The publication of the 7th edition of the CMS study on 2019 trends in European M&A activity in partnership with Mergermarket is an opportunity to shed light on the outlook for the PE market. It shows that despite high amounts of capital, European PE firms are cautious about buyouts.
Record high dry powder and common cautiousness
Even though private capital dry powder is sitting at a record high of USD 2.1 trillion, according to research from Preqin, with European-focused capital accounting for around a quarter of that total, buyout and exit activity has fallen across Europe over the first six months of 2019.
European buyout volume saw a decrease of 14% to 664 deals in H1 2019, with value down 12% on the same period in 2018 to EUR 82.5bn. This is the second-largest buyout value on record for any half year period going back to 2013. Exit volume was 10% down over the first six months of 2018, with value falling 9% to EUR 61bn compared to H1 2018. H1 2019 has the third-lowest exit total of any half year period since H1 2013. Some optimism remains in some respects however according to the study. 67% of investment funds are indeed confident in the prospect of favourable valuations this year, although this may be linked to the expectation of a slowdown in the economy. Another noteworthy point is that PE and cash reserves top the list of the sources of financing most likely to be available in the coming months (both at 53% by respondents).
What to expext in the near feature ?
Even though high levels of dry powder usually predict high deal volume and value, the same macroeconomic and geopolitical uncertainties that have weighed on the wider European M&A market (EU Growth, Brexit issues) have seen buyout houses adopt a cautious approach to new investments, especially when multiples continue to push high levels. At the European level, the study show thas Brexit has had a cooling effect on PE activity. The UK and Ireland, Europe’s largest PE market, still accounted for 29% of total European buyout value over H1 2019, ahead of Switzerland (15%) and Germany (14%), but Brexit uncertainty has seen firms adopt a “wait and see” approach and sit on deals until the market picture is clearer.
In this context, the Argos mid-market index reveals that multiples paid for midmarket privately-owned European companies (valued in the EUR 15m to EUR 500m range), assets are trading at a record average of 10.1x Ebitda. These numbers shall not conceal the higher multiples paid by strategic buyers, 11,0 x Ebitda on average, and the lower multiples paid by PE firms, only 9,3 x Ebitda on average. This suggests that buyout firms are less aggressive than cash-rich corporates and are being trumped by corporates that are comfortable paying fuller prices. It is also relevant to point out that this index is measured for the first time this year on the French market alone, with a trend broadly consistent with that of the euro zone since 2013.
PE houses are also seeking to avoid aggressive auction processes and secondary buyouts, by focusing on primary deals and more complex transactions such as public-to-privates and carve-outs in order to find more proprietary deals and better entry multiples. Data from the Centre for Management Buy-Out Research (CMBOR) at Imperial College recorded 76 secondary buyouts worth EUR 14.9bn over H1 2019, representing 38% of European buyout value. This is down from 45% in H1 2018. The proportion of public-to-privates, meanwhile, has seen a climb in share from 16% to 21%.
This caution has also coloured the sectors buyout firms have targeted over the last six months, with TMT and healthcare the most popular spaces targeted by PE investors.
TMT accounted for 25% of the total value of buyouts in Europe in H1 2019 (EUR 20.8bn), up from 12% in H1 2018 (EUR 10.8bn). The sector has attracted interest because of attractive growth drivers, such as the move to the cloud, software-as-a-service and digitisation across all industries; and the growing value of data and analytics. TMT businesses have also demonstrated resilience and customer stickiness, providing dealmakers with downside protection should the economic cycle move into a downswing as many anticipate.
PMB deals, meanwhile, offer similar downside protection characteristics in a context of an ageing population or an appetite by major pharmaceutical groups to outsource some of their activities.
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