Q1 in Europe has seen a slower than anticipated volume of private equity transactions completed. What are the influencing factors and how will this shape the remainder of the year?
Preqin reports that 2013 (globally) saw the highest aggregate amount of capital raised by private equity firms since 2008*. This is counter to the perception that fundraising has been difficult. However, the perceived wisdom is that debutant funds will continue to find it hard to persuade investors to part with capital on the old blind pool model. These investors are being more selective, with the increased choice available, as supply outstrips demand. This will cause a splintering off of deal by deal vehicles, as “virgin” fund managers seek to develop a track record before returning to the market.
In the UK, Mr Carney’s forward looking statement appears to have settled anxiety about interest rate hikes and that, in turn, would seem to have helped to maintain a sense of calm in the M&A market. The general election looming large on the horizon threatens to disrupt the current status and we anticipate a frenzy of deal activity in the second half of 2014 before uncertainty returns.
Another feature having an influence is the relatively strong performance of the FTSE encouraging PE backed companies to consider the equity capital markets for exit/fundraising (where multiples seem to be higher) and the comparative strength of the pound fostering a sense of purchasing power. This has strengthened the resolve of owner managers who, if they have been delaying the start of “processes” to sell their companies, are now more committed to do so than for a long time. The retail banking community is, for the first time, facing competition from unitranche and other alternative debt providers, and there is definitely leverage finance available to support acquisition bids. If the pricing expectation of sellers can be matched more closely to the requirement of fund managers, July–December 2014 could be a very active period for our industry.
* 873 funds reaching a final close and raising in the aggregate of $454bn.