European equities’ cheap valuations have turned the region into a honeypot for private-equity and arbitrage funds looking to reap double-digit returns. With the buyout firms enjoying a massive amount of dry powder, especially with interest rates this low, the trend is likely to continue.
With a few weeks to go before the end of the year, pending and completed deals targeting public Western European companies in 2019 total $101 billion, according to data compiled by Bloomberg.
“If you’re a large private equity fund and you can pick and choose, some valuations in Europe are really attractive, certainly compared to the U.S.,” said Gunter Waldner, who invests in private equity funds at Tyrus Capital, which oversees $1 billion from Monte Carlo. “The trend will continue. You have a lot of capital that’s been raised by private equity funds that’s dry powder that needs to be invested.”
The EurekaHedge Event Driven Hedge Fund Index, which gives an indication of performance, rose 8.2% this year through the end of November compared with a 0.1% dip in the year-earlier period.
BNP Paribas strategist Edmund Shing says better deals can be found in the public market than in the private sphere, where soaring valuations have made exiting difficult, as shown in the case of WeWork. And the U.K. is particularly fertile ground, he says. Private equity deals on listed companies this year include Merlin Entertainments and BCA Market place, while Inmarsat, Cobham and Sophos are pending.
Indeed, Britain leads European private equity takeovers, with more than 50% of deals targeting U.K. listed companies as the weak pound and low equity valuations add to the appeal. This trend may extend into next year as the country’s divorce from the European Union remains unresolved.
“If you can find companies that get their revenues in foreign currency, then you get a double whammy in a positive sense,” says Tyrus’s Waldner. “So you buy a company at low valuations, at a low exchange rate in pounds and the company does most of its business outside the U.K. — that’s a perfect scenario.”
More broadly, the growth trend in buyouts is continuing unabated, says Oddo strategist Sylvain Goyon. He notes that valuation multiples of private companies have been higher than public equities’ on only three occasions: the middle of the 1980s, the years preceding the global financial crisis (2006-2007), and today. At an average of 10.9 times enterprise value-to-Ebitda ratio, the European leveraged buyout multiple is now higher than at the time of the market peak in 2007, Goyon says. Combined with ultra-low interest rates and the record amount to be invested in private equity.
What could derail the trend? Tightening monetary policy, potentially. Goyon says a return of inflation in the U.S. would likely trigger a rise in interest rates, which would provide investors with arbitrage possibilities out of private equity.
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