant Thornton. And the public markets have not been the domain of large-cap assets alone. In June, Inflexion reaped 16x on the flotation of FDM Group, which achieved a £308.5m market cap, and May saw Gresham list Flowtech on the AIM segment of the London Stock Exchange, which gave the business a ￡40m market cap.

Not only are the public markets taking assets off the table that could have gone to private equity portfolios, they are also informing price expectation. "What we have found with a couple of deals this year is that you look at a business and the advisers have done an analysis of the quoted comparables in the sector and they are suggesting a relatively high purchase price," says Christiian Marriott, partner at Equistone. "There have been instances where we have been looking at deals and there has been a degree of price expectation driven by the quoted markets that has prevented us from turning the next card in the process."

Read part two here. 

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• Topics
• Buyouts
• Exits
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• Activity Review
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• HarbourVest
• Equistone Partners Europe
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• Carlyle Group
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• Gresham Private Equity