The mood was sanguine at a gathering of industry experts in London recently for Private Equity International’s European mid-market roundtable. Participants were in no doubt that a downturn is on the way.
“We will have another crisis,” said Philippe Poletti, head of mid-cap buyout at Ardian.
“Cycles are reducing, so we could have a crisis every three years. Our job is to make sure that we’re taking that into consideration in our models, in the debt that we put in. Probably one of the big changes in our job is that having five years in a row without issue might be difficult in the future.”
Malcolm Hassan, head of fund and asset management sector at Royal Bank of Scotland, added: “[The market] will turn, the question is when and whether or not the cycle will effectively speed up. Standard deviation from the top to the bottom actually might be a little shallower. Ultimately, I think and hope it will shorten from the typical 7-10 years and be a little less volatile going forward.”
While robust pricing will mean the environment for exits is likely to remain favourable, the exiting spree which Europe has enjoyed over the last couple of years is expected to slow.
“What is going to change this year is that public market volatility will make listing less desirable as an option for exit,” said Bilge Ogut, a managing director and head of private equity Europe at Partners Group.
“Many sponsors will be quite uncomfortable with the issues around volatility – both price certainty and listing certainty – and may prefer to get money off the table in a negotiated transaction. People are going to be looking for more deal certainty over price. But I think there are sufficient buyers for the exit climate to hold up overall.”
Tom Salmon, a director at 3i Group, agreed: “The dynamics in terms of supply of capital, in terms of volume of competition, they are going to sustain pricing. Who knows exactly where it’s going to go, but I don’t see it being any less of an attractive market.”
When asked about particular macro concerns for 2016, the panellists answered in one voice: “Brexit”.
“Whether anything actually materially changes as a result of Cameron’s negotiations [held with European leaders in mid-February], there will be that period of uncertainty in the run-up to any referendum, so we may see dealflow subdued and people adopting a ‘wait-and-see’ approach,” said Mark Nicolson, a partner at SL Capital Partners. “Realistically, I’m not sure anybody believes that Britain will leave, and so it may just be a lull in activity and then an acceleration thereafter.”
There was also a consensus that quantitative easing must continue to uphold economic stability and portfolio companies’ prosperity in the region.
“Hopefully [QE] will be a lever by which we could actually ensure the continual upwards trajectory across Europe,” Hassan said.
The participants agreed that managers will need to pick up the pace on deployment in 2016. However, with valuations expected to remain high, managers must have a clear plan going into an investment of how they’re going to deliver the returns their investors expect.
Creative deal tactics are one way managers can secure assets at a fair price, said Salmon.
“We have equity underwritten a number of recent deals and then refinanced thereafter, and certainty and speed of execution has won us deals where we haven’t been the highest bidder,” he said. “When we’re looking at potential investment opportunities, we are certainly thinking about levers right across commercial, operational and financing.”
With today’s entry multiples in mind, the GPs around the table agree that old-fashioned leveraged buyouts won’t cut it.
“We have to be sensible, active shareholders who think very much about what the business will look like when we sell it rather than just arranging an attractive financing package to continue to own the business as-is,” Ogut said.
Look out for the full European mid-market roundtable, featuring 3i Group, Ardian, Partners Group, Royal Bank of Scotland and SL Capital Partners in the March issue of Private Equity International.