A tale of two European private equity markets, finds Bain & Company's 2013 Global Private Equity Report



North Holds Ground, but Deal-Making Activity in South “Crippled” by Sovereign Debt Woes and Austerity Measures; “Dry Powder” Aimed Toward Emerging Markets Surpasses Western Europe

New York, NY—March 4, 2013— Private equity’s (PE) top story in Europe in 2012 was the weakness of deal-making in what has traditionally been one of the industry’s strongest markets; this according to the fourth annual edition of the bellwether report on the state of the industry, released today by Bain & Company, the world’s leading advisor to PE investors.  According to the report, the European PE market in 2012 was anything but unified.  For the region overall, buyout deal count was off by seven percent from 2011 levels; deal value declined by 19 percent.  But those averages masked a sharply divergent experience between a reasonably healthy North and a moribund South.  PE was drawn deeper into the vortex of sovereign-debt woes, rising taxes and budget austerity that crippled deal-making activity in Italy (buyout deal value in 2012 was down 71 percent versus 2011), Spain (-27 percent) and France (-74 percent); this versus deal activity in Germany (buyout deal value in 2012 was +105 percent versus 2011), which held up under a strong economy, and in the UK (+34 percent), where the reign of the pound has largely kept investors above the euro-zone fray.

“Buyers and sellers need to coalesce around a common and realistic view about the region’s longer-term growth prospects in order to bring prices down to levels that are more likely to clear the market,” said Graham Elton, head of Bain’s Private Equity Practice in the EMEA region.  “For activity to pick up substantially in the year ahead, PE funds would need to see stronger economic growth for the region.”

PE in Europe had moved in lockstep with North America in recent years, but that pattern broke last year, as North America is showing signs of a PE revival.  The report finds that the most motivated parties on each side of the transactions that closed in Europe last year were generally PE funds themselves—the sellers eager to take advantage of premium prices in order to return capital to their limited partners and the buyers looking to put dry powder to work.  When the books closed on 2012, therefore, a record 61 percent of European buyout deal value was in sponsor-to-sponsor deals, which Bain estimates will continue as the likeliest source of deal activity for the foreseeable future.

Other key findings from the Bain report:

  • Deal-making activity in Asia-Pacific treaded water in 2012, as Chinese and Indian PE markets hit a growth wall—leaving Brazil as the best-positioned of the key emerging markets, still attracting capital and presenting the opportunity for truly proprietary deals
  • Energy and healthcare, both growth sectors, are attracting a lot of interest.  In Europe, PE acquirers looked for healthcare assets, like nursing homes and medical laboratories that would enable them to take advantage of more efficient purchasing of supplies across country borders.  The hottest draw in energy, according to Bain, is the oil and gas sector.  Many PE acquirers are staking out claims in oilfield equipment and services, which accounted for 45 percent of oil and gas deals in 2012, and will likely remain a mainstay of oil patch deal making going forward
  • With the “exit overhang” now standing at more at $2 trillion globally the rising tide of corporate M&A may create new paths to exit, as strategic acquirers look for new targets
  • The pressure for limited partners (LPs) to boost returns and the need for general partners (GPs) to secure capital is leading the two parties to experiment with a range of new ways to work together – including separate accounts, non-traditional fund models, and direct investment programs
  • Fundraising will continue to be challenging, as LPs are not in a position to commit significantly more capital in 2013 versus 2012 and the number of funds on the road seeking capital is near the all-time high
  • One-third of the 8,000 realized buyout deals that passed through PE funds created 80 percent of the total returns generated—a pattern which held for European deals

“Notwithstanding Europe’s problematic macroeconomic outlook, nimble PE acquirers that are careful not to overpay for assets and have a repeatable model for value creation will be able to ferret out attractive investment opportunities in 2013 and beyond,” concludes Elton.  

Editor’s Note:  To obtain a copy of Bain & Company’s “2013 Global Private Equity Report” or to arrange an interview with one of the report authors, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.

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