European private equity industry expects slower year in wake of uncertainty

03 May 2017 Consultancy.uk

M&A activity by private equity firms across Europe is project to see a smaller increase in activity going into 2017 than into 2016, a new report finds. Companies are increasingly cautious in the face of uncertain economic times, while also concerned about the quality of available targets. Political instability, from Brexit to the new US administration, is further throwing up hesitation. Technology & media and pharma & healthcare are the areas projected to see the most activity; although deal values across all areas are expected to be lower than the previous year.

The M&A market has seen robust activity across the globe in recent years, almost topping $4.9 trillion in 2015. To gain a better understanding of the involvement of European private equity firms in the region’s wider M&A market, Roland Berger conducted, for the eighth consecutive time, its ‘European Private Equity Outlook 2017’, survey. The survey is based on responses from 2,400 experts from private equity investment companies across Europe.

M&A transactions with PE involvement

The PE respondents note a decline in expectations regarding the number of completed M&A transactions by their industry in 2017 compared to last year. This year 52% of respondents expect their involvement to increase, down from 64% last year. Around 26% of respondents say that they will be acting in a similar level to the year previous, 18% expect decline of up to 10% while 4% forecast a decline of more than 10%.

Overview of relevant factors for M&A business in Europe

To gain insight into the reasons for the decreased optimism, the firm ask respondents about factors influencing M&A transaction with PE involvement in Europe in 2017. The overall economic situation looms large, cited as an important factor by 72% of respondents – of which 47% said it would result in the same level of activity as last years, while 36% said it is implicated in the deterioration. 63% of respondents notes a lack of availability of attraction acquisition targets, while 58% cites development of valuation levels as an important factor.

The trend with the biggest negative impact on activity, however, is political instability, which has deteriorated considerably since 2016, cited by 65% of respondents while 9% say things have significantly deteriorated. Key areas of concern are Brexit, the new US administration and election cycles in Europe more widely.

“Investor confidence in political stability has recently plummeted," says Sascha Haghani, Global Head of Restructuring and Investor Support at Roland Berger. "The uncertainties resulting from the newly installed American administration, the Brexit vote and the upcoming elections in France and Germany are weighing heavy on their minds.”

Likelihood of a high number of M&A transactions by industry

The survey also sought to identify the industries most likely to see active interest from the PE industry. Technology & media is shown to be the area of greatest potential activity, cited by 72% of respondents, followed by pharma & healthcare, cited by 68%. Consumer goods & retail comes in third on 60%. Areas of least activity from PE firms, according to the respondents, are the automotive industry, building & construction, and energy/utilities.

“What this tendency tells us is that investors are intensely interested in companies employing innovative technologies," says Roland Berger Partner Christof Huth, adding, "International investors believe that future-proof technologies hold the prospect of very good growth rates.”

Development of PE transactions size class

The study further found that respondents are more likely to focus on acquiring smaller companies in 2017. Particularly the <€50 million class is set to see an increase in activity, according to 63% of respondents. The €50-100 million class is too expecting by more than half (53%) to see activity increase. Respondents are less keen on large deals going into 2017, with 40% of respondents expecting deals worth more than €1 billion to see decreased activity, while 31% expected decreases and 46% stagnation in deal activity in the €500 million to €1 billion range.

Importance of value creation measures

The research also considered the ways in which PE firms are looking to achieve portfolio improvement/value creation going forward into 2017. Respondents overall have a similar reasons for activity going into 2017 as they had at the same time last year. Top most cited is add-on acquisitions, at 34% of respondents, down one point on the year previous, while new products & services came in second, cited by 25% of respondents, and were also a point down on the year previous.

Pricing was up two points, to 8%, while footprint optimisations was static on 8%. Purchasing/supply chain optimisation saw a slight, 3 point increase to 8%, while, while refinancing saw a decrease of 2 points to 5%. Working capital optimisation / Capex efficiency was the least cited measure, at 4% of respondents.

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