Spotlight on: US sponsors
As competition for domestic assets intensifies, US private equity players are increasingly shifting their focus to Europe. David Cannon, Managing Director at KeyBanc Capital Markets, Clearwater International’s US partner, reveals where the attractions lie for American investors.
In the current quarter alone, US buyers snapped up European assets worth €10.6bn
US private equity sponsors are moving in on the European deal space like never before. To put this in context, the value of American PE investments in Europe in the first three quarters of 2021 has already exceeded that of any previous full year by more than 60%. Deal volume, also now at an all-time high, is already up more than 40% on 2020. In the current quarter alone, US buyers snapped up European assets worth €10.6bn. This represents more than 15% of Europe’s overall transaction total by value and nearly 9% of deals by volume.
So, what’s behind the surge of US interest in European assets? Shifts in the US deal landscape are one reason, says David Cannon, Managing Director of KeyBanc Capital Markets (KBCM), the corporate and investment banking arm of US-based KeyCorp: “Vendors are becoming much more selective when conducting sale processes. Not so long ago, sellers would often target 50 or even 100 buyers.
Today it might only be six to ten. Vendors want to engage with buyers who can move quickly, have sector expertise and familiarity with the asset. M&A processes are increasingly bespoke, and this means there are inherently fewer opportunities for many sponsors.”
Big money, small targets
Exacerbating all of this is the scale of the gap between the volume of dry powder now available (which is vast) and suitable targets (which are thin on the ground). “The US markets right now are incredibly frothy,” says Cannon. “There is an exceptional amount of capital pursuing acquisitions and there is not enough deal flow to meet the demand.”
more than one-third of the 30 deals transacted by US sponsors in Europe in Q3 2021 involved targets in the UK and Ireland
PE buyers in the US are responding by looking further afield for opportunities. “The European market provides US private equity players with the chance to get into the type of processes that are no longer easily available within the American market,” Cannon says.
Focusing on geographies, the UK and Ireland are at the top of the list for US sponsors looking to invest in Europe. In value terms, the UK and Ireland is the single biggest regional target for US private equity within Europe, with investments in Q3 totalling €3.6bn. From a volume perspective, more than one-third of the 30 deals transacted by US sponsors in Europe in Q3 2021 involved targets in the UK and Ireland. Beyond that, Germany and France are also seen as attractive, and there is real interest in the Nordics, although volumes in
these three geographies are typically much lower than those seen in the UK.
“The UK and Ireland are attractive to US investors, whether it’s for platform investments or add-ons,” says Cannon. “One reason for this is that there is no language barrier. But probably more important is the fact that it’s an easier buy – there are far fewer restrictions than in other European regions.” For example, acquirers have more flexibility to restructure their UK workforces than they do elsewhere. On top of this, levels of tax and social security costs in the UK are typically closer to those in the US compared with other parts of Europe. All of this makes the environment much more amenable for US buyers.
Focusing on sectors, Cannon says that TMT and healthcare targets are firm favourites with US private equity firms looking to invest in Europe – despite record deal multiples. “These are incredibly popular sectors with our clients right now, and our healthcare team is really busy pitching and marketing assets. The tech and healthcare sectors have both thrived during the COVID pandemic and lots of those assets continue to garner high valuations – much higher than they were a year ago. The consumer and business services sectors are also active in terms of deal volume and deal value.”
Firms that want to own best-of-breed assets are prepared to pay up
In the US, as elsewhere, the collision of high multiples and the need to align with buyer agendas is supercharging the trend towards specialisation within private equity. “PE buyers are becoming subject matter experts. They know what they want to own, they understand it, and they are much more targeted,” observes Cannon. “Buyers are increasingly differentiating themselves in this way. And it means they are much more likely to be included in the bespoke M&A processes that are emerging.”
Having a deeper sector knowledge and clearer strategic focus helps to take the sting out of currently high valuations. “Firms that want to own best-of-breed assets are prepared to pay up,” says Cannon. “One thing we are seeing a lot more of now is private equity firms moving acquisitions into single-asset funds – sponsors want to hang on to high-quality assets for a few more years because they think there’s meaningful upside.”
With US deal flow under pressure, American private equity activity in Europe is only likely to increase. “Cross-border deals can be incredibly rewarding. But you need local expertise to succeed,” stresses Cannon. “It’s incredibly important to have trusted advisors, counsel and people who can guide you through all the various aspects of an acquisition – including what’s coming to market, before it comes to market. There is no substitute for having boots on the ground.”