EUROPE - PE up 107% in Q3

Ashley
22 October 2009

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In the midst of renewed optimism over recovery prospects in the wider economy, private equity investment activity has continued to reverse the slump that had set in at the end of last year, recording a whopping 107% increase to EUR 9.6bn (257 deals) in Q3, according to the latest unquote" Private Equity Barometer , produced in association with Candover.

Significantly, the increase was most marked in the buyout arena, which saw a 135% (74 deals) increase to nearly EUR 8bn. The quarter also recorded the first mega-deal (EV > EUR 1bn) of the year.

The numbers represent the second successive quarterly increase in activity, the first time there has been an increase in consecutive quarters since the second half of 2007. The sharp rise in value also means that the quarter witnessed the highest total since Q3 2008, before the collapse in the market caused by the demise of Lehman.

These impressive numbers, however, must be seen in the context of the barren market from which they arose. Indeed, year-to-date figures show that investment levels remain 39% and 78% respectively off those seen in the first nine months of 2008. Moreover, the private equity industry is still plagued by issues in incumbent portfolios; though the market may have bottomed out, it is certainly not out of the woods yet.

Mid-market might
The turnaround in fortune in the last six months has been mirrored in the buyout space, which witnessed the most marked growth - an increase of around 30% in activity and a remarkable 135% in value. This, again, represented the highest value total seen since before the Lehman collapse, though in terms of deal numbers the figure remains five shy of the total seen in Q4 2008.

The sharp uptick in value is in part due to the completion, for the first time this year, of a transaction worth more EUR 1bn. It is, though, important to note that the EUR 1.7bn merger of BC Partners- and Electra Partners-backed boiler manufacturer Baxi with rival firm De Dietrich Remeha involved little new equity - around EUR 100m - and only rolled over debt (while net leverage was in fact reduced as a result of the deal).

The appearance of a big deal was not the story of the quarter for buyouts, however: the biggest move was in the mid-market (broadly defined as deals worth between EUR 100m-1bn), which saw volume and value more than double from 10 deals worth EUR 2.1bn in Q2 to 21 deals worth EUR 4.8bn in Q3.

In contrast, the small-cap end of the spectrum was more a picture of stability over the three months, rising just 11% and 13% in volume and value respectively to 52 deals worth EUR 1.4bn.

This movement up the value chain coincided with a sharp rise in the number of deals being sourced from family or private vendors, which had been stifled in recent times by a mismatch in pricing but which saw activity levels double over Q3 to 41 transactions. It would seem fair to surmise that economic optimism has resulted in greater confidence in trading, subsequently pushing up pricing.

There was a stagnation in secondary buyouts and corporate disposals, though as distressed deals begin to be worked out as recovery gathers pace this will likely change. Watch this space.

Growth lacks gusto
This story of recovery did not play out quite as simply in the growth capital space, though despite a slight decrease in deal numbers - down by two to 110 - there was a substantial rise in total value, which saw a 36% rise from less than EUR 1bn to more than EUR 1.3bn.

Several large new equity restructuring deals were largely responsible for this value surge, notably accounting for two of three EUR 100m+ deals that completed over the quarter (the first time any deals of this size had appeared since Q1): German tiling business Monier Group and UK-based Aerospace company Firth Rixson.

Venture, too, failed to match the spectacular growth seen in the buyout market, though there were increases nevertheless: 75 deals worth EUR 317m represent increases of 15% and 28% in volume and value respectively on the second quarter.

Despite this the early-stage segment, which appears to have lagged behind the buyout space in terms of progress throughout the downturn due to its lack of direct involvement in the debt market, remains sluggish, with Q3 numbers failing even to match the modest figures witnessed in Q1.