European private equity and M&A markets performing strongly
The European Union (EU), as a single market, is the largest economic block in the world, representing 26% of global GDP. The EU’s member states represent five of the 10 largest economies in the world resulting in a fundamentally prosperous region characterized by open and innovative market-based economies.
Following the 2008 global financial crisis, the European sovereign debt crisis and corresponding fiscal consolidation and structural reform programs implemented across Europe, the continent’s economic recovery is now in its third year and continues at a moderate pace.
Subsequent to the sharp decline in energy prices during the second half of 2014 and the European Central Bank’s (the “ECB”) aggressive quantitative easing program since the beginning of 2015, economic growth has raised private equity activity above pre-crisis levels in more member countries. During the second quarter of 2015, real GDP growth in the EU increased for the ninth consecutive quarter. The European Commission currently projects that it will grow by 1.8% for full year 2015, which would represent the first time euro area growth has exceeded 1% since the global financial crisis downturn.
Beginning in the second half of 2014 and continuing through 2015, the region’s economic recovery has been facilitated by low oil prices. The low prices are similar to a tax cut for consumers and businesses, positively impacting purchasing power without the negative implications of increasing deficits or debt levels. Additionally, the Euro has continued its depreciation relative to the U.S. dollar and other currencies. This is a consequence of quantitative easing and the ECB’s broadly accommodative monetary policy, which is expected to strengthen the price competitiveness of European. However, these tailwinds are expected to have less of a direct and positive impact on growth going forward given the slowdown in China and emerging market countries, which account for approximately one fourth of euro-zone exports, increased global economic uncertainty, and the evolving refugee crisis.
Fundraising approaching record levels
While economic conditions across Europe continue to exhibit consistent, albeit, moderate improvement across most countries, the European private equity and M&A markets have rebounded strongly in the years subsequent to the global financial crisis. After reaching a post-global financial crisis high of $965 billion as measured by total deal value across 12,303 transactions in 2014, the European M&A market has remained quite active through the first three quarters of 2015 reaching a total deal value of $756 billion across 8,150 transactions.
While still far below the 2007 record level of $1.6 trillion in total deal value across 12,169 transactions, 2015 year-to-date activity is on pace to exceed 2014 on a total value basis across fewer transactions reflecting a higher concentration of capital across larger-sized deals. A combination of factors, including widely available debt at increasingly favorable terms to borrowers; diminished organic growth prospects in domestic markets; record private equity uncalled commitments or “dry powder” of approximately €280 billion; and, strategic purchases between corporations, given healthy balance sheets and generally supportive equity markets, continue to underpin the significant deal activity across the European region today. (see Exhibit 1)
Exhibit 1: Europe M&A Activity
Source: Robert W. Baird Global M&A Monthly (October 2015).
Despite acute competition from corporate strategic buyers, private equity firms maintain substantial resources and are serious competitors in today’s market environment given the many successful portfolio company sales over the past two years, a strong fundraising environment characterized by increasing investor allocations to private equity, and accommodative debt markets to finance transactions. On a global basis, private equity buyers have continued to be active participants in the current market as they represented approximately 18% of total M&A activity during 1H 2015, which represents the highest percentage since the 19.5% level reached in 2007.1
Not surprisingly, European buyout transaction multiples have remained at elevated levels in this environment reaching 9.0x on an Enterprise Value to EBITDA basis as of Q3 2015 in the wake of establishing a record high of 10.0x in 2014. Consistent with the overall European M&A market environment, a key distinguishing characteristic of today’s European buyout market relative to the 2007-2008 period is the fact that the volume of transactions, which reached 1,452 through Q3 2015, has declined on a year-over-year basis leading to a 14% increase in average transaction value compared to the prior-year period.2
1. Thomson Reuters Mergers & Acquisitions Review—First Half 2015.
2. Pitchbook European PE Breakdown—4Q 2015.
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