Private equity M&A in Europe has slowed sharply as the coronavirus (COVID-19) pandemic has led to significant disruption in the past weeks. Governments’ reaction to the public health crisis has been to severely limit social interactions, putting large parts of the economy into effective shutdown. In the face of an unprecedented set of circumstances, new deal activity has taken a back seat to portfolio management and protection.
Private equity managers are well used to managing companies through tough economic times. In the aftermath of the financial crisis, private equity firms directed much of their effort and resources to sustaining their portfolio companies. While there are similarities today, the list of issues for firms to deal with is longer – in addition to the squeeze on liquidity, companies face supply chain shortages, travel restrictions, employee quarantines, prolonged remote working regimes and the reduction, or even indefinite suspension, of business activities.
A Changing Market
Even before the impact of the coronavirus on businesses and the economy, private equity deals were becoming increasingly polarised. Sellers have been keen to take advantage of the still-heated UK (and European) auction market to tap into private equity’s considerable reserves of dry powder. However, in the face of high expectations, a number of auction processes have collapsed, or at the very least stalled, as prospective buyers have been unable to meet sellers’ demands on pricing and/or legal terms.
At the same time, processes for top-quality businesses have attracted large fields of private equity suitors with competition fanning valuations for the highest-profile deals. With large capital pools chasing relatively few deals, general partners have been forced not only to pay full prices, but also to take a number of innovative approaches to secure assets.
Current market turmoil, not to mention a swathe of other more pressing priorities, is likely to have a contrasting impact on processes: whilst it is widely anticipated to significantly reduce or stall new or early stage M&A activity for a period of time, a number of existing processes are being accelerated as buyers and sellers urgently seek to lock-in deals over video conferences. Where new deals do happen, they may be driven by necessity rather than demand and as a result the pendulum is likely to swing away from sellers and towards buyers. Sponsors able to attack opportunities across the capital structure are already looking at opportunities across buyout, special situations, debt and hybrid or structured strategies as they seek to take advantage of the market reset and the decline in asset values. It is also notable that fundraising in strategies able to deploy capital into market or sector dislocations has attracted significant investor demand in recent weeks and sponsors are moving quickly to build significant war-chests in expectation of near term deployment, suggesting a spike in deal activity may not be far around the corner.
Michael J. Preston
1. Source:-FT article on CVC investment
2. Source:-EQT press release, 10 February 2020