LBO sell-off to blame for Europe’s dealmaking slump – report

A recent dip in secondary market pricing for leveraged loans and high-yield bonds has made financing costs too high in Q1, according to PitchBook data.

A sell-off in the leveraged loan market has contributed to a decline in European private equity dealmaking, according to research from PitchBook.

Firms spent €65.7 billion across 674 deals in the first quarter of this year, down 26.8 percent and 34.2 percent year-on-year respectively, according to the data and research firm’s latest European PE Breakdown. Only three mega-deals – those above €1 billion – closed last quarter, the lowest figure in three years.

Many fund managers have postponed deals due to a recent dip in secondary market pricing for leveraged loans and high-yield bonds, which made financing costs too high during much of the quarter, the report noted.

“Banks, even more so in Europe, will certainly be more reticent to lend if they can’t syndicate a loan,” Nizar Tarhuni, director of research & analysis at PitchBook, told Private Equity International.

“A higher interest rate could be charged to compensate for the risk, but in today’s market, we see more hesitancy to even place loans past certain leverage levels,” Tarhuni added. “This trend in the US has spurred an uptick in non-bank lenders, and we think we are starting to see a little more of that in the European region as well as regulators pay close attention to the leverage bank lenders provide.”

Less than 1 percent of loans were trading at par or higher in the fourth quarter of last year, the lowest such share since April 2009, according to LCD, part of S&P Global Market Intelligence. By comparison, 64 percent of loans were priced over par at the end of September.

Valuations may also have contributed to firms’ reluctance to spend. The median European buyout multiple was 11.5x over the past four quarters, the highest figure on record, the PitchBook report noted.

Several deals closed above 10x last quarter, including Ardian’s €200 million buyout of beverage dispensing equipment manufacturer Celli at 11.8x.

Switzerland-headquartered Partners Group adopted a “more neutral” view of private equity in November as pricing and competition diminished its appeal.

Apax Global Alpha, the listed private equity trust of London-headquartered Apax Partners, said in August that the pace of new investments being made by the funds in its private equity portfolio slowed during the six months to 30 June 2018 amid “expensive” market pricing.