European private equity has shown a high return in the most recent trends and statistics. Rising deal value in 2019 capped the strongest five-year stretch in history, while deal count reflected stiff competition and rising asset prices and planning carefully for how they can profit from the downturn. With the global financial crisis fresh in their memories, firms are focusing their diligence much more intently on downside scenarios. They learned valuable lessons during the crisis about what holds up well through the cycle or not, and are adjusting accordingly. Even within a sector like healthcare, widely viewed as recession-resistant, there were subsector differences in performance worth noting. Healthcare support services, for instance, produced multiples of better than two times invested capital
Spotting pockets of opportunity has been a challenge even in the up-cycle. For GPs, finding the right asset at the right price was the biggest constraint on doing deals in 2019. That helps explain why the number of transactions has remained stubbornly flat. The number is bouncing between 3,000 and 4,000 buyouts per year since 2010 according to Bain. Both exit value and volume in 2019 dipped far below the postings of recent years. 900 European PE exits closed for a total of €201.7 billion, though we anticipate these figures to increase as we collect more data.
The rise of bolt-on investments, GP-led secondaries, and long-dated funds has consolidated exit activity. Exit value via IPO hit a nine-year low, as European private equity firms sold a heightened proportion of portfolio companies to strategic. The IT sector accounted for nearly a quarter of the total PE exit value in 2019, its highest annual proportion.
Trends in European private equity
According to the PitchBook European PE deal activity in 2019 remained robust. European private equity deal activity records €453.5 billion closed across 3,867 deals, reflecting YoY declines of 2.4% and 3.2%, respectively. The deal value recorded its second-highest reading in our dataset. This was largely propelled by 34.1% YoY growth in the median deal size to a decade peak of €30.8 million.
The near 4.5x growth in European private equity deal value over the past decade point to capital markets graduated closer to the mainstream. Moreover, 2019’s record fundraising year in terms of capital raised. An ever-growing number of institutional investors previously shied away from PE allocations. However, now they see the asset class as fundamental to their portfolios.
European IT deals accounted for €79.0 billion of the total value in 2019, the highest annual figure for the sector. Nearly 60.0% of IT deals occurred in the software space. Further, subsectors of business & productivity, financial, application and network management software accounting for most of the total deal count.
The healthcare subsectors of telehealth, provider services, and payor/payee services could be ones to watch in 2020. A notable deal within this realm in 2019 was the €550.0 million bolt-ons of Belgium-based Armonea. In Q2 by IK Investment Partners via its portfolio company Colisée, a leader in the elderly care industry. The combination will reportedly become the fourth-largest European player in the elderly care segment with approximately €1.0 billion in revenue.
European Private Equity Exits
Over the past decade, an increasing proportion of non-European investors are leading or participating in European transactions. In 2019, non-European investors participated in 726 deals worth a combined €125.8 billion. Abu Dhabi Investment Authority, Public Sector Pension Investment Board and Ontario Teachers’ Pension Plan contributed to nearly a quarter of annual transaction value.
Though the absolute volume of these deals declined YoY, their annual proportion of deal volume increased to 23.0%. Seven of the top 10 European private equity deals in 2019 involved at least one non-European investor.
Moreover, 900 European PE exits closed for a total of €201.7 billion in 2019, finishing with the lowest totals in recent years. That being said, we do expect exit activity to increase from reported figures due to reporting and data collection lags. Bolt-on investments have ballooned in the past five years, accounting for 44.0% of overall European PE deal volume.
As the buy-and-build strategy continues to increase, portfolio/platform entities have become larger. Moreover, that has resulted in a dwindling number of total exits as bolt-on acquisitions will exit as part of a larger entity. We see this trend continuing in 2020.
Top five buyout mega-funds
Given the growth of the private markets and their higher return potential vs. public markets. That said, making private equity more accessible to retail investors is gaining importance. Moreover, retail investors are struggling to gain exposure to the small and middle-market companies that have been the bread and butter of private equity. These companies are increasingly turning to private financing to avoid the cost and hassle of being publicly traded.
In 2019, a record of €86.4 billion was raised for European PE funds. Although fund count increased just over 10% YoY, 2019’s 89 closed vehicles represented the second-lowest annual figure in over a decade. Additionally, capital continues to flow into larger funds. This is evidenced by the average buyout fund size rising by 21.4% to new record of €1.3 billion in 2019. Further on, eclipsing €1.0 billion for the second year in a row. Much of the increase in capital raised is also attributable to the rise in the number of funds closed in the €1 billion-€5 billion brackets.
Buyout funds have continued to account for the majority of European PE capital raised. That said, over €74.3 billion was raised across 61 funds in 2019, reflecting YoY increases of 25.7% and 5.2%, respectively. Moreover, the €12.0 billion raised across 27 growth equity vehicles in 2019 caught our eye up substantially from the €4.4 billion raised across 16 funds in 2018. The fund type gained significant traction in 2019, likely given the potential for lower valuations and less competition. Additionally, a larger and more differentiated pool of targets compared with buyouts.
Opportunity for New retail PE investors
Individuals are missing out on the opportunity to invest in fast-growing start-ups with the potential to generate big returns. That said, companies stay private longer. Now, as a growing number of traditionally public companies go private, it makes more sense than ever to push the door open for retail PE investors. Around 15% to 20% of Blackstone’s annual fund-raising already comes from retail investors, and this is likely just the start. Moreover, PE firms continue to rely on IPOs less and less as a liquidity option. To sum up, 2019 saw 29 entities exit to public markets for €20.4 billion in total exit value (on a pre-money valuation basis). Additionally, registering the lowest IPO value and volume figures since 2012.
Permira gathered €1.5 billion in commitments for its debut growth fund in 2019, Permira Growth Opportunities Fund I. The fund marks a departure from the firm’s typical control buyout and credit strategies. Furthermore, CVC also closed on €1.4 billion in commitments on its second growth fund in 2019, CVC Growth Partners II. Additionally, Paris-based Keensight Capital raised €1.0 billion for Keensight Capital V, achieving a sharp 2.2x step-up from its 2014 vintage predecessor, Keensight Capital IV. Despite the steep increase in fund size, the firm’s strategy will remain the same, targeting Western European companies in the healthcare and IT sectors. Moreover, they generate between €15.0 million and €250.0 million in revenue, which are profitable and have been growing north of 10% per year.