European Market Sees Modest Rebound

Like its U.S. counterpart, the European buyout market is witnessing a modest rebound in the aftermath of the financial crisis, thanks in part to recoveries in EU economies and in the leveraged loan markets. It has also helped that institutional backers are seeing a bump in distributions, enabling them to back funds again.

It takes a blend of factors to fuel a buyout market, but one of the most important is naturally the flow of euros from institutional investors into the depleted coffers of European buyout, growth capital and mezzanine firms. According to the 2010 EVCA Buyout Report, published last month by the European Private Equity & Venture Capital Association, €8.4 billion ($11.5 billion) had been raised for European funds as of the first half of the year. That put the market on pace to easily best the €10.6 billion raised in 2009, although it is still a long way from the €70.6 billion raised in 2008 and €69.2 billion raised the year before. The figures include money earmarked for European investments, even if managed by a firm located outside of Europe.

Banks led the way as the main source of capital for European buyout, growth capital and mezzanine funds, accounting for 20 percent of capital raised, the report found. Losing the top spot were pension funds, which accounted for 24 percent of capital raised in 2007, 37 percent in 2008 and 21 percent in 2009—good for first place all three years—but just 12 percent in the first half of 2010, which meant a drop to fourth place. In second place in the first half of 2010 were capital markets (19 percent) while the public sector, including sovereign wealth funds, took third place, accounting for 18 percent.

Beneath the headline fundraising numbers lie two noteworthy trends—that of a higher percentage of money flowing into growth capital and mezzanine funds, according to the report. Of the €8.4 billion raised in the first half, just 70.3 percent represents money earmarked for buyout funds, while 17.7 percent is earmarked for growth capital and 11.9 percent is earmarked for mezzanine. By comparison, buyout funds captured 86.0 percent of the money raised in 2009, 94.5 percent of the money raised in 2008 and 90.4 percent of the money raised in 2007.

Ross Butler, a spokesman for EVCA, wrote in an e-mail that “the relative increase in growth equity investment reflects the low point in the economic cycle, with very low credit availability, and few other sources of company finance to invest through the downturn. This created opportunity for growth-oriented investors.”

A second trend saw the United States become a less important source of capital to the European private-equity markets. From 2007 to 2009, the United States was either first or second as a source of capital. But it fell to fourth place in the first half of 2010, supplying just 10 percent of the total, down from 21 percent in 2007. The United Kingdom, France and Australasia took the top three spots in the first half of this year.

As in the fundraising market, private equity-firms (based in Europe and elsewhere) investing in Europe registered a modest uptick in deal pace in the first half, the report found. A total of €15.1 billion was invested in 807 companies in the first half, approaching the €18.9 billion invested in 1,603 companies in all of 2009 but well short of the €46.2 billion invested in 1,889 companies in 2008, and €65.4 billion invested in 1,769 companies in 2007. If the second-half pace accelerates, the year-end euro-volume tally would approach the 2005 figure of €34 billion. Shrinking deal sizes played their role in the big fall-off. Whereas European private-equity firms invested an average of €37 million per company in 2007, they invested just €12 million per company in 2009 before rebounding to €19 million in the first half of this year. More evidence of the same phenomenon: Only three mega-deals took place in the first half of 2010, down from 53 in 2007.

Growth capital deals stole the show in the first half of 2010, accounting for more than half of the deals, up from 46.8 percent last year, 30.6 percent in 2008 and just 19.9 percent in 2007, according to the EVCA report. By contrast, buyouts were by far the most prevalent kind of transaction in Europe in both 2007 (71.2 percent) and 2008 (59.2 percent). As in the United States, other private-equity shops have evolved into a significant source of deal flow, a reflection of the maturity of the asset class and a growing acceptance of so-called secondary transactions. By amount invested, buyout firms represented nearly half (49 percent) of all sellers, in the first half of the year, though just 19 percent by number of sellers. Family and private owners came in second place by amount, at 19 percent, and first place by number, at 36 percent.