European deal activity plunges to 15 year low

European private equity activity collapsed to its lowest level in 15 years in the fourth quarter last year, highlighting the impact of all the economic uncertainty in the latter half of 2011.

The private equity industry in Europe has been hit hard by the political and economic crisis in the Eurozone, according to new deal data from Arle Capital Partners.

After a strong first half last year in Europe, when private equity firms sealed 626 deals worth a combined €45.2 billion, activity fell sharply in the second half: 433 deals were agreed, totalling €27.5 billion. The fall from third to fourth quarter was particularly pronounced – from 241 deals worth €17 billion to 192 worth €10.5 billion. That fourth quarter deal count represents the lowest number since Q2 in 1996, according to Arle and partner unquote, which helped to produce the report.

Compared to 2010, the overall figures for 2011 constitute an 11.5 percent fall in deal volume. Despite an increase in the number of larger (€1 billion or more) deals – 15, up from 12 in 2010 – the total value of deals also fell.

John Arney, managing director at Arle, said: “It should come as no surprise that the stream of first half activity became a meagre trickle by the final quarter of 2011. The Eurozone sovereign debt crisis, the resultant economic frailty and the scarcity of available leverage finance conspired to delay or wreck a significant number of transactions. The outlook for the first quarter of 2012 is for more of the same.

“However, these issues will eventually subside and with private equity managers looking to deploy committed capital ahead of approaching expiry dates, there is considerable pent-up demand for new deals. I would expect secondary buyout activity to lead the way as leveraged buyout lenders maintain their bias towards more responsible borrowers.

“The challenge for private equity owners is the search for increasingly elusive growth. Lateral thinking and a highly active approach to ownership is essential, given that performance-enhancing boosts from unnatural levels of debt remain firmly off the table.”

Buyouts, as opposed to growth capital and early-stage investments, proved to be the most robust segment of the private equity market, Arle said. While growth capital deals over the whole of 2011 showed a 23 percent decline in volume (and 36 percent fall in value) compared to 2010, and venture capital or early-stage investments declined by 15 percent in volume terms and 22 percent in value terms, buyout volumes rose 6 percent.

The value of buyout deals also remained steady, Arle said, largely due to a number of larger deals: Apax Partners' acquisition of Orange Switzerland for €1.6 billion was the largest fourth quarter transaction, ahead of Apollo's €1.2 billion buyout of Taminco and Kohlberg Kravis Roberts' €794 million acquisition of Capital Safety Group.

However, dealflow slumped in the fourth quarter, falling by 31 percent from Q3 to just 79 deals. It's the first time since Arle began its quarterly barometer that the industry has failed to post 100 deals in a quarter.

Geographically, the UK remained the most popular market, with 34 deals in Q3 and 26 in Q4. That put it ahead of France (15 deals in Q4), the Nordic region (9) and the German-speaking region (16). In value terms, UK deals totalled €3.5 billion and €2.1 billion respectively, again making it the highest in Europe.

For further analysis of private equity in 2011, please look out for our Annual Review, due with the March issue of PEI.