Garrett Black May 14, 2014
The number of carveouts in Europe hit a seven-year high last year, according to PitchBook data, and they should continue to rise for the foreseeable future. Carveouts are uniquely situated to benefit both from economic insecurity and confidence, and so in Europe, it makes sense that carveouts are more popular, as businesses are bouncing back, while high unemployment levels are still leaving consumers languid.
It’s easy to chalk up the increased activity to stronger investor confidence and corporations’ willingness to divest operations to focus on core businesses. Yet that assertion is overly simplistic; according to the European Commission, capital flows still trouble financial markets and high levels of unemployment still threaten consumer demand.
Why the sudden comeback, then? If times are good, as the PitchBook blog has noted before, corporations may wish to shed bloated operations to refocus on their most profitable divisions. Yet, as management consulting firm A.T. Kearney states, carveouts in uncertain times can provide sellers with much-needed cash and also provide acquirers not only platforms for growth but also investment opportunities with less competition. They also fit neatly into the rise of the buy-and-build strategy PE firms are increasingly adopting, their difficulty outweighed by their possible returns. As Blue Wolf Capital managing partner Adam Blumenthal states, carveouts can be “the ultimate win-win”.
Even if economic recovery in Europe is threatened—for instance, by trade sanctions against Russia—carveouts should stay strong, as corporations divest to raise cash for the short-term. Lagging investor enthusiasm and a lack of availability of funds can both slow the number of carveouts; however, both are in good supply, according to a recent PwC report and PitchBook data on fundraising trends in Europe. For example, on the investor enthusiasm front, Triton has agreed to purchase Alstom’s auxiliary components biz for €730 million ($1 billion), as well as GEA Heat Exchangers for €1.3 billion. And as for available capital, given the €66.2 billion raised in 2013 by PE firms in Europe, all should be well in the near future.
It’s also worth noting that B2B carveouts have been increasing considerably as a share of overall European carveouts over the last few years, in addition to financial services. This is the opposite of what we’re seeing with B2C carveouts, which have decreased the most. Since the global financial crisis, businesses around the world have recovered far quicker and stronger than consumers, and Europe is no exception. PE firms are probably leery of investing in B2C companies until unemployment drops and more Europeans are back in the workforce. Hence, as carveouts continue to steadily grow in Europe, they will most likely be in B2B and other sectors not quite as reliant on consumer confidence.
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