emea private equity - s&p global · firms into emea-based targets reached €30.1bn during the...

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EMEA Private Equity Market Snapshot

APRIL 2017 │ Issue 13

• 2017: EMEA Blossoms in the Spring

• France Affected by Counterfactual Thinking?

• Global GPs Cautiously Optimistic Towards the Energy Sector

• Borrowers Hold the Upper Hand in Flooded Leveraged Loan Market

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Editor’s Note

Welcome to the 13th issue of the EMEA Private Equity Market Snapshot, a quarterly publication focusing on the private equity [PE] market in Europe, the Middle East & Africa [EMEA] from S&P Global Market Intelligence.

This issue leads with a review of the EMEA region for Q1 2017. With average entry deal sizes increasing by 86% compared to the same time frame in 2016 and total allocated capital into the EMEA region nearly doubling compared to Q4 2016 (€30.1bn vs €18.4bn) it seems the EMEA region is off to a flourishing start.

Next, we turn our attention to France and the heated impending elections. We analyse the private equity landscape given the political changes and question whether private equity in France is immunized to political changes? Our data suggests that over the last 15 years, France has been on a par with its Western European counterparts in terms of private equity growth and investments and mirrors Germany closely year-on-year in terms of growth. We also note the private equity industry appears to move in opposite directions to the perceived business impact of each new President’s economic agenda– how will this trend fair with the result of the next election?

Our sector focus looks to Energy, noting that global GP’s are optimistic (albeit cautious) about this sector. With 2014/2015 seeing the oil price plummet, this didn’t leave the Energy sector in a favourable position for the private industry. As oil prices continued to decline in 2016, Energy targets became more expensive to purchase, but have the tables started to turn? 2017 YTD (1 January to 15 March 2017) paints a different picture with Global PE buyers allocating €13bn into global energy targets, a 117% uplift compared to 2016.

Finally we look to the leveraged loan and bond market, both of which had a strong start to 2017, with too much money chasing too little product. Overall, Q1 loan volume is up at €33.8bn — the highest quarterly level since the second quarter of 2007. This coupled with a positive macro environment and worldwide growth, means that 2017 so far is looking optimistic, but how long will borrowers hold the upper hand in this flooded leveraged loan market?

At the heart of our analysis is the S&P Capital IQ platform, an offering of S&P Global Market Intelligence. The platform incorporates a database capturing more than 3.1 million historical transactions, including deal values and transaction multiples, target company fundamental data, sector-level financials and comprehensive private equity manager and fund information.

We look forward to receiving feedback and suggestions on regions or sectors of interest for future analysis. To subscribe or comment on the EMEA Private Equity Market Snapshot, email [email protected]

Authors

Silvina Aldeco-Martinez

MD, Product & Market Development EMEA & APAC

S&P Global Market Intelligence

Olga Parfiryeva

Associate, Product & Market Development EMEA


Ian Hazard

Manager, Investments Data


Taron Wade

Director, Leveraged Commentary & Data (LCD)


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2017: EMEA Blossoms in the Spring

The EMEA region as a destination for new global private equity investments struggled throughout 20161. However, during the study period of 1 January - 15 March 2017 the attractiveness of EMEA targets flourished. For the first time since Q4 2015, the average entry deal size showed signs of recovery, increasing by 86%– from €35.7mn for the same 2016 time frame to €66.4mn in 2017.

The beginning of 2017 also marked a period of growth in total allocated capital into the EMEA region. Investments by foreign PE firms into EMEA-based targets reached €30.1bn during the 2017 study period nearly doubling the €18.4bn over Q4 2016. On the other hand, the number of new deals decreased, with global PE firms investing in only 791 deals in 2017 compared to 1028 in 2016 (23% decrease).

