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European Private Equity Deals a Mixed Bag in Second Quarter

The second quarter in the private equity space in Europe this year was less lethargic than the first, with a 12.2% increase on a quarter-to-quarter basis. Pitchbook, in partnership with ACG, has issued its quarterly European PE Breakdown offering everything you might want to know about that space.

The number of deals closed in the second quarter was 611. The asset value of these deals reached €70 billion. Although this was an increase from the first quarter, it was considerably lower than the corresponding deal activity a year ago. Year-on-year, the deal number is a decline of 37.8% from a year before, and the asset valuation is a decline of 42.3%.

One transaction is worth mentioning. It involved a sovereign wealth fund and the €2.2 billion acquisition of IFCO Systems, a German company that provides reusable packaging solutions for fresh foods. The acquirer, Triton, is a subsidiary of the Abu Dhabi Investment Authority. The sale of IFCO was Germany’s largest PE buyout of the quarter.

Winds from Front and Rear

Looking at the economic context of Europe, the authors are well aware there are “headwinds” in the region, including the uncertainties of politics in the British Isles. But there are tailwinds as well, “a dovish European Central Bank, further stimulus and a low interest rate environment,” which should sustain public market capital flows in the medium term.

There is a downtrend in European PE exits, which continued in the second quarter, despite a “considerable uptick” in the initial public offerings. There had been no IPO exits in the first quarter, so this amounts to a market picking itself up off the arithmetical floor.

There is also trend in the European markets toward more take-privates. The second quarter confirmed that trend, with 11 companies taken private.

In terms of asset value, the take privates of 2019 will almost certain pale compared to those of 2018. But 2018 was an outlier. As the report observes, two of the largest take-privates since 2013 closed last year. Removing those from the figures, the authors observe that 2019 is on pace “to reach near decade-high levels in terms of take-private deal value.”

The UK and Ireland

Over the last three years, the region including the UK and Ireland has consistently increased its share of the completed European PE transactions, as measured by sheer number of deals. In the first half of 2019, the Kingdom and the Republic together accounted for 392 deals, or 34.6% of the closed European PE transactions total. This is the highest mid-year proportion recorded in the PitchBook database.

But while the number of deals is going one way, the value is going the other. The value of deals done in that sector in the first half of this year was at a five-year low as an aggregate and “pacing behind previous midyear levels” as a percentage of Europe’s activity.

Why? It is a reasonable speculation that concerns about a hard Brexit and its possible consequences are putting the brakes on the bigger deals, as parties—especially the general partners who must make sizable capital expenditures for such deals—look for more clarity.

The intra-European significance of the DACH (German, Austria, and Switzerland) and the Nordic regions has increased in recent months. Three of the four largest PE deals of the first half have taken place in DACH. Notably, Nets bought Concardis, the payment services firm, for €5.2 billion.

A Word on France and Taxes

The paper includes a “Spotlight” section on France. It tells us that the corporate income tax in that country will be cut gradually to 25% by 2022. It was 33.3% until quite recently. The idea of the cuts is to make France more competitive with the rest of the European Union as a corporate home.

Taxes on financial income, including capital gains, are also coming down. Consequently, the report says, “LPs should achieve greater returns on investments via exists, enabling GPs to engage in additional fundraises and assist the capital cycle from LPs back to GPs, and ultimately into portfolio companies.”