DC Advisory's European Mid-Market Private Equity Round-Up: Q3 2020

European highlights: overview of the current investment landscape

There are two clear themes across Europe emerging:

• Transaction volumes are making a comeback
• Fundraising – more resilient than first thought?

Transaction volumes are making a comeback

• With Q3 the first full quarter when Europe emerged from ‘local lockdowns’, the uptick in deal making was apparent
• Q3 2020 deal volumes increased by 38% across Europe, in comparison to the previous quarter, showing an improvement on Q3 2019 levels by 4% (see figure 1)
• This rebound has been driven by a combination of sponsors turning their attention to sourcing new opportunities, and away from portfolio management, alongside the resurgence of previously stalled processes

Figure 1: Total number of deals by quarter across Europe (2014-2020 YTD) [1]

Fundraising – more resilient than first thought?

• In tandem with the improved level of M&A seen in Europe, fundraising across the continent has also made a comeback in Q3, despite the total capital target being smaller than the past few years [2]
• Our view is that, despite the difficulties imposed by Covid-19 surrounding business travel - and therefore the ability to commit to on-site due diligence - LPs have continued to consolidate GP relationships and commit capital to their most trusted managers virtually
• With more funds now having been successfully raised remotely, we believe LPs will be more confident committing to funds based on entirely virtual processes, creating bandwidth to consider new funds and relationships

Figure 2: European financial sponsor dry powder to be invested ($bn) [3]

Additionally, dry powder remains at record highs in Europe – now totalling $229bn (see figure 2 above [4]). This is a result of continued momentum in European fundraising and from the lack of M&A opportunities for sponsors between Q2-Q3 2020.

Regional Highlights

We explore how some European regions have recovered from the impact of Covid-19 quicker than others, and the region-specific activity we have witnessed throughout Q3.

• Some regions have recovered quicker than others
• Regional breakdown

Some regions have recovered quicker than others

Whilst deal volumes across the continent have seen an uptick against last quarter’s figures, in relative terms some geographies have contributed more than others to this positive shift – see figure 3 below.

For example, the UK accounted for 5.7% fewer deals than normal, whereas Italy’s buyout contribution was up 6.6%, a possible result of Italy emerging from a prolonged lockdown some time before the UK [5].

Figure 3: Buyout volumes across Europe, Q3 2020, split by region (%) [6]

Regional breakdown

Benelux

• Deal activity in the Benelux region has picked up, showing more recorded deals in Q3 2020 than the previous two quarters put together, so far this financial year [7]
• During the quarter there have been a number of pandemic-resilient opportunities, which we believe have proven attractive for international private equity funds and trade acquirers, especially from the US and China
• Across the sectors we have noticed that deal-making has predominantly been led by technology, media and telecom and business & tech-enabled services this quarter. There were no healthcare deals completed this quarter within our criteria for the region and a small handful of consumer, leisure & retail and industrials deals [8]
• As the region entered into a second lockdown immediately following last quarter, it is likely those sub-sectors that have been resilient thus far will continue to remain key areas for deployment by funds

CEE

• Q3 2020 has seen an uptick in M&A activity in the region [9]. The number of distressed deals completed have been fewer than expected, as government relief measures provided sufficient protection for struggling businesses to pull processes, albeit perhaps temporarily
• As the CEE has begun to fully emerge from lockdown, we believe the outlook for the region is a positive one. We are not only seeing a flurry of sponsor-backed businesses coming to market, but also more completions of deals negotiated before pandemic lockdowns (although some with revised pricing)

DACH

• In the DACH region, funds are looking beyond the current market turbulence, and the majority of financial investors have returned to business as usual. Successful fundraising has meant that there is ample dry powder in the market to be invested [10]
• Businesses that have experienced limited Covid-19 pressures are perceived as sustainable, and normalisation of financials has been viewed in both directions. This has been experienced particularly in the healthcare (specifically pharma services), technology & software, and business & tech-enabled services markets
• Additionally, banks continue to remain cautious and there is a greater preference for lower leverage and equity commitments. Restructuring transactions have been limited due to the relief provided by government funding, however we anticipate more cases for 2021 once this begins to subside

France

• During Q3 we have witnessed sectors such as aerospace, automotive and non-food retail suffering through the impact of the global pandemic more than others – resulting in fewer deals emerging
• In the more resilient spaces, we are seeing sponsors fight for fewer assets, namely in the media & telecom, tech & software, healthcare, infrastructure, food retail, and selected business & tech-enabled services sub-sectors
• The above, coupled with excessive dry powder in the market [11], has meant that valuations of the aforementioned assets are at a peak and often, through very discreet processes, restricted only to previously-educated bidders