Within EMEA, the Rest of Europe sub-region2 (RoE) took the largest (49%) share of the invested capital in the region, standing at €14.9bn. This growth was mostly attributed to the acquisition of a stake in the Public Joint Stock Company Rosneft Oil Company (LSE:ROSN) for €10.5bn3 by Glencore Plc (LSE:GLEN) who participated alongside the Qatar Investment Authority. If we were to remove the outlier deal4, the sub-region is still within the top three most invested into sub-regions, standing only behind the UK at €5.4bn and BeNELux at €3.6bn.

1 Previously discussed in Issues 9, 10, 11 and 12. 2 The Rest of Europe includes the following countries: Belarus, Bulgaria, Czech Republic, Hungary, Moldova,

Poland, Romania, Russia, Slovakia, Ukraine, Channel Islands, Estonia, Ireland, Isle of Man, Latvia, Lithuania, Albania, Bosnia-Herzegovina, Croatia, Cyprus, Gibraltar, Kosovo, Macedonia, Malta, Montenegro, Serbia, Slovenia, Austria, Liechtenstein, Monaco, and Switzerland. 3 https://www.capitaliq.com/CIQDotNet/Transactions/TransactionDetail.aspx?transactionId=412359103&companyId=7828813 4 RoE totalled €4.4bn in 2017 after removing the outlier deal.

On the other hand, Southern Europe5 reported the biggest pullback in capital deployed by global PE firms. This represents a continuation of the negative trend experienced in 2016 (Issue 12). From 1 January to 15 March 2017 the sub-region experienced a 69% drop from €4.4bn to €1.4bn in capital allocation compared to 2016. Interestingly, the number of investments into Southern Europe fell only by 15% (from 110 to 93), showcasing that the size of the deals during the 2017 study period was much smaller.

On a sector basis, the biggest winner was the Information Technology sector, totalling €7.8bn for this study period vs. €2.2bn in 2016. This was also the most active sector in terms of the number of new deals, recording 306 investments in 2017, followed by Consumer Discretionary (115 deals) and Industrials (85).

Looking at capital recovered by Global GPs from EMEA target exits during the 2017 study period compared to 2016, we notice a decrease of 55% (€69.8bn6 to €31.7bn) and a fall in deal counts from 359 to 271 new deals.

At a sector level, Consumer Discretionary experienced the largest capital influx from target exits, standing at €13bn in the 2017 study period vs. €7.7bn in 2016.

5 For the purposes of this article, Southern Europe is defined as: Greece, Italy, Portugal and Spain.

6 For the purposes of this article, the following outlier deal was removed to avoid overestimating a trend: Royal

Dutch Shell plc (ENXTAM:RDSA) acquired BG Group plc (LSE:BG.) from Temasek Holdings (Private) Limited and others for €80bn in February 2016, https://www.capitaliq.com/CIQDotNet/Transactions/TransactionDetail.aspx?transactionId=290601037&companyId=256611

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Domestic Targets Fared Better with Timid EMEA GPs

Unlike their global peers, over the course of the study period, the EMEA-based GPs deployed 15% less capital than in the same period in 2016, totalling €24.8bn across 823 new deals.

In terms geographical allocation, EMEA GPs have continued to favour the local market7, having invested 90% of new money into EMEA (€22.3bn of €24.8bn. The sub-region that prospered the most was once again RoE, taking €14.1bn of new capital from the EMEA GPs8.

Information Technology was the hottest sector with €6.1bn captured during the study period, representing a 31% increase compared to 2016. At the other end of the spectrum, Industrials and Consumer Discretionary experienced the largest drop in capital allocation, falling to €0.8bn from €4bn and to €2.2bn from €9.3bn, respectively, in 2017 vs. 2016.

The Venture Capital space (VC) has not yet seen meaningful signs of improvement within the broader PE industry. The total aggregate capital deployed into EMEA VC targets dropped 54% during the 2017 study period across 27% less deals (€1.3bn over 335 new deals). EMEA head quartered VC firms followed the negative trend and deployed 23% less capital in 2017 compared to 2016(€3.4bn to €2.5bn)

7 Suggested reading: “A Stronger Eurozone Economy, Despite Higher Volatility On Bond Markets”, Jean-Michel Six

& Sophie Tahiri, S&P Global Ratings. Available at: https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=35832841&From=SNP_CRS 8 As mentioned earlier, the majority of it is attributed to €10.5bn sell of Public Joint Stock Company Rosneft Oil

Company (LSE:ROSN).

