There is one issue that has eclipsed all others in the European private equity market this year: Brexit.
The timing of the UK’s referendum on EU membership – slap-bang in the middle of the year – meant the whole year was adversely affected, with dealmakers sitting on their hands in anticipation of the vote and then taking time to digest the unexpected outcome.
Brexit seems to have taken a particular toll on the large-cap end of the market, with just 10 deals worth more than €1 billion closing across the continent, down from 20 in 2015, according to data from the Centre for Management Buyout Research sponsored by Equistone Partners Europe and Investec Specialist Bank.
“The referendum outcome has clearly had a material impact on the buyout market, the UK in particular, with the numbers reflecting a significant decline in mega-deals in the wake of the Brexit vote,” said Christian Marriott, partner at Equistone.
Studies have shown that UK dealflow in the lower mid-market has remained robust. Several UK-focused funds have closed above target, including Livingbridge’s eighth fund, which closed on £660 million ($820 million; €784 million). This makes it almost twice the size of its 2012 predecessor, Mayfair Equity Partners’ debut fund, which gathered £400 million, and CBPE’s ninth fund, which closed on its £459 million hard-cap.
However, despite this apparent support from investors, the LP community is cautious.
We conducted a poll in the days following the referendum, which revealed more than 55 percent of LPs thought Brexit would have a negative impact on their business. More than 40 percent said they would decrease their commitments to UK-focused funds, and almost one in 10 was considering selling stakes in UK-focused funds.
Similarly, almost three quarters of LP respondents to Coller Capital’s Global Private Equity Barometer Winter 2016-17 said a “hard” Brexit – a decisive separation of the UK from the EU involving significant restrictions on the UK’s access to the EU single market and strong immigration curbs – would have a negative impact on the UK, and 64 percent believed it would negatively impact the EU.
Despite concerns it is becoming harder and harder to generate robust returns, private equity has proved as popular as ever across Europe, delivering another strong fundraising year; by mid-December, just over $400 billion had been raised globally, of which almost $70 billion was for 117 Europe-focused funds, according to PEI data. This compares to $76 billion raised for 107 Europe-focused funds in 2015.
The year saw many European heavy-hitters returning to market, including Cinven, Permira, Apax Partners and BC Partners. The 10 largest funds raised for Europe in 2016 accounted for almost half the year’s fundraising total.
In fact, throughout 2016 the investor community has lamented that the balance of power in fundraising negotiations has remained firmly tipped in favour of GPs, sharing tales of sky-high carried interest, eradicated hurdle rates and trebling fund sizes betraying a lack of discipline in the face of cash-rich LPs.