Private Equity Trends: Expectations Vs Reality. 2019 Update

The private equity market flourished in Europe in 2018 to post crisis highs, both in terms of volume and value. Given the political turbulence the continent experienced over the course of the year, this continued strength was a welcome surprise.

In total, a record 1,566 buyouts were completed in 2018, with a total value in excess of €175bn. This exceeds the number of buyouts completed in 2017 by 11%. The total capital invested also increased by 25.1% in volume, which indicates the continuation a trend of larger buyouts. In addition, private equity firms have taken to utilising the ever-more popular build-and-buy strategy; over 50% of deals involved bolt-on acquisitions – a trend which is likely to continue through the new year.

Further trends were identified in PWC’s ‘Private Equity Trend Report 2019’, as we have sought to detail in more depth below.

Opinions regarding the impact of Brexit

While the United Kingdom’s exit from the European Union has long been expected to harm the country’s attractiveness to private equity (PE) investments, respondents to PWC’s survey suggested that – thus far – the UK industry remains a viable, if somewhat uncertain, choice. In total, 50% of respondents reported that Brexit will not impact the UK’s attractiveness for buyouts. However, on the negative side, 45% believe that succession will make the UK less attractive.

Given that the remaining 5% reported that the UK will be more attractive as a result of leaving the EU, the report paints a less than rosy picture for the UK – the majority of respondents believe that Brexit will not overly harm the country, but very few believe its prospects will actually be stronger outside of the bloc. However, it is important to note that these opinions were likely formed on the basis of the UK exiting the EU with a Withdrawal Agreement – which, at the time of writing, is not necessarily a certainty. Should the UK default to a “no deal” withdrawal, PE confidence will likely dip substantially.

Germany, the Netherlands, and Switzerland leading the way

Outside of the UK’s EU-related woes, the confidence for PE investments across the rest of the continent remain stable, with three countries in particular continuing to receive votes of confidence from investors. The headline news is that Germany continues to thrive; in total, nine in ten respondents stated that they believe the German PE market will become more attractive in 2019. Similar confidence was seen in the Netherlands, which 85% of respondents stated would become more attractive in the year to come, and 84% also expected a bright future for investments in Switzerland.

Credit continues to rise

Investments in private debt and credit continue to be a viable choice for many PE investors, to the point where investments in credit have risen to become the most popular choice for those seeking to diversify their PE assets. In total, 44% of respondents have already invested in this area, with a further 51% intending to do so in future. Given that private debts continue to rise across the continent, investments are likely to continue to grow in popularity throughout 2019.

Exit market lags behind

As we discussed earlier, while buyouts experienced roaring success last year, the exit market actually regressed somewhat during 2018. In total, there were 945 company sales, amounting to a 4.5% drop compared to the year before. Worse yet, the value of those sales also fell; the total sales volume was €139bn – a 13.1% fall – which demonstrates the weakest activity in almost five years

While these falls are concerning, the strength of the buyout market helps to balance the picture somewhat, and suggests most PE investors will continue to lean towards buyouts when seeking new investments in 2019.

PE firms’ continue to adapt their business models

The PWC report also indicates that PE firms are continuing to innovate and change their business models in pursuit of greater success. In total, 92% of respondents to the survey reported that their firms were seeking greater cooperation with strategic investors – by far the most popular measure. However, other changes were also noted as increasingly popular; 87% of firms were seeking to rely less on leverage and financial engineering measures, while 82% had focused on greater active portfolio management in 2018.

In a post-crisis age, the absence of capital investments continues to be noticeable, with trends indicating that rather than introducing new investment, firms are essentially seeking to fix the roof while the sun shines and focus inwards – which should prove fruitful for the overall health of the industry.

Digital remains of paramount importance to PE firms

The PWC survey suggests a positive attitude towards digitising portfolios, with 93% of respondents opining that digitisation can help to increase the speed of investment successes. On a similar note, 79% of respondents suggested that digital transformations have a crucial role to play in their future exits, as well as the returns they hope to achieve. These signs of positivity towards digitising portfolios suggest that more and more PE firms’ will seek to start, or continue, a digitisation process over the course of 2019.

Covenant breaches fall significantly

Somewhat worryingly, in 2017, 82% of PE firms reported that 10% (or more) of the companies in their portfolio were breaking banking covenants – a concerning trend. However, the trend appears to have been short-lived; in the 2018 survey, only half of respondents reported the same concerns. The significance of this fall cannot be overestimated, and shows increased dedication to protecting banking covenants amongst portfolio companies.

Relative economic optimism amongst general partners

Given that PE investments and mergers and acquisitions are largely dependent on overall economic health, the survey also considered the opinions of general partners of PE firms regarding the health of the world’s economy. For the most part, confidence remains relatively high: 68% of GPs stated that they believed the world economy would continue to grow in 2019, which echoes the general consensus of most financial experts. More promisingly still, 78% of GPs do not believe that the next big financial crisis will occur within the next three years – again, a belief that is roundly shared by economists.

In conclusion

The PWC report cautiously indicates a strong future, which is supported by relative confidence across a number of areas – and particularly in regards to the German market, and the power of digitisation.