Europe enjoys record second quarter but fears grow(2)

European private equity enjoyed yet another record quarter in the three months from April - but fears are growing that this momentum may not be sustainable.

Increasing deal size has driven the European buyout market to another record level in the second quarter of 2007, according to new research, despite an overall drop in deal volume.

Buyout firms active in Europe completed €62 billion ($85 billion) of transactions in the second quarter, according to the latest edition of the Unquote Barometer, a report published by UK-based buyout firm Candover and Incisive Media. This was the highest quarter on record, up 13 percent from the previous quarter, and took the total value of private equity deals to €116.4 billion in the first half of the year – a 44 percent year-on-year increase.

The record total last quarter came despite a slow-down in deal volume, which fell 18 percent during the quarter. Nonetheless, thanks to the bumper dealflow in Q1, 775 deals were still completed in the first half of the year – another record.

The increase in value was largely due to a continued increase in average deal size, which reached a record high of €334 million last quarter. As ever, this was driven by the top end of the market – the four biggest deals accounted for almost €30 billion, about 50 percent of the total buyout volume.

The €16.3 billion acquisition of health and beauty chain Alliance Boots by Kohlberg Kravis Roberts was the biggest contributor to the total, with the merger between Saga, the insurance to travel group for older consumers, and roadside assistance service the AA adding a further €9 billion. Indeed, the UK was the dominant market for buyout deals during the quarter, seeing a record €36 billion of deals agreed – including four of the biggest five transactions.

However, there is widespread concern that recent problems in the debt markets could spoil the chances of European buyouts breaking the €200 billion mark for the year. Candover managing director Marek Gumienny said: “It remains to be seen if the jittery state of the debt market of the last few days will dampen activity levels for the rest of the year”. If not, he said, another record looks certain to fall.