European Private Equity snapshot at the end of 2021

After being impacted by the Covid-19 pandemic, European private equity transaction activity has reached a new annual high supported by three dimensions: growing asset allocation towards the asset class, the vast amount of dry powder, and sellers looking to profit from the bubbly pricing situation. 

Private equity deals are flourishing in Europe

According to data from ¹Pitchbook, the combined value of Private Equity transactions in Europe has almost tripled during the past decade. At the same time, the number of transactions has doubled compared to 10 years ago, supported by a robust lending environment, willing sellers and significant Limited Partner (LP) commitments. Through the third quarter of 2021, approximately 5,492 deals closed that are worth €548.7 billion compared to €493.4 billion in deal value set in full-year 2018. In terms of regions, most of the deals in 2021 concentrated on UK & Ireland, followed by France and Benelux and the DACH region.

Surge of Private Equity transactions in specific sectors

Private equity deal activity within the overall financial services sector surged significantly:  throughout the third quarter of 2021, 247 deals closed worth €38.3 billion. The healthcare industry significantly benefited from the pandemic in 2020 and 2021 as well and remains one of the most important target investment sectors in the coming months. The industry is gaining popularity and tailwinds as a result of strong long-term development potential, a predicted increase in consumer spending and IT advances in the industry.

As regards to IT, the continued interest of private equity companies in the technology industry is motivated by increasing need for digital transformation of fundamental organizational operations, as well as a trend toward machine learning, cloud computing, artificial intelligence, and digital payments². This supports the importance of investments in IT towards other sectors, both in terms of number and value of transactions.

Lastly, as more insurance companies sell off lower-growth units with tight margins, private equity firms are contemplating methods to boost permanent capital vehicles, the present interest for insurance companies³ is certainly predicted to continue in 2022.

Fundraising on high level – but focused on lower number of GPs

Pitchbook reveals that as of the third quarter of 2021, the amount of European private equity fundraising summed to €88.3 billion⁴ represented by 104 private equity funds, placing it most likely above the 2018 level. In 2020 total fundraising amounted to €97.5 billion. It is noteworthy that more than 46% of the capital raised through the third quarter of 2021 came from just three mega funds demonstrating that LPs support smaller number of established General Partners (GPs) that have a strong track record, and a clear differentiated strategy. In terms of type of investment strategy, the biggest chunk of commitments is allocated to traditional buyout funds.

Exits performance particularly high in the technology sector

At the end of September 2021 Private Equity firms completed 425 exits totaling roughly €126.4 billion. This value is surpassing all previous years’ annual figures, even though data of the last quarter is not available yet. The technology sector accounted for most exits, amounting to more than 30% of total exit value. GPs were optimistic about investing in and disposing of IT assets because of their long-term disruptive potential and resilience throughout the economic crisis, which pushed valuations higher and resulted in larger returns. Furthermore, the surge of SPAC acquirers concentrating on IT assets has intensified competition, boosting values and encouraging additional private equity exits.

“Retailisation” is expected to further fuel the industry

While the Securities Exchange Commission (SEC) in the United States is working on expanding access for retail investors and achieving greater transparency, the "retailisation" of the industry is also a major topic for asset managers and policymakers in Europe. European policymakers would like to encourage non-professional investors to have access to private equity funds through the current reform of the European Long Term Investment Fund (ELTIF). A trend which is carefully followed-up by the UK with the launch of the Long Term Asset Fund (LTAF). The new rules would remove minimum investment and wealth requirements for individuals while also broadening the type of assets fund managers can hold – reducing various investment restrictions and marketing hurdles.

Europe will continue to lead the way in ESG

Concerns about the environment, social issues, and governance (ESG) have quickly risen to the top of the corporate agenda over the last two years. Previously merely a matter for discussion, large institutional investors have pushed companies to take action on climate change.

In this regard, the European Union's new Sustainable Finance Disclosure Regulation (SFDR) was unveiled in March 2021, introducing the fact that managers conducting business in the EU must begin disclosing their approach to incorporating sustainability (such as climate, diversity, and governance disclosure) risks into the screening and assessment of their investments.

Even though globally, most managers are incorporating ESG risks into their corporate governance and investment, they are still in the early stages of their ESG  journey⁵. Europe is certainly leading the way: ESG products in both the liquid and illiquid spectrum are in high demand and this trend is expected to continue in 2022.

As regards to the funds’ terms and conditions, evergreen Private Equity funds are gaining momentum. Several large Private Equity houses already offer long-life funds, with terms of 15, 20 or even 25 years, designed to accommodate longer holding periods or even decided to launch evergreen funds. Such form accommodates managers to invest in strongly cash generative businesses that benefit from patient capital and strategic planning, pursuing acquisitions or developing industry partnerships to cement or expand its portfolio companies’ market position while less exit oriented.

Expected macro-economic challenges in 2022

Without any doubt, inflation and related volatility will certainly be a prominent area of attention in the next months to come. Capital availability may face decline in 2022 as a result of an anticipated tightening of monetary stimulus amid inflationary pressures. European Private Equity nevertheless seems in a stronger position than ever thanks to the significant dry powder the industry benefits from and seems very well equipped to take benefit of any sudden change in the economic environment either due a restriction in the liquidity available or a more structural slowdown of the economy.

¹Pitchbook – Q3 European Private Equity Breakdown

² EY – Private Equity Pulse Q3 2021

³ Preqin – Alternative Assets in Europe Report

⁴ Pitchbook – Q3 European Private Equity Breakdown

⁵ EY – Global Alternatives Survey 2021