The PE Industry: European Review
As European economies began to re-open in Q3 2020, after the COVID-19 lockdown, the European PE industry got back on its feet very quickly. The re-opening of leveraged lending markets, the resilience demonstrated in the market's lower end and recovered dry powder levels all contributed to a notable increase in the deal volume.
As sponsors remained cautious about exiting positions during volatile periods, the annual count of PE exits reached a record low. Also, the fundraising activity in the third quarter gained considerable momentum, nearing the second-highest capital raised in a year in the entire decade.
Want more insights? This guide serves as a comprehensive review of the European PE industry, specifically covering deal activity, exit activity, and fundraising activity in the sector.
PE Deal Activity
In the third quarter of 2020, European dealmakers closed 972 transactions valued at € 100.8 billion, and dry powder reached a record of €224.6 billion. Plus, the focus of GPs greatly shifted toward sourcing and pursuing newer opportunities. According to an S&P Global survey, 57% of the European dealmakers said they would be prioritizing new opportunities in the upcoming months. After a sizable fall in Q2, the UK and Ireland experienced the highest jumps in deal volumes.
Despite the recovery, however, the deal activity numbers stood nowhere close to the pre-pandemic figures. Even the predicted multi-year recovery is expected to be uncertain and uneven with fluctuating trends across asset classes and regions because of the pandemic.
When compared with the previous year, the deal volume declined by 6%. The decrease was even more drastic in terms of YoY deal value— close to 20%. Hence, the majority of GPs set tighter financial thresholds for large deals and made outsized platform bets during the volatility.
In addition, despite the EU's signing of the €750 billion recovery fund, the complete revival of deal activity will take time. Even though the European PE deal activity is well above the lowest points of the Global Financial Crisis (GFC), dealmakers wish to stay prudent for many reasons. These include the following:
According to the European Commission, the Eurozone GDP is expected to reduce by 8% during the current year. This will have a negative impact on the PE-backed assets that are linked to the GDP.
The improvement in Euro value—10% appreciation against the US dollar since March 2020—combined with the rising COVID-19 infections, will only discourage non-euro denominated buyers to consider European assets.
As social distancing measures are reinforced, economies will more strictly scrutinize firms’ cash flow profiles, widening the gap between fundamentals and valuations.
The European economic outlook looks shaky, especially in the short to medium term, owing to a hard Brexit, the ending of important fiscal support programmes, and the possibility of more national lockdowns.
Besides, it’s important to note that sponsors’ appetite for technology’s 6 Cs, namely cashless, eCommerce, cloud, cybersecurity, collaboration, and content creation, continued to grow considerably faster than the overall economy. As such, the IT deal volume proportions reached a new quarterly peak of 29.7%.
PE Exit Activity
As far as the exit activity is concerned, 181 liquidity events valued at €58.1 billion were reported in Q3 2020. While the third quarter saw QoQ increases of 6.9% and 1.9% respectively, the exit count has been falling to a ten-year low on an annual basis, representing severe declines in exit volume and value with a YoY decline of 35% and 36.5% respectively.
In the remaining months of 2020, the realization activity is expected to be slow. Since buyers tend to mark the market faster than sellers in times of market gyrations, sellers are considerably more cautious about exiting positions.
In the upcoming months, sponsors are not likely to pursue liquidity events, which could mean fewer distributions, longer hold periods, and a surge in GP-led secondaries. This trend should continue until valuations bounce across PE portfolios and a sense of normalcy resumes.
The sponsors’ desire to exit portfolio companies through a listing has been enhanced by the booming public equity markets that have unconditionally embraced central bank and government stimuli.
Hence, 14 European IPOs valued at €22 billion closed YTD, exceeding the full-year exit value of 2019 with less than half its IPO value. The Hut Group, a UK-based eCommerce company, marked the largest exit of Q3 2020, raising €2.1 billion on the LSE (London Stock Exchange) at a € 5 billion pre-money valuation. Since the Royal Mail’s debut in 2013, this was the largest listing by market capitalization at LSE.
In the upcoming quarters, we expect more exits through IPOs as the public equity markets continue to recover.
PE Fundraising Activity
In the third quarter of 2020, PE fundraising activity was right on track, with healthy figures reported and further acceleration of the market bifurcation. The final close was held by 69 funds, amounting to € 68.5 billion, all set to exceed the decade's second-highest total of €90 billion. Even with minimal on-site due diligence due to COVID-19-related travel restrictions, LPs haven’t stopped consolidating GP relationships and committing significant capital to their experienced, well-resourced, and trusted managers.
The most dominant and competent managers have acquired massive sums at an unprecedented pace. Thus, funds sized over € 1 billion accounted for around 80% of all capital raised in 2020. For instance, the period saw the largest-ever European buyout fund as CVC Capital Partners closed € 21.3 billion for CVC Capital Partners Fund VIII.
In spite of such massive fundraising numbers, the fund count is fast-moving to a new annual nadir in 2020. Since LPs largely avoid committing to emerging managers without face to face meetings and/or onsite due diligence, the lesser-known GPs are having a hard time transitioning to the online model.
If we examine by region, UK and Ireland maintained their highest capital shares and fund count proportions with 66.6% and 39.1% respectively. Growth funds accounted for 20% of the fund closings, while buyout funds contributed close to 80%.
This was our take on the review of the European PE industry. While we’ve done our best to portray the current PE situation, let’s see how things unfold in the future.