Platform deals are the new buyout in Europe

European buy and build activity in Europe surged to an eight-year high in the first half of the year, according to a report from Silverfleet Capital.

A total 325 add on deals were completed in the six months to 1 July, up from 204 over the same period last year, the data show.

The UK and Ireland accounted for the largest proportion of market activity, with 57 deals. The number of transactions in the Nordics almost doubled at 53, compared with 28 in the second half of 2015.

The largest drop in add-on acquisitions took place in Spain and Portugal with only seven transactions in the first half of 2016 compared with 20 in H2 2015.

Average deal size also grew by £8 million (€9.3 million: $9.88 million) compared to the second half of 2015 to £53 million.

“The findings show that add-ons by Eurpoean private equity-backed companies have risen much faster than the buyout market, which has been almost flat. Historically the volume of add-on deals has been strongly correlated with the volume of private equity funded buyouts in Europe and has broadly tracked the trend in the mid-market M&A index,” the report said.

The two largest add-on acquisitions were both in financial services. Permira-backed Tilney Bestinvest acquired Palamon-backed Towry in a £600m transaction, while Nordic Capital’s Norway-based Lindorff entered the Spanish property non-performing loans market by adding on Centerbridge’s Aktua in a deal worth £246 million.

“In an increasingly expensive but flat buyout market, it’s clear that private equity firms are strongly encouraging their portfolio companies to make add-on acquisitions to help average down high entry prices, drive EBITDA growth and generate investment returns. The benign debt markets over the period no doubt helped to facilitate this increase,” Neil MacDougall, managing partner of Silverfleet Capital said.

Beyond Europe

Outside Europe, North America continued to be the favourite target for add-ons with 22 deals recorded, over double the 10 for Asia Pacific. Despite being Latin America’s largest economy and increasingly seen as a resurgent private equity market, only one add-on was completed in Brazil from a total of five in the entire region, a probable reflection of its current political and financial problems.

In the US, as in Europe, private equity firms have been adapting to new highs in asset valuations by focusing more on les pricy add-on acquisitions.

“The market in 2016 continued to be very strong, perhaps overpriced, but with opportunities to find value if you looked hard enough,” Béla Szigethy, co-chief executive of Riverside Company, told PEI.

He noted that valuations for mid-market companies on average reached 11X EBITDA in 2016, while valuations for add-ons were closer to 6X EBITDA. “Add-ons are required today to get the blended purchase multiples down,” he says, adding that add-on acquisitions also help contribute to the growth of an existing company. “It’s such a predictable value-creation driver.”

As a result, out of the 58 transactions completed by Riverside as of mid November, 34 were add-on acquisitions. This is a trend happening not just in the mid-market but in the US private equity market overall, as add-on acquisitions represented 64 percent of all buyout transactions in 2016, according to data from Pitchbook.

Marine Cole contributed to this report