Roland Berger: Is the private equity market on the upturn?

MUNICH — The mood is upbeat once again in the European private equity sector. After a more pessimistic mood among PE investors in 2012, more deals are expected this year – especially in Scandinavia and Germany. In contrast, Spain, Portugal, Italy, France and Greece are expected to continue to experience a slight decline. Pharmaceuticals, healthcare, consumer goods & retail and energy utilities are considered the key target industries. However, really big transactions are expected to be the exception, partly because the economic situation remains uncertain, according to those surveyed; despite more liquidity, debt financing will be difficult and purchase price expectations are expected to remain unchanged. Two thirds of the 1,200 European executives surveyed are also of the opinion that the business model of PE companies need to be examined and adjusted to fit the market environment. These are the key findings of the new European Private Equity Outlook 2013 study by Roland Berger Strategy Consultants.

“The mood in the European private equity market is slowly but surely picking up,” says Gerd Sievers, Partner in the Corporate Finance Competence Center of Roland Berger Strategy Consultants. “Since the overall economic prospects are expected to remain unchanged, this can be attributed to improvements in financial markets and the development of the euro crisis.”

The number of M&A; deals with PE involvement is going up

Currently, 52% of those surveyed believe the number of M&A; transactions with PE involvement will go up compared to last year – especially in Scandinavia (+2.7%), Germany (+2.4%) and Poland (+1.9%). This can be attributed to the positive economic forecasts in these countries.

Investors expect most activity will take place in pharmaceuticals and healthcare (54%), consumer goods and retail (51%), energy utilities (41%) and IT and telecommunications (41%). “In the coming years, these sectors promise stable growth or, due to industry changes such as the energy transition in Germany, an increase in the number of transactions. Therefore private equity companies will have the opportunity to acquire profitable targets,” explains Roland Berger expert Sievers.

A slight drop in market activity is expected, particularly in the countries struggling most with the euro crisis – especially Greece (-1.0%), France (-0.7%), Spain/Portugal and Italy (-0.6%).

Debt financing will be more difficult

Large transactions exceeding EUR 500 million will remain the exception in 2013. This is because experts believe the availability of debt financing will continue to be difficult: “This is rather surprising, considering the amount of liquidity in the market and the preparations for sale that we observe involving larger targets,” says Sievers. “Targets’ attractiveness and purchase price expectations will be decisive for the number and size of M&A; transactions.” The survey participants expect that at least the attractiveness of targets will rise. In terms of purchase price expectations, no significant reduction is expected compared to last year.

Sources of acquisitions will mainly be major shareholdings in family-owned businesses (46%) and carve-outs and secondary buy-outs (43% in each case). Strategic investors (23%) will make up the majority of potential buyers closely followed by other exit options via PE companies as well as dual or triple tracks (all at approx. 20%).

The focus: Adjusting the business model

In 2013, PE investors will focus more on developing their portfolio companies. To do so, they will take both strategic (39%) and operational (36%) actions. Financial actions such as refinancing or recapitalization are relevant for only 26% of those surveyed.

Two thirds of the investors believe that the PE business model must be examined in terms of their future sustainability. “The financial crisis showed us that certain adjustments are necessary. For instance, passive portfolio management is no longer sustainable over the long term. The private equity funds should take the opportunity and enforce a more active approach to manage their portfolio companies now. This will help to adjust for the new market conditions and thereby be better equipped to deal with future crises,” explains Sievers.