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.

×

Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

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.