Following four years of solid economic recovery in the European private equity deal-making environment, PE firms appear to be taking a major step back. According to PitchBook’s upcoming 2Q 2014 European PE Breakdown, to be released tomorrow, 1Q 2014 marked the third consecutive quarterly decline in European PE deal count. €37 billion was invested across 532 transactions in the first quarter, a noticeable decline from 595 deals in 4Q 2013 and 802 in 2Q 2013. The decline in deal flow in recent quarters coincides with a decline in exit counts. The first quarter recorded 136 liquidity events and €17.1 billion of capital exited; both figures were down substantially from 4Q 2013 (€27 billion across 163 exits) and represented a 36% quarterly drop in terms of exit counts.
Will European PE activity pick up in the second half of 2014?
Why the decline? Despite the ongoing recovery in Europe, investors are no doubt concerned by the lack of major progress in resolving budget deficits and generating economic growth, both of which are crucial for PE investments to succeed in the long run. That’s especially true in hard-hit countries like Spain, Portugal, Italy, Greece and France, the latter of which is on pace to see its 2014 deal flow cut in half from 2011 levels. But the decline in activity was widespread in 1Q 2014, as every region in Europe recorded a decline in deal flow from 1Q 2013 levels.
It’s hard to see the trend lasting very long, however, particularly for private equity investors. The number of distressed companies in the region that could benefit from private equity know-how is huge. On one level, we’re already seeing investors take advantage of the deflated European economy, as evidenced by a visible increase in bolt-on activity. Between 2012 and 2013, bolt-on acquisitions jumped by 17%, and 1Q put 2014 on pace for another year-over-year increase. The increase in acquisitive growth likely reflects an effort by investors to take advantage of smaller distressed companies, which may operate more productively as subsidiaries of platform companies rather than independently.
Outside of bolt-ons, we still anticipate a gradual increase in deal activity on the continent, given the huge amount of capital that was raised by GPs in 2013. The 119 vehicles that closed last year raised €66.2 billion from limited partners, which was more than double the €27.8 billion raised in 2012. Much of that capital is going toward funds targeting safer areas like the U.K. & Ireland and Nordic regions. There’s been increasing discussions, though, of LPs expressing interest in more depressed economies like Spain, Portugal and Italy. Several U.S. college endowments and pension funds are said to be upping their exposure to the continent in the near future. If that’s the case, increases in deal flow and capital invested can’t be far behind.
Featured image courtesy of Wikimedia Commons user Alan Eisen.
To be released Wednesday, May 28th, PitchBook’s 2Q 2014 European PE Breakdown investigates recent private equity, venture capital and growth investment activity on the continent, as well as exits and fundraising numbers and a regional breakdown. League tables for the most active investors, lenders and law firms in the first quarter are also included. There are a few ways you can download the report: read tomorrow’s PitchBook newsletter, where a download link will be provided; visit the PitchBook library tomorrow; or fill out the email form below.
Interested in receiving the report? Enter your email address below and we’ll send you a copy of the report.