France Affected by Counterfactual Thinking?

France is in the final act of a gripping Presidential election cycle where traditional parties seem to be crippled by scandals and infighting against the backdrop of anti-elite politicians ahead in the polls9. Top of the agenda for the electorate appears to be the economy. And whilst the presidential hopefuls disagree on the cure, they all seem to agree that the French economy needs immediate attention. The structural challenges are significant and multifold including amongst others: reducing the public sector spending share of GDP, reforming labour markets, tax reform, tackling the fiscal deficit, and increasing job creation. Although some small steps have been taken recently more change would be quite fitting10.

Whilst all of this makes for interesting political debate, in this section we will review whether the victory actually matters for private equity. Looking at macro indicators and deal activity over the last three Presidential election cycles our analysis suggests that, perhaps unexpectedly for the candidates, previous presidents and their policy agenda have had little impact on the fortunes or direction of the French economy in general or the private equity industry in particular.

The Power of the Former Presidencies Fell Short of Radical Change

While any presidency is by definition central to French foreign affairs; in practise its influence appears severely restricted in terms of

9 https://www.spglobal.com/our-insights/The-Source-of-Uncertainty.html.

10 https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=35028222&From=SEC_OVER

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domestic policy. Since the introduction of the quinquennat11 the French political landscape has remained fragmented and risk-averse, dragging out policy changes into incremental legislation and ensuring that climb-downs from election manifesto are a regular occurrence. Although the most recent quinqennat has on the whole managed to make a small dent on fiscal policy12, the outcome appears to have fallen short from the package of reforms touted by Mr Hollande. The OECD Economic Surveys13 in the year prior to the last three election cycles point to common observations; the need for labour market reforms, reducing the tax wedge on labour and reducing the ratio of public spending to GDP.

For illustrative purposes only. S&P Capital IQ as at 15/03/2017

Even after two right-leaning and one left-leaning legislature – each vowing significant tax and labour market reforms – the French

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Quinquenat: Five-year term of the French Presidency 12

BNP Paribas Global Markets - France Fiscal deficit reduction – a closer look – April 4th

: https://www.capitaliq.com/CIQDotNet/Research/DocumentViewer.aspx?documentViewerDocumentId=3612788 13

OECD: http://www.oecd.org/eco/outlook/

economy seems to still be facing the same structural issues highlighted by the OECD in several occasions. This could turn out to translate into a potential long term disadvantage versus its main European rival Germany, which appears to have successfully implemented broader labour market reforms in the early 2000s14.

S&P Global Market Intelligence data shows average GDP growth year on year over the last five years of 0.8% for France and 1.2% for Germany, with fixed investment15 averaging 0.6% for France and 1.1% for Germany. Expanding our GDP analysis to the five largest European Economies our data suggests that on the whole France has been following a more general Eurozone economic growth trend rather than reflecting economic policies of the most recent presidencies. The S&P Global Ratings European Economic Outlook confirms that common factors16 have been driving Eurozone performance across the region over the period.

Private Equity Immunized to Political Changes

At macro-level France continues to face deep-rooted challenges which based on recent history the current candidates may struggle to shift. On a positive note though, our analysis also suggests that the outcome of the election may not have a meaningful impact on the fortunes of the Private Equity industry.

S&P Global Market Intelligence’s data covering the last 15 years17

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OECD Unemployment data for France remains high at an average 10% over the last five years, compared to 4.9% for Germany. 15

Fixed Investment – Real (% Growth) : Fixed Investment represents a country's investment in tangible capital goods, or the replacement of depreciated capital goods 16

https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?articleId=&ArtObjectId=10032973&ArtR

evId=1&sid=&sind=A& 17 Private Equity backed M&As and Private Placements for French and German targets, closed between January

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illustrates that France has generally been on trend with its Western European counterparts in terms of growth of private equity investments, and – correcting for outliers – mirrors Germany closely year-on-year in terms of growth in total invested capital.


