"While the European PE market is waiting for macroeconomic conditions to stabilize, certain pockets of the market remain active and the pipeline continues to grow. But the question remains: when and where will deal flow return?" Sachin Date,
EMEIA Private Equity Leader,
Ernst & Young

The second quarter of 2012 has been challenging for private equity buyout deals across Europe. Adverse macroeconomic factors have led to a marked slowdown in activity, both in terms of volume and value.

Despite healthy medium-term optimism, short-term nervousness, encapsulated by the ongoing crises in the Eurozone, continues to have a detrimental impact on the buyout market.

As a result of current macroeconomic conditions, there could be a polarized market emerging. At one end there is appetite for high-quality assets, where a buyer can identify strategic synergies, and at the other an increase in distressed asset sales.

Mediocre businesses, or those that do not need to be sold, simply won’t come on to the market.

European deal activity at a glance:

• European buyout activity drops as only €9.1b of deals completed in second quarter of 2012, 34% lower than first quarter, and below 60% of the value of Q2 2011
• Volumes are down by a similar amount, average deal price is down to €82m
• While short-term activity is dictated by events outside private equity control, medium-term prospects remain healthy due to the availability of capital
• Activity in Germany and France continues on a downward trajectory as companies assess the impact of Eurozone turmoil
• UK accounts for more than a third of deals but, after a strong first quarter, values drop from Q1’s €6.6b to Q2’s €3.3b
• Sweden is the second-most active market in the second quarter by value (€2.0b from 11 deals)
• Two mega-buyouts completed in the second quarter with total value of €3.4b: Sweden’s Ahlsell bought by CVC for €1.8b and UK’s Misys taken private by Vista Equity Partners for €1.6b
• With 83 deals, manufacturing is the most active sector in the first half of 2012, but TMT remains the largest in terms of deal value (€5.3b)
• Exits in the second quarter realized €9.5b, with 22 secondary buyouts generating €4.4b
• No IPOs in the quarter, but only five exits through insolvency

Pipeline prospects: What the future holds

Despite the data supporting a bleak short-term outlook, there are a number of announced deals still pending and there is pipeline activity in 2012. This situation is not confined to single countries. We expect to see eight deals valued a €6b complete across Europe by the end of 2012.

Across Europe, there are pending deals such as Bain Capital’s acquisition of Bravida in Norway and Lion Capital’s acquisition of Alain Afflelou in France. If conversions prove successful, this could be seen as a return of market confidence.

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