Europe heats up

Deal activity in Europe has picked up this year, with some countries like the UK and France more open to private equity opportunities than others, writes Buchan Scott.

European private equity is back on track after a period of lackluster activity. Successful fundraisings and decent exits from pre-credit crunch acquisitions are demonstrating that private equity is going to be an important part of economic recovery in Europe.

Private equity’s share of the UK M&A market has bounced to the heady levels of 2006, up to a handsome 73% in 2010, against just 28% last year. In the UK, average deal values, according to KPMG, are back to 2006 levels of around £180m. In Q2 2010, 95 deals fetched average multiples of more than 11x EBITDA. In France, private equity’s M&A share is up to 64% in the third quarter of 2010, according to CFNews, with a large proportion of high profile deals also trading at 11x EBITDA, according to Argos Mid-Market Index for June 2010.

But activity is not spread across the board and cultural norms persist.

Compared to the rest of Europe, a two-tiered private equity market has emerged in the UK and France – the most developed buyout markets in Europe – while Germany and Italy remain far more averse to changes in business ownership.


This first tier is made up of larger companies auctioned through competitive processes at racy multiples. Activity is driven by an estimated €137bn (€161 billion; $219 billion) capital overhang of European private equity funds under pressure to invest. The ‘willing sellers’ market, with private equity houses looking to deliver early exits of their best portfolio companies before fundraising, has led to a bubble characterised by pre-Lehman multiples and a record number of secondary and tertiary deals.

The second tier consists of smaller companies acquired outside competitive processes at more moderate multiples. Within this tier, there are many good businesses that aren’t suitable for auctions today, however more attractive pricing is attainable and it is traditionally where, in previous downturns, excellent post-recession vintages have been formed. The trick is to find these businesses and develop them, so that they can be made auctionable in the near future.

The four acquisitions Duke Street has completed so far this year have been in this second tier- completed outside competitive processes at an aggregate multiple of 5x EBITDA. Results can be rewarding – the four businesses we’ve sold post-Lehman were at an aggregate 9x EBITDA.

Naturally, some countries are more pre-disposed to private equity than others. Post-downturn, the UK and France have been the most active players in Europe. France in particular, has had a good downturn. Its socialist legacy has meant that it never became overheated or overly cooled as a market. The huge weight of civil servants and the low household debt levels are strong shock absorbers for French consumer demand.

Also, the main reason for heightened UK and French private equity activity is the propensity for close links to managers, especially useful when acquiring companies off market. Experienced UK and French managers are more predisposed to partnering with private equity in smaller companies than in other European countries.

Germany has the potential to be a huge market for private equity, but experienced German managers are pre-disposed to being executives in large, established groups or to stay in family-owned companies, than to partner with a buyout house. In Italy, the family-owned company is still very important. Managers prefer not to partner with foreign financial investors and instead keep it in the family.

A strong, hands-on operational model is key to yielding absolute returns for PE holders, via a transformational approach. The focus on value creation is even more important as GDP in Western Europe is likely to grow moderately over the next couple of years, addressing the challenge of achieving high growth in a low growth environment.

UK and France are expected to at least maintain or increase current private equity deal activity for some time to come and, for those managers not turned off by complex deals and ready to get their hands dirty to transform a company, there is a clear path to strong returns.

Buchan Scott is a partner with Duke Street.