European private equity buy-outs increase for five consecutive quarters
- Lowest gearing levels seen for a decade
- UK leads activity across European countries London, 2 August 2010 — European private equity buy-out activity across 15 countries* consolidated its recovery in the second quarter of 2010 (Q2’10) with 125 buy-outs in Europe. Whilst this was only a five per cent increase in volume compared to Q1’10, there have been five full quarters of growth, according to the quarterly European Buy-out Market Overview, sponsored by Ernst & Young and Barclays Private Equity.
The data, compiled by the Centre for Management Buy-out Research (CMBOR), also finds that though average deal size in Q2 was €69m, which was 26% lower than in Q1, it represents more than a 60% increase on the 2009 average, suggesting that last year’s lull in activity is over – albeit primarily driven by deals of modest value.
The first quarter of 2010 at €11.1 billion was almost double Q4 2009 figure. The second quarter of this year (€8.6 billion) remained relatively strong by recent standards.
After reaching a record of 84 buy-outs with a value of €500 million or more in 2007, these large deals fell to 5 last year, whereas in just the first half of 2010 (H110) there were 10.
The total value of deals over €500 million reached a high of €118.1 billion in 2007 but only recorded €4.6 billion last year. In the first half of this year €10.1 billion has been invested. Buy-outs in the €50-500 million mid-market range fell to 78 last year and stand at 55 in H1 2010.
John Harley, Global Private Equity Leader at Ernst & Young, says:
"There has been a clear change in buy-out funding for Europe. Deals are on average well over fifty per cent equity funded compared to one-third in 2007. In reality, we have seen deals which are all equity funded as well as those that are attracting debt financing equivalent to that available in 2006. While the Eurozone debt concerns prevail, larger initial equity cheques are an inevitable consequence.”
Structure: equity leads
On average in H1, deal structures were 66% equity and 33% debt. This balance represents the lowest gearing levels seen this decade. Driven primarily by limited liquidity, the days of leveraging a buy-out with debt seem a distant memory.
Use of specialist forms of debt finance such as mezzanine or loan notes have tailed off and now represent barely 2% of total buy-out financing (in 2006 they averaged 12%). This compares to the pre-credit crunch norm where debt could be as high as two thirds of consideration.
UK leads the way in European buy-outs
In H1 2010 UK buy-outs have risen to €9.3 billion from a full year 2009 total of €5.3 billion. Last year the UK remained by far the largest country by volume although buy-out numbers fell sharply to 120. Buy-outs stand at 99 this year.
Germany has already reached €3.0 billion in H1 2010 compared to €1.9 billion recorded in 2009. Germany had 54 buy-outs in 2009 and has 26 so far this year.
France recorded only €1.9 billion last year after being as high as €33.8 billion in 2006. In H1 2010 France has recorded €2.1 billion with Ireland at €2.1 billion from just three deals. The French market fell to 76 last year and has 41 in H1 2010.
Joachim Spill, EMEIA Transaction Advisory Services Leader at Ernst & Young, says:
"Buy-out transaction multiples have rebounded. In the first half of this year, the average price to earnings on larger European deals was 17.9x - which is actually higher than back in 2007 when the market was at its peak. This is interesting because in 2009, PE multiples were barely double digits. Our view is that where buyers have the funding, they are now more willing to listen to businesses with sustainable growth stories. There remains however a gap between vendors and acquirers, with Private Equity houses focussed on actual results and many sellers still talking about forecasts. This can slow down the deal making process."
Christiian Marriott, Director at Barclays Private Equity commented: “The first half of 2010 has seen secondary buy-outs continue to drive activity, representing 56% of overall deal value in the period. It’s clear that private equity houses across Europe have taken the opportunity to harvest the quality assets in their portfolios, especially deals from earlier funds where the underlying investors are keen to see realisations.”
Manufacturing and healthcare are largest sectors
Manufacturing was the largest European sector by volume this year (H1) with 73 buy-outs followed by Business Services with 34.
Healthcare at €3.8 billion is the largest European sector for buy-outs by value in 2010. Retail at €2.9 billion is also strong. Business Services has €3.3 billion this year.
Outlook
Harley concludes: "The volume of European buy-out deals in Q2 is up to 125 in total. Equally notable has been some return to favour of IPOs with Europe raising €4.2 billion despite some high profile postponements during the period. The level of exits arising through ‘returning the keys’ to the banks/insolvency have decreased significantly in 2010 but we still remain watchful that funding constraints may drive further defaults as the economy recovers and covenant terms bite."
*The 15 countries include in the research are: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the UK
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About CMBOR
The Centre for Management Buy-out Research (CMBOR) was founded at Nottingham University Business School in 1986. CMBOR is world-renowned as the long-standing leader in providing robust analysis of the buy-out market. CMBOR data covers all buy-out activity and therefore includes transactions funded on a cash or debt-only basis as well as traditional private equity-funded buy-outs. CMBOR is independently sponsored by Barclays Private Equity and Ernst & Young.
About Barclays Private Equity
Barclays Private Equity is one of Europe’s leading investors in mid-market buy-outs with a successful track record spanning over 25 years. It has a team of over 40 investment professionals in seven offices across five countries. Its offices are in Birmingham, London, Manchester; Paris; Munich; Milan and Zurich. Its investment in individual transactions ranges between €10m and €200m although it is able to underwrite much larger equity investments up to €300m which would be shared with co-investors. In the UK, it has a sector focus on Consumer & Travel, Financial Services, Support Services and Specialist Engineering.