Over the last year however, deal activity and overall capital allocation seems to indicate that French PE has had a better run than Germany, displaying a 4.7% increase in deal activity (€7.1bn) compared to a 10% reduction for Germany (€6.9bn).

Interestingly the private equity industry appears to have moved in opposite directions to the perceived business impact of each new President’s economic agenda. For example, following the elections of Mr Chirac and Mr Sarkozy – both running on a resolutely pro-business ticket – the S&P Global Market Intelligence database shows that total Private Equity capital invested into French targets, dropped by 56% in deal value between 2002-2003, and 64% between 2007-2008. Conversely the year following the election of Mr Hollande –which was

coined as anti-business18 by opponents – total invested capital rose by 38% (2012-2013). Additionally, in terms of deal activity we found no relation between the election cycle and demand for French targets with a regular upward trend and compound annual growth rate of 8.97% (Germany 8.98%). It would therefore appear that the elections have no relation, at least in the short term, to private equity activity that in turn seems to be primarily driven by the global economic outlook instead.

In part, the lack of expected reaction to the election outcome could be a consequence of the phased and long-drawn implementation of new legislation in France. Or perhaps this is a result of PE investors seemly unimpressed by election promises or government initiatives which may take years to implement. As an example the French Tech initiative aimed at attracting startups to France launched in 2013, continues to play catch-up with the United States and the United Kingdom with only 23 French Tech Tickets issued in 201619 and generally a significantly smaller proportion of foreign nationals working in the start-up sector20.

More interestingly however the disconnect in industry reaction may be explained by the significant involvement of the French state in the domestic private equity space. The French government, through the Banque Publique d’Investissement (BpiFrance) is a major direct and indirect investor in French start-ups, underpinning the market even through periods of macro contraction. In terms of direct growth capital investments (private placement), our data indicates that BPI Investissement and BPI Participations were involved as the sole buyer or as part of a club in 18% of all private placements in France in 2016. Their involvement has grown consistently from less than 1% share in 2002, to investment activity accelerating from 2010 onwards (9.5% in

18 http://www.economist.com/node/21553446 19 http://www.lafrenchtech.com 20 European Startup Monitor – Proportion of foreign nationals in Startups: France 12%, UK 44%, Germany 30.8%

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2010). In 2016 the direct investments BPI were involved in represented 29% of the total private placement value in France (€916mn).


The Structural Challenge in French PE

French private equity is dominated by domestic investors, more so than Germany. For example considering exclusively single buyer deals the S&P Global Market Intelligence database suggests that 85.3% of the acquisitions between January 2002 and December 2016 were completed by a French buyer (3,224 of 3,778), representing 53.3% of €35.4bn capital invested. For Germany the domestic deal count on single buyers represents a share of 69% (1,990 of 2,843) of the total deal count and 12% of the €58.4bn total invested capital. The United Kingdom and the United States emerged as the top outside investors at €13bn (20%) and €11.38bn (17%) respectively. Looking at private

placement investments as a proxy for start-up investments, our analysis points to a domestic imbalance with 91% of the deals (2,056) and 81% of the value (€4.9bn) originating in France. Although it may seem that French investors simply ‘know the market better’, our research suggests that external investors continue to see France as a less business friendly destination for start-up investment due to challenging labour laws, large government intervention in funding and financing and unfavourable taxation at the exit stage21 .

