The year 2017 marks the culmination of the strongest bull-run ever recorded for private equity exits in Europe. With €493bn clocked up in the four years through 2017, it even surpasses the boom years a decade ago in the four years to 2007, when €365bn was exited. The UK led Europe for exit values, with the €7.5bn sale by CVC of Formula 1 to Liberty Media in 2017 boosting figures, according to data from the CMBOR at Imperial College Business School, sponsored by Equistone Partners Europe and Investec Specialist Bank.

There are a number of drivers for this strong activity, namely dry powder driving demand, and high pricing driving supply. To the first point, buyers are increasingly drawn to assets that have grown under private equity stewardship given the reputation European GPs have built up over nearly two decades of deal-doing.

“Trade buyers came out of the crisis with much better balance sheets than previously – they were strong and resilient and have therefore been active buyers and we’re seeing their cash being spent now,” says Simon Turner, managing partner of Inflexion Private Equity.

‘The number of exits we see is only a portion of those ripe for a sale, as processes fall down where pricing expectations are not met.’

The numbers bear this out: secondary buyouts, which accounted for the majority of exit values in 2007 (52%) have lost ground to trade buyers, who now make up 45% exit value, with other private equity firms accounting for 41% and public markets the remainder last year.

“If you look back at the market ten years ago, you can see we are currently at peak levels, and no one knows how long this will last,” cautions Matthew Robinson, managing director at ICG. “If you have executed on the bulk of your plan and your investment is performing well, then why wouldn’t you exit now?”

The IPO market in 2017 was less active than in 2014 and 2015, albeit did host 25 successful PE-backed flotations. CBPE was behind two of them last year: Xafinity and Medica. The former, a UK pensions consultancy, generated a 66% IRR and 4.3x money multiple for the backer at listing, while the latter, a teleradiology business, has seen its share price soar from 135p at listing to 199p at the time of writing.

‘If you have executed on the bulk of your plan and your investment is performing well, then why wouldn’t you exit now?’

All exit routes are truly open right now, but assessing the options carefully to fully map out the buyer universe is crucial ahead of any process in order to truly maximise value,” explains Christian Hess, head of the financial sponsor transaction group at Investec. “The number of exits we see is only a portion of those ripe for a sale, as processes fall down where pricing expectations are not met.”

But is a good time to sell a bad time to buy? Not so, suggest the stats: buyout completions hit a 10-year high in 2017, with €96.6bn clocked up for Europe last year. The UK accounted for €30.1bn and Germany €18.5bn, with France comprising €14.9bn of the total. The average deal size was €142m, the highest since 2007 and fourth highest on record.

But entry pricing is high – in fact an all-time high for some surprising bits of the market. The steepest climb in entry pricing in Europe last year was the €25-50m value bracket, which came in at 12.0x EBITDA, up from 7.9x a year earlier. High pricing across the board may have caused some in the mid-market to balk, with mid-market deal volume down year-on-year: The €50-250m EV bracket saw the number of deals completed drop from 144 in 2016 – which itself had a weak second half owing to Brexit – to 126 in 2017, while the €500m+ bracket saw a sizeable uplift from 31 to 51 deals.

“Pricing in 2016 and 2017 was high, and we walked away from a few deals,” Robinson explains. But turning one’s back on a deal isn’t the preserve of GPs alone. “2017 saw a number of deals get done not only at dizzying price levels but also high leverage levels. We chose to prioritise a selective deployment approach over book-building on a number of deals, and so turned some down; we saw others make similar decisions. While it’s a sign the market is hot, it is also a sign that maturity and discipline remain and that is encouraging,” says Callum Bell, head of corporate and acquisition finance at Investec.

“The increase in pricing is substantially debt-driven,” explains Turner, whose private equity funds have a remit to invest from £10-150m in a deal. He continues, “Non-amortising, inexpensive and cov-lite leverage has been available for a long time for the €100m+ EV deals and so we’ve seen very little change in that part of the market. The very pronounced development we’re seeing is in the smaller end and that is the result of lenders now offering similar terms to smaller deals.”

‘Debt funds now have a significant share of the leverage market, whereas 10 years ago it was just banks’

Statistics bear this out: in the UK lower mid-market (EV < £25m), average equity cushions dropped from 77.9% in 2016 to 65.1% in 2017, as debt increased from 20.6% to 29.4% over the same period. Though changing, the capital structures remain a way off the peak, when comparable equity cushions were 49.2% and debt 39.6% in 2007.

And with much of this coming from funds, it is committed debt with four to five years left to deploy, meaning this phenomenon may be here to stay for the medium-term at least.

“The market is very different structurally to ten years ago,” explains Robinson. “Debt funds now have a significant share of the leverage market, whereas 10 years ago it was just banks, and this is putting pressure on the banking market to compete on leverage and pricing, particularly on smaller deals where the debt funds are not as prevalent.”

Says Turner: “Pricing has been one of the big challenges for a few years now; we walked away from deals in 2017, as we did in 2007 and 2008. But you don’t have to buy what the market is selling. There are different ways to find value. We try to build relationships which can yield us new opportunities.” 

Robinson concurs with this strategy. “When paying market prices, differentiated angles and strong relationships are key. If you have those, and find businesses with both resilience and growth, then you can justify paying a premium for an asset.”

‘Some of the best returns to come from 2017 could be the assets which command the highest price at entry.’

Others share this view. CBPE has deployed nearly a third of its latest fund across five deals in the last two years. “We are happy with the prices we are paying, but it is because of how we operate and what we choose to do. We do not rely solely on processes,” says Sean Dinnen, managing partner of CBPE Capital. “The skill for private equity in any given year is to pick the stocks. This doesn’t always mean it’s the cheapest ones, but it’s the skill of finding the ones you can create the value with.” He recalls an investment CBPE did at the height of the cycle in August 2006 when it paid £93m (c11x) for Rosemont Pharma. During the hold period, which spanned the downturn, CBPE invested significantly into Rosemont, including a £6m injection to expand capacity in the firm’s manufacturing facility as well as a doubling of the R&D and regulatory affairs personnel. Altogether headcount increased from 156 at the time of the 2006 deal to 209 at the time of the February 2013 exit, when trade buyer Perrigo bought it, offering a 3.25x multiple for CBPE’s £52m equity investment. “We paid up for quality.”

Turner agrees with the need for adding value. “It’s about the other levers you can pull – are there transformational M&A or international expansion opportunities which may help create value? You’re not just paying for organic growth. In some circumstances, such as where there is exceptionally high underlying growth, it can be legitimate to pay market prices for something.”

Indeed, as Dinnen says, “Some of the best returns to come from 2017 could be the assets which command the highest price at entry.”