Western Europe had a standout year for private equity in 2019 when measured by buyout activity. Total buyout value (primary buyouts and secondary buyouts combined) came to US$162.5 billion, the second-highest level since the global financial crisis more than a decade ago, fueled both by a surfeit of dry powder and assets that are attractively priced for dollar-denominated funds.
While this total buyout value in 2019 represents a year-on-year decline of 16.1%, 2018 was the highest level of buyout activity in the region since 2007—private equity's most abundant year, which came at the height of the last credit boom. Indeed, the average annual buyout value over the past five years, which has been the strongest run of the last decade, was US$149.9 billion, which 2019 topped by a comfortable 7.7%.Looking at the volume of PE investments in Western Europe, 2019 was also an impressive year. The 1,373 buyouts over the course of the year is the third-highest annual figure on record and just above levels seen prior to the global financial crisis.
UK take-privates take over
It was the UK stock market that represented the most fertile ground for PE dealmaking in Western Europe, in what was one of the most defining trends of 2019. The second-biggest buyout of the year saw Blackstone Group return to previous investee company Merlin Entertainments, owner of the London Eye and Madam Tussauds. The buyout house teamed up with Kirkbi, the family office of the owners of Lego, to take the leisure group off the London Stock Exchange for US$5.8 billion, in the second-largest buyout of 2019 in the region.
Other noteworthy UK take-privates included cybersecurity firm Sophos' takeover by US private equity fund Thoma Bravo for US$3.9 billion in October and Advent International delisting defense firm Cobham for US$5.2 billion in November, as well as Charterhouse Capital Partners' acquisition of Ireland-based, UK-listed exhibitions group Tarsus for US$802 million in May (all deals inclusive of net debt).
A weak pound, weighed down by Brexit uncertainties, has made UK deals especially attractive for funds investing US dollars, including Thoma Bravo and Advent. Sterling momentarily sank to its lowest level in three years on September 3, ahead of prime minister Boris Johnson losing a crucial Brexit-related vote in parliament, and remains low.
Another factor is the narrowing public-to-private premium. Historically, private markets have been comparatively attractively priced precisely because of their illiquidity. But unprecedented levels of dry powder, currently sitting at more than US$2 trillion across all private capital strategies, means that—even with a take-private premium factored in—acquiring businesses off the stock market is a compelling strategy.
These dynamics not only ensured that the UK maintained its long-running position as Europe's largest PE market, but also meant the country had its best year since before the global financial crisis, with a tally of US$53.5 billion worth of buyouts. This represents a year-on-year increase of 40% and suggests that investors viewed the value opportunity on offer as outweighing any imminent threat posed by Brexit.
Germany nipping at the UK's heels
Nor was the UK the only country in the region which enjoyed a record-breaking year. Germany also enjoyed its highest buyout value since before the financial crisis: US$34.1 billion, representing an annual rise of 39%.
This was boosted by the PIPE (private investment in public equity) investment into Berlin-based media group Axel Springer. The deal, valued at US$5.6 billion, is yet another example of private equity uncovering value in the stock market arena and saw Traviata I, a holding company for PE firm KKR, Canada Pension Plan Investment Board (CPPIB) and Swiss asset management firm Partners Group, acquire a 54.6% stake in the media group.
Unlike the UK, Germany represents a politically stable market and, though the country contended with headwinds in 2019, its skilled workforce and historically dependable economic growth remain a draw for investors—perhaps because of, not in spite of, Brexit.
Exits slump as funds focus on raising and deploying
Total PE activity including exits does not paint quite as impressive a picture, although it is nothing short of robust. All told, the total value of private equity-related deals in Western Europe fell by 22% to US$227.9 billion. Again, this comes off the back of a post-crisis peak in 2018 and is above 2015 and 2016 levels.
This is a simple function of a significant slump in exit activity, which fell to its lowest point in the last six years, to US$111.5 billion (including both secondary buyouts and trade exits), a 25% year-on-year drop. In particularly, trade sale exits fell at a steeper rate, dropping 33% from 2018’s totals, to US$65.4 billion.
The trend is even more striking when contrasting exit and buyout volume, and helps to illustrate where we are in the PE cycle. Where there were 1,080 primary buyouts in the region in 2019, there were only 551 trade sales and 293 secondary buyouts.
This imbalance should be expected given how much money sponsors have to work with. Preqin estimates that PE dry powder stood at around US$1.2 trillion at the start of last year. In spite of that enormous figure, PE fundraising has continued apace. Blue chip names that filled their reserves in 2019 include Cinven, KKR, Permira and Carlyle, who collectively raised €33.2 billion across funds specifically targeting the European market. All of their fundraisings were the largest of their long track records, in what has been a bonanza for mega funds.
Looking back, 2019 represented a natural progression of the PE cycle. Funds refocused their efforts on asset sales to deployment as they sought to put capital to use. Facing 2020, with a coterie of newly raised mega funds targeting the continent, all evidence points to another abundant year of dealmaking, provided that a now twice-delayed Brexit does not cause too much disruption to M&A sentiment. And if the last 12 months are anything to go by, expect European stock markets to be a prime source of deal flow.