Favorable debt markets, successful fundraisings and a growing appetite for deals have boosted private equity potential across Europe. Financial sponsors are eager to put money to work in several key industries, says Jonathan Bourn, managing director at Robert W. Baird & Co. Inc. Baird’s European investment banking team, which closed more than 60 deals over the last three years, expects M&A volume to pick up in the third and fourth quarters. Mergers & Acquisitions spoke with Bourn, who is based in London, on the breadth of opportunities across Europe.
What’s different about private equity in Europe?
In Europe, there are a couple of phenomena going on. First, there is this massive overhang of private equity funds waiting to be invested. It’s a massive amount of dry powder. If there were no more fundraisings in Europe, with our current level of deal volume, there would still be enough capital to do deals for another three or four years. Second, we’re seeing a rise in the availability of debt whether it’s from traditional lending banks or debt funds. A new debt fund springs up once a day over here. In Europe, investors are basically seeing leveraged loans as a decent place to put their capital. As a result, you’re seeing prices on high-quality assets going through the roof.
Are there any deals that are emblematic of current trends?
In October, we sold talent management services company Alexander Mann Solutions (AMS), which had been owned by Graphite Capital since 2007, to New Mountain Capital for $420 million, or 13 times Ebitda. The deals 2006 and 2007 were being done at high multiples, but financed with a lot of debt. They over-leveraged those businesses. Now, those prices are still being paid, but not being financed with large amounts of debt. Four times debt went into AMS, but nine times equity went into it when it was sold. I would say 13 times Ebitda, or north of 10 times Ebitda, is the new norm for high-quality assets. U.S. private equity firm GTCR bought a business called Callcredit Information Group, a British credit checking agency and consumer data provider, for more than $803 million. That deal happened in February and is a good example of a U.S. fund looking to invest in the European middle market and paying a high price.
Have there been more U.S. funds investing in the U.K.?
Yes. Both of those funds, GTCR and New Mountain Capital, acquired an asset in Europe within the last six months and neither of them have an office in London, let alone Europe. They have had limited experience or exposure to doing deals in Europe, but they see it as a good place to invest. They also see sale processes that are higher touch, which in Europe means your access to management and advisers is much greater.
How has fundraising changed in the U.K.?
The fund raising market in 2011 and 2012, and partly through 2013, was very difficult. There are always exceptions. CVC Capital Partners can raise a fund at the drop of a hat, but the majority found fundraising very difficult. But as of August 2013, there was a sea change or flip. The fundraising market had become easier and funds are raising money again. That has been partially driven by U.S. investors willing to invest in the U.K. There was this realization that the Eurozone crisis is no longer a crisis. It’s no longer a dirty word. They’re more comfortable and prepared to invest. If you roll back to 2011, people were out fundraising and if they were lucky enough to get a meeting with a limited partner, they’d ask, “What’s the economic situation?” That’s no longer a topic.
Where do you see the most activity taking place?
I think there is going to be an increase in deal activity, but there are two extremes. High-end luxury is doing well, and so are low-end consumer goods. But if you’re caught in the middle, it’s a disaster. There are far too many competitors out there. If you’re high-end, you’re differentiating yourself as far as quality of the brand and if you’re in the low-end, you’re competing on price. If you’re in the middle there’s limited differentiation. Clayton Dubilier & Rice LLC has bought into a number of low-end retail value concepts, including B&M Retail Ltd. in 2012. Since then, it has performed really well.
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