Private Equity backed M&A to slow down in 2015

26 February 2015

The outlook for private equity-driven mergers & acquisitions, after a positive 2014, is expected to be more conservative in 2015. While the quality of targets is expected to rise, a disbelief in the robustness of the private equity business model is creating some disillusion about prospects of 2015.

For the sixth year in a row Roland Berger has conducted a survey on private equity activity and related M&A outlook. The report, titled ‘European Private Equity Outlook 2015’, surveyed 820 private equity professionals, with 64% having >10 years of experience.

M&A expectations
As part of the research, the strategy consultants looked at the 2013 expectations in relation to the facts 2014. The firm found that half of the PE professionals had their expectations for Mergers & Acquisitions (M&A) activity in 2014 met, while for a third the activity panned out worse than expected.

Development of PE M&A activity in 2014

The main reason for the expectations to have been met, according to the consulting firm, comes out of the availability of quality targets, with the availability of financing also highly ranked. A number of factors holding back the years’ M&A development, were the pricing of targets and negative geo-political developments inhibiting deal makers.

Reasons for 2014 M&A activity

The expectations for 2015 are much more reserved, with 20% expecting the year to be flat in terms of deal growth, while 18% of survey respondents expecting a decline of activity, with 8% expecting a >10% decline. The majority of respondents expects the growth rate in M&A activity to be in the positive range up to 10%. In terms of specific countries, the UK is expected to see the biggest rise with a 2.1% gain, followed by Iberia/Italy with a 1.8% rise.

PE M&A activity in major countries

In terms of the sector expected to see the most activity, the respondents nominated Pharma & healthcare first with 49% of respondents indicating, Consumer goods & retail came in second with 48% and Technology & media third with 46%. In terms of the value range of companies that the respondents see the most M&A activity in, the mid-cap comes out on top. In total 86% of respondents thought that deals would be predominantly be done below $250 million, with 25% expecting to see deals in the $100-$250 million range and 37% expecting to see deals in the $50-$100 million range.

Value range of expected M&A targets

While most of the indicators, such as the overall economic situation, development of valuation levels and political stability, are expected to improve in the 2015 period, the respondents still remain reserved about activity in the period. One factor that trends positively however, is that 44% of respondents expect 2015 to bring with it more attractive targets, while 41% remain uncertain about whether the year will differ from 2014. The most attractive kinds of targets are “parts of groups/carve-outs” at 69% and “majority shareholdings in family-owned companies” at 66%.

Business model
One interesting result from the survey is that 62% of respondents see a need to adapt the PE business model – with 26% continuing to believe in the current model. According to Roland Berger, this reflects the “conservative opinions of the professionals regarding the next year showing subsequently less optimism regarding PE-driven M&A deals development.”

Lost faith in PE business model