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European Buy-outs

Real DealsEurope’s buy-out houses have just enjoyed an “annus mirabilis” as leveraged buy-outs have swelled on the back of liquid debt markets and plentiful institutional funds. And there are appears to be no let-up. We’ve just published, in association with Bridgepoint, our annual European Buy-out Review. Here’s what some leading figures had to say:

I can’t remember a time in the past decade when the economic landscape for private equity deals was so good”
Alan Mackay, head of European buy-outs, 3i

“Last year there were 32 deals worth more than €1bn and we expect that to increase in 2006.”
Larry Slaughter, managing director, JP Morgan

I’ll talk about some of the technical trends in another post but it’s worth noting how the market – as a geographic region – is altering.

Just five years ago, the UK market accounted for more than half the value of European buy-outs. Now it’s less than one-third. As the most mature market, the level of buy-out investment has remained steady in the UK but the number of actual deals has dropped sharply – from 694 in 2004 to 571 in 2005.

The Spanish market has been home to some of the biggest deals in 2005, such as the €2.25bn buy-out of fixed line telco Auna and the €4.05bn buy-out of Amadeus Global Travel Distribution. These mega-deals may be kickstarting activity lower down the chain among Spain’s family-owned businesses.

Italy’s buy-out market is small compared to the size of its economy.

And 2005 was the promising year so far for German private equity. Our calculations don’t include the enormous – but unusual – private equity deals in German real estate (again, more anon).

10 Real Deals' 2006 predictions

P01cover120106 The sensible thing to do when making predictions for Europe’s private equity market in 2006 would be to offer a pessimistic, if not apocalyptic, prophecy. Conditions in recent times have been so good – for buy-outs at least – that it would be sensible to bet that things will deteriorate.

On that basis, many of Real Deals’ predictions for 2006 are risky. However, they are also non-alarmist forecasts, with only a prudent degree of fence-sitting. Predictions do not account for a
bird flu pandemic or similar disaster.

1 Debt markets will not implode, but may correct slightly
The hysteria that has surrounded a “debt bubble” for much of this year is looking increasingly misplaced. Bubbles burst. Debt markets are cyclical and so appetite for LBO paper, which has
mushroomed over the past two years, will fall back eventually. But supply remains strong, and if there are a few “high-profile defaults” there are plenty of debt providers waiting to fill any gaps
in the market.

2 Unwins does not hail the start of a bankruptcy wave
The turn of the year saw several retailers file for administration. While the default rate is likely to rise, it does not presage a flood of leveraged buy-out bankruptcies. Even if the macro-economic
outlook worsens, equity houses and creditors will work together quickly to mend them, as they have done during 2005. The ability to detect and respond quickly to problems is what sets most buy-outs apart from Unwins.

3 More turnaround and special situations funds will be launched
EQT has already seen the opportunity and others are likely to follow suit. But the skills for turnaround investing are different to mainstream private equity, and expertise may need to be bought in.

4 More private individuals will become involved in private equity
More ultra-rich individuals will want a slice of private equity’s pie. Some will want to lead, others will be happy to sit back and silently co-invest alongside big buy-out houses. Expect more to follow
in the footsteps of Philip Green, Richard Branson, the Barclay brothers, Hugh Osmond and Luke Johnson.

5 Hedge funds will not pose a serious threat to private equity
They just won’t. Maybe on take-privates, but nowhere else.

6 The biggest LBO in Europe will exceed €20bn
Danish telco TDC is unlikely to hold its record for the largest buy-out in Europe for long. By 2007, expect a consortium of the world’s largest buy-out houses to complete Europe’s first €20bn-plus deal. And it’s a fairly safe bet that one of the big US houses – KKR, Blackstone, Carlyle – will be the ringleader.

7 At least one FTSE 100 company will be taken private
It’s not just about big funds or red tape. It’s also about values and overweighting. The FTSE 100 is running at a price/earnings ratio of 11; the figure for the FTSE 250 is 14; and the FTSE 350 is
at 11. In other words, the value in the market is currently in the FTSE 250, while FTSE 100 companies are clearly regarded as too big.

8 The best tech venture capital firms will start to raise large funds
This year will see a handful of elite VCs raise several hundred million euros each. But for most second-tier funds, 2006 will be make or break as fees run out, and they struggle to show exits to
institutional investors.

9 Venture firms will consolidate
And yes, that is consolidate rather than fade away. While the purchase of entire portfolios has long been thought of as too clunky and complex, in the latest edition of Real Deals alone, two venture portfolios have been bought by secondaries players. That is good news for long-suffering LPs.

10 Investors will re-buy more assets
Just as LPs come to terms with the logic of secondary buy-outs, buy-out houses start a trend that is even harder to justify: that of buying back the same businesses having sold it to another firm. This allows the other firm to profit, in addition to the fee argument of secondary buy-outs. As churn gets
to pandemic proportions, expect more buy-backs along the lines of PHS, Frans Bonhomme, Actaris and Aster City Cable.

Thoughts?

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