The latest in European Private Equity in 2022

In recent months, Europe has observed significant economic and political events that have in turn contributed to a slowing down of economic growth. Russia’s invasion of Ukraine, record inflation levels (particularly in the UK, Europe’s largest PE market), an expected continental recession, and a shift from quantitative easing to quantitative tightening are all factors that have, and will continue to, cause changes in the private equity market. 

We’ve taken a look at Pitchbook’s European Private Equity Breakdown, which investigates activity by deal type, sector, size, region and more, to uncover what we can expect for the private equity sector in the near future. 

Key highlights on European Private Equity in Q1

• European Private Equity (PE) in Q1 remained especially resilient 
• Deal value reached a new quarterly peak of €241.3 billion in Q1 2022, following 1,978 transactions closing
• Dealmaking demonstrated strength despite macroeconomic uncertainties
• Transaction sizes grew, which resulted in record cumulative deal value and pushing the median deal size to €50 million
• European Private Equity exits had a slow start to the year, following its worst quarter since Q4 2020
• European Private Equity fundraising has experienced a slow start to 2022
• Retail channels will likely be a big fundraising growth area, as more individual investors seek to increase exposure to private equity

What happened in Q1, and what can we expect for Q2-4?

In Q1 2022, we saw the median deal size accelerate to €50 million and deals larger than €2.5 billion hiked 4.5% in deal value, the most of any deal size bucket. The acquisitions of France-based Suez Environment and Italy-headquartered Falck Renewables for a total of €16.3 billion have indicated an enhanced appetite for a more sustainable future.

We are presented with a dilemma; with low economic growth and a record-high inflation rate of 7.5%, a prolonged period of stagflation is becoming a real potential risk, putting downward pressure on deal activity. 

A tighter policy environment has accompanied higher inflation. The European Central Bank (ECB) has been more accommodating, but its recent move towards a tighter policy landscape shows inflation prospects continue to move up, thereby putting downward pressure on the PE deals environment as leverage becomes more expensive. 

Markets are expecting four quarter-point interest rate increases from the ECB by March 2023, taking its interest rate from -0.5% to 0.5%, while others expect the ECB to be more aggressive and increase interest rates by 180 basis points to 1.3% in 18 months. This would be the quickest hiking cycle since 2009, as central bankers determinedly try to hit their neutral interest rate. 

The Bank of England (BOE) has already begun its hiking cycle, with three back-to-back rises since December 2021, taking the UK’s interest rate back to its pre-COVID-19 levels of 0.75%. Higher interest rates make financing acquisitions and refinancing portfolio company debt more costly and slower to close. 

Private equity deals

The sustainability sector was responsible for two of the largest deals in Q1, which, with increasingly urgent climate emergencies, we’re expecting to see more of throughout the remainder of 2022. However, due to the aforementioned macroeconomic circumstances, we are also likely to see a slowdown in PE deals.

Over the past 18 months, PE deal activity targeting European sports assets has been active, and this is anticipated to continue. In Q1 2021, CVC Capital Partners invested nearly €2.0 billion of growth capital into LaLiga, the premier Spanish football division. 

As the institutionalisation of sports strengthens, and as these unusual assets are treated like businesses, activity is unlikely to slow. 

Despite the slow start to the year for take-privates, low-interest are likely circling opportunities for several reasons, including

• Sponsors, flush with cash, are looking to deploy large sums; take-privates offer great opportunities. 
• Pricing is favourable. The 8.7% drop in the Euro STOXX 50 in Q1 is providing convincing estimates for some public companies to be taken private. 
• With the intensified risk of a European recession, more public companies will tap the private markets for liquidity. 
• Due to fewer travel restrictions and lockdowns, sponsors can mobilise due diligence teams, meet target companies, and visit key sites. 
• Despite the unstable markets, debt financing is still widely available to pursue such deals.

Exit activity in private equity 

In Q1, 338 exits closed worth €74.5 billion overall, with year-on-year drops of -1.9% and -32.4%, respectively. Market instability, valuation variations, the war in Ukraine, and a tighter policy environment have all contributed to the worst quarter for exits since Q4 2020. 

Corporate acquisitions and SBOs accounted for most of the exit value and volume, while public listings recorded only four exits in Q1. For most PE-backed companies, the public listing route of IPOs and reverse mergers was shut in Q1 because of the complicated macroeconomic environment, which saw public equities aggressively sell off. 

While companies feel the squeeze from declining stock prices, less certainty, and tighter cash-flow profiles, corporates arrived at 2022 from a position of strength with strong balance sheets. Thus, seeking growth via M&A, which has the potential to provide scale, digital capabilities, and revenue or cost synergies, will continue to mean that corporates play an active role in PE exits. For instance, in the largest exit of Q1, Italy-based SIA was sold to Nexi (MIL: NEXI) for €4.5 billion. 

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