Additionally French PE buyers often struggle to support their investments past the start-up stage, with many of the most promising start-ups moving to a global buyer as early as the growth stage onwards. This appears to be a consequence of a lack of local fund investors for large scale PE funds which leaves French GPs outgunned and sees future unicorns moving abroad before realizing their potential domestically22. Looking at secondary exits and trade sales of French portfolio companies from S&P Global Market Intelligence deals data we see that domestic buyers are the most likely buyer for smaller firms but are being outpriced as deals get larger. Over the last 15 years looking at single buyer deals only, we found that French buyers – PE or trade – account for 52.2% of the deal count under €50mn (44% of aggregate capital). Their presence reduces steadily to 16.6% for deals above €1bn (16.9% of aggregate capital).

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Conseil d’Analyse Eqonomique – Note du Conseil July 2016 – Renforcer le capital a risque Francais

http://www.cae-eco.fr

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Based on some of the findings above it would appear that the likelihood of a new French Tech giant emerging could be better aided by supporting a private funding ecosystem rather than cherry-picking global start-ups for support.

Global GPs Cautiously Optimistic Towards the Energy Sector

The dramatic plunge in the oil price in 2014 and 2015 unarguably left the Energy sector in an unfavourable position in the eyes of the private equity industry. In issue five of this report, we discussed the effect that the sharp drop in oil prices had on PE Energy investments: “Q1 2015 was the lowest first quarter figure over the past ten years, with

only €84mn23 of new capital invested into the EMEA region”.

2016 was a challenging year where Energy experienced a 72% drop in new capital allocation compared to 2015, standing at €19.8bn. Based on the S&P Global Market Intelligence database, it appears that as oil prices continued their decline in 2016, Energy targets became more expensive to purchase based on the entry Implied Enterprise Value/EBITDA multiple in 2016, at 20.1x – a significant growth from 8.1x in 2015 (Fig. 5).


From a geographical perspective, North America and EMEA registered a 58% and 46% decrease in new capital in 2016, attracting €15.3bn and €4bn respectively.

2017 YTD (from 1 January to 15 March 2017) on the other hand offers a cautiously optimistic improvement. Global PE buyers have thus far

23 After removing the single €4.5bn deal attributable to the L1 Energy acquisition of RWE Dea AD in early March

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allocated €13bn into global targets, a remarkable 117% uplift compared to the equivalent period in 2016. In addition to this, since the beginning of the year, 10 additional Energy PE-backed deals have been announced. If closed, it would register a further €2.5bn more of new capital for 2017, which could already bring the year’s activity on a par with 2016. 7 out of 10 targets are within the Oil and Gas Exploration and Production sub-sector, with the largest deal taking place in APAC at €1.9bn24.

Global Energy Assets are Getting Viscous…

In spite of the pick-up in investment activity, global GPs have been experiencing somewhat of a slowdown when it comes to divesting their Energy assets over the last few years. Since 2007 capital realised from sales of global Energy targets reached its peak in 2014, standing at €84.6bn with North America leading at €79.4bn, and EMEA following with just €3.1bn. The period is an outlier as prior to this the sector never passed the €50bn mark25.

In line with oil prices decline in 2015, global PE divestment activity also fell by 32%, to a low of €57.1bn. Global GPs appeared to have struggled to liquidate their energy assets, especially in EMEA. As shown in Fig. 6, total capital realised from EMEA-based targets fell by 33% with only €2.1bn exited in 2015 – the lowest amount since 2007.

24 China Reform Holdings Corp. Ltd., Investment Arm and China ZhenHua Oil Co.,Ltd. agreed to acquire

Bangladesh oil and gas assets, https://www.capitaliq.com/CIQDotNet/Transactions/TransactionDetail.aspx?transactionId=421812456&companyId=421812428 25 For the purposes of this article, the following outlier deal of 2016 was removed to avoid overestimating a trend:

Royal Dutch Shell plc (ENXTAM:RDSA) acquired BG Group plc (LSE:BG.) from Temasek Holdings (Private) Limited and others for €80bn in February 2016, https://www.capitaliq.com/CIQDotNet/Transactions/TransactionDetail.aspx?transactionId=290601037&companyId=256611

The activity recovered somewhat modestly in 2016, with the EMEA region experiencing 12% uplift. Interestingly, in 2017 no Energy exits from EMEA targets have been recorded yet.


