European
Private
Equity M&A:

November Market Snapshot

Private equity investment bounced back in the third quarter as easing restrictions on businesses and individuals, combined with positive progress in the search for COVID-19 vaccines, fuelled improving confidence. Global investment value increased by 69% to $102 billion in the three months to end-September compared with the second quarter, according to Preqin. European investment also grew by 59% compared with the prior quarter to $19 billion, led by a number of large deals, but remained well down on the previous year.

Deal flow continued to improve from September into October, with sponsors retaining their appetite for hot sectors, including technology, healthcare, financial services (particularly insurance and fintech) and infrastructure. The return of restrictions across Europe towards the end of the quarter, together with continued Brexit uncertainty, is likely to have a negative impact however and the pipeline for the rest of the year is looking less optimistic as company earnings soften again in the final months of 2020.

Furthermore, portfolio company restructuring plans that were put on hold as lockdowns eased and conditions improved could be back on sponsors’ agendas, and this time might require more permanent fixes. One positive for the UK outlook is the recent Treasury decision to relax eligibility criteria for bailout loans for leveraged private equity portfolio companies, effectively allowing them to access finances and meet EU state aid rules.

After ASDA’s merger with rival Sainsbury’s was blocked on competition grounds in 2019, US owner Walmart began to explore a sale of the UK’s third-largest grocery chain. The sale process was put on hold in April as the pandemic escalated before being restarted in July as conditions improved and attracted significant private equity interest. The Issa brothers and TDR Capital already jointly own the petrol station operator EG Group, giving them extensive experience in UK retail.

Work Restrictions Impact Deal Sourcing

One of the consequences of increased working from home has been a fall in deal activity sourced through informal, proprietary channels. With bilateral deals more difficult to source and execute, deal activity is increasingly being pushed into auctions, resulting in notably larger processes with a high number of participants.

On the plus side, private equity firms are finding their ability to conduct due diligence or execute deals has not been materially curtailed by the current working norms, albeit with a number of innovative and tech-heavy solutions being implemented to navigate logistical challenges.

Permira’s investment in Neuraxpharm is reported to be the largest private equity pharma investment of 2020 so far. The company has an 80% share of the European market for drugs for central nervous system conditions. Permira aims to further strengthen Neuraxpharm’s position by helping it develop its product pipeline, while at the same time targeting bolt-on acquisitions that will enable the company to expand internationally.

Distressed Opportunities on the Rise

At the same time as core buyout activity has recovered, opportunities for distressed investors are beginning to increase. Companies in hard hit sectors have been quick to feel the impact of renewed restrictions and declining consumer confidence. At the end of August, a group of private equity firms including Apollo Management, TowerBrook and Ares took control of Swissport, the Switzerland-based ground services and aircraft cargo handling group, through a debt-for-equity swap. As part of the deal, the investment group is providing new financing for the company, including a €300 million super-senior loan to help trade through the crisis {{¹}}{{{Press Release: Swissport agrees comprehensive restructuring</br>Source: Swissport}}}.

While distressed investors are finding more potential deals in travel, retail and energy, there is also reason for them to be cautious. The global financial crisis of 2007-2008 demonstrated the risk of moving too soon, as the escalation of the banking crisis at the end of 2008 caused a liquidity crunch that placed intense pressures on companies and accelerated the wave of bankruptcies, as well as extending the recession well into 2009.

Those funds that waited until 2009 to deploy capital typically generated higher returns and avoided “catching the falling knives”. While the financial system is fundamentally stronger than it was in the GFC, many distressed investors will be keeping an eye on the potential risks of investing too early as they investigate the emerging opportunities.

Oaktree Capital Management LP acquired a majority stake in Zzoomm Plc, one of the private equity group’s first investments in telecoms infrastructure. The investment will enable Zzoomm, currently building its network in Oxfordshire town Henley-on-Thames, to expand its full fibre broadband network across the UK, helping meet the need for internet infrastructure outside major towns and cities.

Financial Services

Among the sectors in focus for sponsors is financial services. With the notable exception of the reported continued interest from private equity bidders for HSBC’s retail business, rather than looking at the international banking business, which is constrained by low interest rates and facing the rising threat of bad loans, private equity firms have agreed a steady flow of deals in the insurance sector where consolidation and expansion into complementary fields are the main strategies.

Fintech also remains an attractive sector at the confluence of technology and financial services. Klarna’s $650 million funding round in September made it Europe’s most valuable fintech company, while a number of other start-ups, including French payments group Checkout.com, UK digital banking group Revolut and Germany’s N26 challenger bank have all secured new funding and multi-billion euro valuations in 2020.