European Private
Equity M&A:

September Market Snapshot

Private equity pipelines are as full as they have been since the onset of the COVID-19 pandemic. The continuing effects of COVID-19 and the annual summer hiatus in European M&A is lengthening sale processes, but we are past the point of simply remarking on “green shoots” and are witnessing a tangible pick-up in private equity activity that is expected to result in a significant increase in agreed deals over the coming months.

A key driver remains the sizeable, and ever-growing, reserve of dry powder to invest. Throughout the crisis, firms have continued to raise funds across a range of strategies. According to Preqin data, 225 fund closes were achieved in the second quarter of 2020, compared with 425 during the same period of last year. However, capital raised remained relatively robust at $116 billion (compared to $150 billion in Q2 2019), a sign that money is being concentrated in the hands of the largest and most robust sponsors. The trend continued into July as CVC was reported to have closed its eighth global fund at over €21 billion.

Another factor underpinning activity is that many companies – notably in technology, ecommerce, healthcare and consumer staples like food and beverage – are weathering the downturn better than expected or are seen as resilient to the effects of the crisis. The market has been quick to respond when attractive targets look like they might become available. UK roadside recovery and insurance group The AA is reported to have received several approaches from private equity after the company started investigating options to reduce its debt ahead of forthcoming maturities.

Strong Competition Drives Full Valuations

Auctions tend to drive pricing and sellers have been launching processes for assets which they hope will attract significant numbers of potential buyers. Under these conditions, some private equity sponsors who are wary of full valuations are choosing not to engage in highly competitive processes. Sponsors with specific experience of extracting or adding value in certain sectors are more likely to be successful.

In order to avoid the challenges of an auction race, some private equity firms have been successfully identifying and pursuing bilateral deals, in some cases by pre-empting contemplated auction processes. In such cases, sponsors can be looking for investments that play to their strengths or offer synergies with other assets in their portfolios. Buyers are not expecting bargains, but rather hope to put forward a knock-out offer that is full enough to encourage the seller to skip an auction process that might ultimately result in a higher price, but which still carries the risk of failure, involves significant work and distracts company management. KKR teamed up with Ardian in July to successfully forestall an expected $3.5 billion auction process by CVC for French clinics chain Elsan.{{1}}{{{KKR in talks to buy French clinic chain Elsan from CVC Capital – Bloomberg</br>Source: S&P Global}}}

Asian Private Equity Appetite Increases

In addition to domestic European and US sponsors, in a continuation of trends from 2019, increasing numbers of Asian private equity firms have shown interest in European assets. Many are seeking out companies, particularly in consumer sectors with pricing hit by COVID-19, with sizeable growth prospects in their domestic market.

However, the tightening of focus on foreign direct investment in many European countries following COVID-19 is leading to a degree of caution from inbound investors keen to avoid regulatory scrutiny or publicity associated with assets that national governments are increasingly seeking to protect. This has resulted in investors concentrating on a narrower range of sectors and countries and a shift away from the most restrictive regimes.

Conducting Deals Under COVID-19 Restrictions

Although investment appetite has strengthened, there are nonetheless challenges to participating in auctions in the current environment. Virtual data rooms are an accepted part of sales processes around the globe. However, online meetings cannot fully replace face-to-face meetings with management teams, either for building rapport or unearthing strengths and weaknesses. With strong competition for good assets, buyers are unlikely to receive an extensive set of warranties or protections from sellers to address risks either caused by, or exacerbated by, the conditions created by COVID-19.

In response to the situation and counterparty risks amplified by prevailing uncertain market conditions, buyers are likely to turn increasingly to W&I insurers. Those insurers are generally still willing to offer coverage – including synthetic coverage – without significant exclusions despite the limitations that COVID-19 can place on buyers’ due diligence. However, they are also particularly focused on fully understanding the impact of COVID-19 on the target business. We have also seen other innovative approaches to conducting due diligence remotely, including the use of drones and body cameras to record and transmit footage of target assets. Interesting times make for interesting solutions.

Michael J. Preston

T: +44 20 7614 2255

Gabriele Antonazzo

T: +44 20 7614 2353

Michael James

T: +44 20 7614 2219