US sponsor activity
In spite of the economic volatility brought about by the coronavirus pandemic, United States (US) sponsors are continuing to view Europe as a solid market for investments, says Brett Donelan, a Managing Director in the Financial Sponsors Group of KeyBanc Capital Markets.
US sponsors completed 27 buyout deals in Europe in H1 2020 totalling circa €13.59bn ($16bn), according to Unquote Data. Although this is a drop from the 40 buyouts completed in first half of 2019 with an aggregate value of circa €20.3bn ($23.8bn), US sponsors were still involved in some of the largest deals recorded in the European market in the challenging environment brought about by the coronavirus pandemic. Such deals included Insight Venture Partners’ circa €4.5bn ($5bn) buyout of Swiss software business Veeam, as well as KKR’s circa €4.7bn (£4.2bn) carve-out of UK-based Viridor Waste Management.
Targeted fundraising in the US is evidence of the enthusiasm of US sponsors for the European market, Donelan notes. KKR closed its fifth European Fund in November 2019 on €5.8bn, while Carlyle held a final close for its fourth Carlyle Europe Technology Partners fund in January 2019 on €1.35bn and for Carlyle Europe Partners V in October 2019 on €6.4bn. Such fundraises are also testament to the desire of such sponsors’ LPs to reap rewards from European investments.
The European M&A field has also traditionally seen lower valuations than the US market, which naturally makes for appealing investment prospects. Donelan adds: “On average, in recent years US PE deals have generally traded at one multiple higher than European ones.”
Brexit uncertainty has led to headwinds when it comes to deal activity in the UK, but I would expect there will be an uptick when sponsors can move forward with transactions that have been delayed
Europe has long been an appealing market for US sponsors, with the UK and Ireland a particularly favoured region. “The UK is culturally similar to the US, with a common language, relatively low corporate tax rates, good transport infrastructure and a stable legal environment,” Donelan says. He adds that Ireland is also positively viewed by US investors. “Ireland is the most western point of Europe, so there are a number of data centres there, which is also good for sponsors looking to invest. A lot of US companies with European headquarters agree that Ireland is a good place to be, such as Google and Microsoft. So, it will continue to be a good place for US private equity to spend time.”
“Brexit uncertainty has led to headwinds when it comes to deal activity in the UK, but I would expect there will be an uptick when sponsors can move forward with transactions that have been delayed,” says Donelan.
The DACH region, and Germany in particular, is also a market that has traditionally sparked interest from US investors, exemplified by deals including the acquisition of Stada by Bain’s European arm, alongside Cinven, in 2017. “English is widely spoken in Germany and it’s viewed as a robust and stable economy,” says Donelan. “Its business culture is known for precision and efficiency, which US investors like.”
Donelan explains that some US-based GPs have already looked to Europe for more complex deals as the M&A and debt markets have fluctuated. “When the pandemic presented itself, most PE firms were initially focused on the liquidity of their portfolio companies; we saw many companies drawing on their revolvers, even just for precautionary reasons. The next step was focusing on company projections and whether they had the appropriate cost-cutting measures in place. Many sponsors then decided that they would get active in this environment – for example, in buying up secondary debt or in making structured investments such as PIPEs.”
There will be less opportunity to buy things at a discount, but there is more regular M&A dialogue. TMT and healthcare are certainly where we are seeing an uptick, as well as in business services.
While there has been less plain vanilla buyout activity from US sponsors in recent months, there will be opportunities for such investors as the market stabilises, Donelan suggests. “The equity and debt markets are currently trading up. There will be less opportunity to buy things at a discount, but there is more regular M&A dialogue. TMT and healthcare are certainly where we are seeing an uptick, as well as in business services.”
Beyond platform investments, US GPs have historically looked to the European market to find add-ons for their US-headquartered portfolio companies, a strategy which presents both opportunities and challenges. “I would say the two main advantages that US sponsors and their portfolio companies have when seeking European acquisitions are ready access to US financing markets, and the multiple arbitrage generally observed between the US and European deal markets,” says Donelan. “The obvious disadvantages can include cultural and languages differences, and challenges caused by distance, such as operating in different time zones and the difficulty of meeting in-person, especially nowadays.”
COVID-resilient businesses have nonetheless been looking to expand in recent months, Donelan notes, reflecting the trend seen in platform deals. “Much of the add-on activity I have seen has been in the area of business services such as utilities, especially those services less impacted by COVID.”
“US sponsors are always seeking to grow their portfolio companies, and one of the ways to do that will be to continue to pursue European add-ons,” says Donelan. US-based portfolio companies made 41 add-on acquisitions in Europe in the first half of 2020, according to Mergermarket, compared with 20 such deals in the same period in 2019, showing that add-ons have remained desirable in spite of the pandemic. Nevertheless, it remains to be seen whether appetite will hold up in the second half of 2020 as the pandemic uncertainty continues. “I do think the current COVID environment may delay that effort somewhat,” says Donelan.
Although the pandemic might also slow the pace of new office openings for US sponsors in Europe, this does not mean that appetite for deal-doing is diminishing, says Donelan. “COVID has made international travel less desirable. PE firms globally have also accelerated their adoption of digital technology – Zoom can often be more efficient than jumping on a plane. Face to face meetings are not going away, but COVID might have changed how they are viewed.”
“US large-cap sponsors generally have the advantage of having more resources in dollars, offices and personnel,” says Donelan, noting that US sponsors are well-known for their role in high-end deals. “Without feet on the ground in Europe, it might be harder for US mid-market firms to generate deals there. But with the increased use of digital technology since COVID, you might see mid-market sponsors getting creative in terms of how they source deals in Europe. In the long term, you will see more US sponsors in Europe.”