Italy

• H1 2020 showed a slowdown in private equity investments due to Covid-19, which derailed or postponed the closing of several transactions [12]
• Overall buyout volume decreased by 61%. The number of divestments made by private equity funds decreased by 55% vs Q3 2019 [13]
• Companies were mainly sold to strategic investors (40% of volume) but in terms of value, financial sponsors represent the vast majority (71% of total amount divested) [14]
• As with the rest of Europe, technology investments showed an active trend with a large proportion of industry share, followed by the healthcare sector with 17% of total deal volumes [15]

Spain

• Covid-19’s impact has slowed private equity activity in Spain during H1 2020, with a 54% reduction in volume vs. H1 2019 [16]
• In the period until June there had been a scarcity of large megadeal transactions, however since July the trend has been reversed with a number of large sponsor transactions in the country, such as Partners Group acquiring Rovensa from Bridgepoint in a €1.0bn transaction[17] and EQT acquiring Idealista from Apax in a €1.3bn transaction[18]
• The sectors most affected by the crisis (eg consumer, leisure & retail) have not - in the short-term – been the focus for investment. A greater effort has been placed by funds on consolidating opportunities and refinancing transactions
• Additionally, most investors have delayed their exit decisions for 1-2 years. We are seeing more distressed and restructuring deals in sectors heavily affected by the pandemic, as well as an increasing interest in healthcare, media & telecom and education

UK

Pre-empts are prominent

• The UK M&A market in Q3 2020 showed a surprising resurgence in activity and we witnessed a rise in the number of deals that are being completed on a pre-emptive basis[19]
• Competition for quality businesses is at an all-time high and these businesses are continuing to trade at premium valuations, often in bi-lateral or accelerated ‘deniable’ processes
• We expect that sector-focused firms with strong senior executive networks - that will help to identify and unlock these deals - will be more effective in finding new opportunities
• Although there was a significant uptick in activity this quarter, deal volumes are still down substantially on the same period in Q3 2019[20]
• Whilst the private equity community has continued to drive ahead to achieve their investment goals, there is still the looming uncertainty of what a second wave will truly mean, and coupled with the continued Brexit impact, the UK will likely suffer in the medium to long-term

Hot sectors

• Covid-19 has meant sponsor appetite for businesses in sectors that are deemed both recession and pandemic-resilient has heightened. We track these resilient assets closely across all sectors, and remain encouraged by the quantity available
• In particular, we are witnessing strong PE appetite for businesses in the technology & software and business & tech-enabled services sectors (see figures 5 and 6), where average EBITDA multiple valuations have risen sharply during the year [21]
• For the healthcare sector it is anticipated that sponsor demand for assets, particularly in the life-sciences space, will increase directly as a result of Covid-19, following the exposure of weak healthcare systems across the globe
• Within the consumer, leisure & retail sector the trend for domestic tourism offered favourable M&A activity for the quarter. Areas such as holiday cottages, parks and camping has enabled the sector to remain active for buyout deals in Q3 (see figure 6) [22]
• Across all sectors, we believe that there has been an uptick in sponsors acquiring bolt-ons for other assets within their portfolios, often as a means of solidifying their resilience and creating additional growth levers

Figure 5: Buyout volumes across Europe, 2014-2020 YTD, split by sector (%) [23]

Figure 6: Buyout volumes across Europe, Q3 2020, split by sector (%) [24]

Related Fund Transactions (RFTs)

A trend that we have continued to see across Q2 and Q3 of 2020 is the increasing popularity of Related Fund Transactions (RFTs). By manifesting themselves as a viable method by which GPs can continue to support high quality and proven assets with fresh capital, we are seeing more sponsors engage in RFTs at a time where opportunities to deploy funds have been lacking, and companies’ growth potential has only ‘part-delivered’.

For insights from our European Debt Advisory & Restructuring experts, click here for our latest European Debt Market Monitor.

References

[1] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[2] Page 2, Preqin Quarterly Update: Private Equity & Venture Capital Q3 2020, Preqin, 7 October 2020

[3] European Dry Powder, Preqin, 13 October 2020

[4] European Dry Powder, Preqin, 13 October 2020

[5] European Dry Powder, Preqin, 13 October 2020

[6] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[7] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[8] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[9] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[10] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[11] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[12] Private Equity and Venture Capital, AIFI, 30 October 2020

[13] Private Equity and Venture Capital, AIFI, 30 October 2020

[14] Private Equity and Venture Capital, AIFI, 30 October 2020

[15] Private Equity and Venture Capital, AIFI, 30 October 2020

[16] H1 2020 review, Page 53, Capital & Corporate Newsletter July 2020, Capital & Corporate,

[17] Partners Group to acquire Rovensa, a leading provider of specialty crop nutrition, protection and biocontrol products, from Bridgepoint, Partners Group, 17 July 2020

[18] EQT acquires idealista – the leading online real estate classifieds platform in Southern Europe, EQT, 10 September 2020

[19] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[20] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[21] 3Q20 Global M&A Report with legal league tables, Mergermarket, 1 October 2020

[22] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[23] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)

[24] Q3 2020 European mid-market deal report, Mergermarket, 13 October 2020 (available on request)