European PE Shops Face the Same Challenges as U.S. Peers

January 2018

European private equity trends are increasingly mirroring those seen in the U.S., including the extreme competition for deals and the mismatch in buyers’ and sellers’ price expectations.

The vast majority of non U.S.-based fund managers[1] who participated in BDO’s Ninth Annual Private Equity PErspective Survey are based in Europe. And just like their U.S.-based peers, most of which are based in the Northeast and especially in New York, they are concerned about the gap between buyer and seller price expectations, with 42 percent of survey respondents deeming it the main challenge to getting deals done.

Also, 32 percent of international fund managers point to increased competition from private equity peers, just like in the U.S.

It’s the same story repeating itself on both sides of the Atlantic: a strong fundraising environment and easy access to leveraged loans with loose covenants is driving up both asset valuations and competition for quality deals.

Fundraising in Europe hit €74.5 billion in 2016, a 37 percent increase over the previous year and the largest amount since 2008, according to Invest Europe. That amount was collected by 74 funds, also the highest number since 2008.

Meanwhile, the use of covenant-lite leveraged loans, once rare in Europe, has skyrocketed. As of May 2017, cov-lite loans, which offer little protection to lenders, made up almost 73 percent of all European loan supply, according to data compiled by Standard & Poor’s LCD. This is well above the 55 percent share seen at the same point last year. The year’s European cov-lite share is nearing the U.S. record set in 2016, when such deals accounted for 75 percent of all volume, LCD notes.

These factors, in turn, are driving up valuations. According to Fitch Ratings, buyout firms in Europe paid an average of 11.6 times EBITDA for targets in the first half of 2017, up from an average of 10 times EBITDA seen the previous year.

But the show must go on, so just like their U.S. peers, international fund managers intend to continue seeking acquisition opportunities, with 79 percent of respondents already directing most of their capital toward new deals. About 82 percent of them plan to make between one and four new platform deals in the next 12 months.

Whatever number of acquisitions they do manage to close, one thing is certain: they will likely have to hold on to these investments longer than usual, with 58 percent of international respondents expecting investment periods to increase.

[1] International fund managers comprised about 35% of the respondents