“Uncertainty” has been the name of the game in European private equity during 2016 as industry participants first anticipated and then digested the outcome of the UK’s referendum on EU membership.
Despite this, industry experts predict dealflow will pick up as we move into the new year.
1. Uncertainty will drive dealflow
With major elections across the EU scheduled for next year, not to mention the ongoing Brexit negotiations and expected triggering of Article 50 of the Treaty on EU, uncertainty and volatility will remain key characteristics. However, the ensuing market dislocation is expected to produce some interesting opportunities for buyers.
“The US elections and Brexit will lead to changes that create opportunities in the middle market,” said Mounir Guen, chief executive at placement agent MVision.
Tristan Nagler, managing director at Aurelius Investments, added: “While private equity-led deal activity on the whole has been impacted by the recent political environment, namely Brexit and the result of the US election, the resulting volatility has provided an excellent backdrop for special situation investors.”
Philip Sanderson, a private equity partner at Ropes & Gray, said transaction volumes were likely to be augmented in 2017 by processes which were delayed in 2016 as a result of the EU referendum.
“On top of this, many sellers which have plans to make sales in 2018 are talking about bringing the processes forward to next year,” said. “So 2017 could bring M&A supply and demand closer together than it has been for a number of relatively lean years.”
2. Valuation multiples will contract
In some ways, private equity is becoming a victim of its own success: significant outperformance versus other asset classes has attracted more and more investors which, while causing a fundraising boom, has driven up asset prices.
For the second year in a row, European LP respondents to the PEI Perspectives 2017 survey indicated that extreme market valuations are a major concern.
At a media briefing in London in December, The Riverside Company co-founder Stewart Kohl said the firm is building into some of its portfolio company modelling an assumption that multiples will contract by one to two turns between entry and exit. This makes a focus on operational improvements more important than ever.
3. Focus on co-investments will continue to rise
Limited partners looking to minimise the cost of private equity by focusing on co-investments and direct investments will continue to gain steam in 2017.
Almost half of the Western European respondents to the PEI Perspectives 2017 survey are intending to increase their co-investment activity in 2017, and 25 percent are expecting to make more direct investments.
What’s more, Coller Capital’s Global Private Equity Barometer Winter 2016-17, which polled 110 private equity investors globally, found that more than 90 percent are asking their new hires to focus on direct investments and co-investments.
“The growth in LPs investing in co-investments and direct private equity programmes is a theme that has become more prominent throughout the Barometers, over the last 18 to 24 months,” Coller partner Stephen Ziff said.