European private equity market to see solid 2018 on strong fundamentals

Private equity activity is projected to see growth in Europe, according to a new survey by Roland Berger taking in the views of those with significant market experience. France is marked for the highest activity growth, followed by Italy. Targets are likely to be smaller than previous years, while external expertise is most frequently called in for pre-purchase analysis.

The Roland Berger study, titled ‘European Private Equity Outlook 2018’, involved more than 2,500 respondents, many of whom have been in the private equity industry for more than a decade. The respondents were largely concentrated in Germany (26%), Scandinavia (14%) and the United Kingdom (11%).

The research found that around half of the respondents (51%) expect M&A activity from private equity firms to increase in 2018 compared to 2017. Around 41% project growth in the segment to be between 0-10%, while 10% project growth in excess of 10%. Few (21%) respondents expect there to be a decline in M&A activity from private equity firms.

France is projected to see the highest level of individual country growth, at 4.4%, followed by Iberian firms, at 3.8%. Eastern Europe comes in at a positive 3.2%, while the only area projected to see a decline, if somewhat modest in scope, is the UK, down 1.7% for 2018. The decline reflects wider market uncertainties with regard to Brexit negotiations. 

Business sentiment toward increased M&A activity in Europe from private equity firms is partly a result of the availability of attractive acquisition targets, although there is some decline in the number of those who cite this as an influential factor relative to 2017. The overall positive economic situation in Europe was noted by 71% of respondents, with the sentiment growing relative to 2017 on the back of stronger macroeconomic data for the region.

Debt financing has decreased in importance, due in part to tightening markets as the region recovers, while valuation levels – many respondents say that companies are overvalued – is pressuring companies toward inaction. The positive sentiment persists in spite of an expected deterioration in political stability, while competition from strategic investors has also reduced in severity since 2017.

"Sentiment in the private equity industry is good, even though Europe's biggest M&A market, the United Kingdom, is still troubled by uncertainty over the ongoing Brexit negotiations," said Sascha Haghani, CEO DACH region and Head of Restructuring & Corporate Finance at Roland Berger.

The research shows that smaller revenue companies are increasingly targeted – with 65% suggesting that acquisitions of <€100 million companies are more likely in 2018 compared to 2017, while the €100-250 million range is also projected to see slight increase in activity. Larger transactions, in excess of €1 billion are only slightly more likely in 2018, with 35% projecting a slight increase and 30% a slight decrease.

Christof Huth, Partner and Head of Investor Support at Roland Berger, explains that, "Although valuation multiples were in some cases already very high last year, private equity funds are still on the lookout for attractive targets."

In terms of exit channels for 2018, strategic investors are set to slightly increase their acquisition activity (as cited by 56% of respondents), while few respondents believe the segment will decrease in activity. Other private equity firms are also set (cited by 41% of respondents) to pick up targets from private equity firms’ exiting stock. IPO activity comes in third place in terms of positive change, with 41% projecting a slight increase compared to 21% projecting a slight decrease.

The research also found that external consultants tapped for advisory are the most likely to be involved during the acquisition part of the private equity portfolio company lifecycle, while their presence during the early-post acquisition period and portfolio holding period are less common. The pre-exit stage, however, sees private equity firms again call in external experts more frequently, although less frequently than the acquisition stage.