European Private Equity industry maintains appetite for M&A

17 May 2016

The global private equity market has enjoyed strong growth on the back of cheap money and a demand for their portfolio stock from cash rich corporates. A new report from consultancy Roland Berger finds that the European private equity is set to build on global appetite and enjoy continued growth in the coming twelve months.

The report from Roland Berger, titled ‘European Private Equity Outlook 2016’, explores expectations for the private equity (PE) market in the coming years, as well as conditions affecting PE players. The European private equity survey involves 2,600 participants: of which 28% were from DACH the region, 12% from the Benelux and 10% from the UK. 68% of respondents have more than 10 years of PE experience under their belt.

Fundraising in M&A

PE market growing
The survey finds the PE involvement in M&A transactions is expected, by the majority of respondents, to increase this year. 54% believe that the market will expand between 0% and 10%, while 10% believe it will increase 10%. Of respondents, 22% believe that it will be flat this year, while 13% hold that there will be decline.

The respondents are slightly more bullish about the market this year, with 53% in 2015 saying that there would be between 0% and 10% growth, and 9% saying that growth would be more than 10%. The figures are down on 2014 however, when a combined 82% expected growth in the PE transactions market. The development is overall in line with a recent study released by Bain, which found that 2015 was a solid year for the global private equity landscape.

Private Equity M&A in Europe

Regional growth
The survey takes a closer look at the respondents’ expectations for the growth of PE related M&A transactions in different regions for the coming year. The biggest growth according to respondents comes from Germany, up 3.2%. This is followed by the wider Iberia peninsula and Italy, where growth of 3.1% is projected. The UK too is expected to see relatively strong growth figures at 2.9%. Only Greece sees negative growth, although only a marginal -0.2% decrease, while Austria and Switzerland will see low growth in activity (1%) in the coming year.

Industrial activity
The research also considers which sectors are expected to see the most growth in the coming year, participants were able to select multiple categories. The survey respondents expect the technology & media sector to be the most active, at 65% of respondents, followed by pharma & healthcare, at 62%. The areas that are expected to see the least activity are building & construction, at 14%, and energy and utilities, at 14%.

Private Equity value chain

Ecosystem changes
While respondents are relatively positive about growth to the European PE market in the coming year, a number of factors affecting the market are expected to see change this year. The respondents rate political stability as the most important factor likely to affect the market, at 35%, followed by the availability of inexpensive debt financing, at 23%. The availability of attractive acquisition targets is the least important, at 19%, although it is relatively close in importance to the previous four categories.

In terms of how things will change this year, respondents believe that political stability will deteriorate in the coming years, while the availability of cheap money will remain. The overall economic situation is projected to improve for the region, while valuation levels development will decrease. The availability of attractive targets increased ever so slightly over last year.

"As of the end of 2015, the PE industry appears to be rather unconcerned by the overall economic situation," says Roland Berger Partner Christof Huth, who interviewed investors across Europe with his Investor Support Team. "Most firms even expect this year to be a significant improvement on 2015." PE investors do not expect any reduction in the availability of cheap financing compared to 2015 either. "That said, our survey does indicate a growing concern about Europe's political stability. This is primarily what will influence how many transactions actually complete this year.” Private Equity focus areas

The survey further asked respondents to nominate the most important activity in the PE value chain of for 2016. The top reason, again this year, was making new investments – which is due to the current attractiveness of selling portfolio companies. The development of portfolio companies is no longer a chief concern, falling to the most important for 23%. Divesting existing investments too remains an important feature of the landscape however, coming in at 26%. Fund-raising and extending existing funds are the least important, at 12% and 1% respectively.

"This is the first time in the recent past that we are seeing PE investors focus more on divesting investments than on developing their portfolio," says Huth. "What this shows is that they have done their homework, strategically and operationally developing many of their portfolio companies to such a point over recent years that they are now in a position to take advantage of this favourable time to sell up."


Private equity firms ramp up sustainability focus

19 April 2019

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.