European dealflow shows weak Q2 performance

During the second quarter European private equity and venture capital activity declined both in total volume and deal value.

Figures published by Initiative Europe show that European private equity and venture capital is still subject to a high level of uncertainty with activity across all sectors declining for the fifth consecutive quarter.

The Initiative Europe figures show a sharp decline occurred in buyout activity, which has fallen from a high of E22.9bn in Q2 2001 to E5.2bn in the three months to the end of June 2002, a drop of nearly 80 per cent in the past twelve months. The lack of ‘mega buyouts’ is the primary driving force behind this decline, with the E1.2bn buyout of Vivendi Universal Publishing by a consortium comprising Apax, Cinven and Carlyle representing the only transaction to surpass the E1bn mark in Q2.

Reduced valuations have not led to an increase in deal activity as had been anticipated. Much emphasis was placed on a possible increase in deal flow as companies seek more realistic prices for their disposals. However, the second quarter saw a small decline in completed transactions, from 64 in Q1 to 57 last quarter, suggesting that for the time being at least, lower valuations are not having the desired knock-on effect on what remains a cautious market.

The principal catalyst for an upturn in activity over the coming year is likely to be the sharp increase in funds raised in the last quarter. Initiative Europe reports that E12.8bn was raised for European investment in Q2, an increase of E9.8bn on the figure raised in Q1. Warburg Pincus ($5.3bn), Cinven (E4.4bn), Bridgepoint Capital (E2bn) and Candover (E2.7bn) will all be looking to make investments from their respective funds in the near future. The main concern for most firms is to avoid the recent spate of auctions which has led to an increase in valuations at the top end.

A number of transactions currently pending could significantly boost deal value in the third quarter. Already this quarter EQT Partners completed the acquisition of Bayer’s manufacturing business in a E1.7bn deal to merge it with German company Dragoco. Deals likely to complete this quarter include KKR’s impending acquisition of electronics firm Legrand in a deal worth at least E3.5bn. Other transactions include the $2bn-plus sale by Diageo of Burger King and the ongoing public-to-private deal to acquire Irish packaging firm Jefferson Smurfit, for a price in the region of E3.7bn.