P2Ps fuel recovery in Q3

Take-privates drive Q3 value as first three quarters of 2017 surpass 2016’s full-year figures

European private equity activity for the first nine months of this year has reached €64bn, already exceeding last year’s total of €61bn, with three months left to go. A number of mega-deals are driving value totals, with three accounting for €9.8bn of Q3’s €21.8bn – itself flat on Q2’s €22bn total, according to data from CMBOR, sponsored by Equistone Partners Europe and Investec.

P2Ps, usually conspicuous by their absence, comprised 17% of year-to-date activity, driven by three sizeable deals in Q3 (Stada(Germany), Punch Taverns (UK), Shawbrook (UK)). This proportion is substantially higher than the ten-year average of 10.5%, and could rise further as the £2.9bn take-private of Paysafe, which narrowly got the go-ahead last week, progresses, as well as the $5.3bn delisting of Nets in Denmark.

Says Christian Hess, Head of Financial Sponsor Transaction Group at Investec: "We expect three PE M&A trends to bear out for the remainder of the year and into next: a historically high proportion of PTPs, a further increase in bilateral deals outside of a process, but also a continued increase in failed auction processes." (View research here)

The reality is that the volume of deals is down, and so average enterprise values have jumped to €149m – the second highest since the 2007 peak. Large buyouts which drove value totals were Stada (Germany, €5.4bn), Domus (France, €2.4bn) and Punch Taverns (UK, £2bn).

The apparent uptick is not spread equally, however, with the UK’s long-established position as rain-maker in Europe under threat. Though the country clocked up £14.3bn by the end of September (outstripping the £11.6bn for whole of 2016), the former market leader was neck-and-neck with Germany, with each accounting for €16.5bn of this year’s total thus far.

The UK does, however, continue to boast a strong small buyout market, with 82% of the quarter’s 42 deals done in the sub £50m EV segment. The £50-500m segment was quiet however, with just 15% of the deal volume. Three deals accounted for £3.3bn of the quarter’s total £4.8bn, suggesting a polarisation of the market as the mid-market cools. Pricing also showed some surprises, as EBITDA multiples hit a four-year high for the sub-10m EV segment at 5x. Mega-deals (1bn+), on the other hand, saw average entry EBITDA multiples drop to 10.2x – the lowest in 11 years.

“A certain amount of pricing increase is inevitable as pent-up demand from equity houses pushes values up. The potential impact on returns is likely to be somewhat mitigated by rising debt multiples as both banks and direct lending funds compete to deploy capital,” says James Stirling, Head of Growth & Acquisition Finance at Investec.

UK consumer-related businesses have fallen out of favour as Brexit bites. Deals in the leisure and retail sector accounted for just a tenth of PE volume in 2017, down from 13.5% in 2016 and 18.2% in 2015 – likely as investors pause to consider consumer confidence in a post-Brexit environment.

Exits are also slowing in the UK. Following a strong showing over the last few years, they have continued their decline, dropping to 33 in Q3, down from 41 in Q2 and 52 in Q1. They account for £4.25bn – the lowest value since Q1 2012. The largest was Bregal’s sale of QA Group to CVC
for a reported £700m after a ten-year hold.

This drop stands in contrast to high valuations and an otherwise healthy exit backdrop, suggesting a witnessed increase in failed processes.