EMEA Becoming More Illiquid?

S&P Global Market Intelligence data suggests that historically, the average holding period of global Energy targets has been just slightly shorter than that of other sectors. Over the 10 year period (2007 – 2016), Energy’s average holding period was 3.61 years while other sectors were held for more than a 4 year mark.

On a regional breakdown, Energy assets based in EMEA are held onto longer by global PE firms than North American targets. Looking at Fig. 7, it is clear that EMEA-based targets were not liquidated at the same

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pace as North American assets. The average holding period for private equity investments in EMEA for 2015 and 2014 was of 6.08 and 6.45 years, respectively. EMEA-based Energy targets also remained in portfolios for longer in 2010, 2008 and 2007.


As illustrated by Fig. 8 the decline in average oil price in 2014 and 2015 was met with growing average holding periods over the same time frame.

Zooming in, we take a look at what influenced this trend of growing average holding periods in EMEA and it emerged that two sub-sectors appear to outweigh the rest in terms of portfolio companies in PE. Oil and Gas Equipment and Services, and Oil and Gas Exploration and Production were not only the most exited assets in a 10 year period (47 and 19, respectively) but also experienced growth in average holding periods. Prior to the oil crisis in 2014, the average holding period was 4.23 years for Oil and Gas Equipment and Services, and 4.15 years for Oil and Gas Exploration and Production. In 2014 it went up to 4.83

years, and grew further to 6.11 years in 2015 for Oil and Gas Equipment and Services assets. A similar trend could be observed for the Oil and Gas Exploration and Production sub-sector, with average holding periods growing to 4.5 years in 2014 and 5.33 years in 2015.


2016 did register a slight shrinkage in holding periods, yet at the same time there were less PE exits to take into account. 2017YTD has not registered any exits thus far.

Borrowers Hold the Upper Hand in a Flooded Leveraged Loan Market

Both the leveraged loan and bond markets had a strong start to 2017, aided by too much money chasing too little product, set against a benign macro and political backdrop. Given investors into the asset

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class took the U.K.’s Brexit referendum result and election of Donald Trump as U.S. President in their stride last year, a large and unforeseen threat would have been needed to derail the leveraged finance markets in the first quarter. At the same time, the macro environment has been benign, with economic data pointing to growth around the world, the default rate remaining very low, and the wider markets have also mostly enjoyed a positive start to the year.

Against this backdrop, the supply/demand balance for leveraged loans in particular in Europe has shifted dramatically since a year ago, when buyout financing dominated issuance amid sparse repayments, and borrowers were forced to pay up to fill their books in syndication. In contrast, repricings26 have shaped the narrative in the first quarter of 2017, as new buyout financings have been scarce, repayments have spiked, and flows into non-CLO funds have supplemented healthy CLO issuance on the demand side of the equation.

Overall, first-quarter loan volume is up at €33.8bn — the highest quarterly level since the second quarter of 2007 (when €69.1bn was recorded), and surpassing the prior recent high of €30.5bn posted in the second quarter of 2014, according to LCD, an offering of S&P Global Market Intelligence. That tally compares to €20bn in 4Q 2016, and €13.8bn in Q1 2016.

However, although volumes were record-breaking only 26% of the total Q1 2017 issuance was directed to funding an LBO or to make an acquisition, while 13% was for dividend-related funding, and 61% for refinancing activity. This contrasts with 2016, when 54% of deal flow funded M&A activity (including LBOs), 7% was for dividend recap purposes, and 35% was refinancing-related.

26 LCD defines repricing as those transactions where borrowers opportunistically reprice a facility – either via an

amendment or a refinancing.

For illustrative purposes only. LCD, an offering of S&P Global Market Intelligence as at 31/03/2017

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The market for refinancings and repricings became particularly busy towards the end of the quarter, as arrangers rushed to get deals in ahead of the Dutch general election in mid-March, and the upcoming presidential election in France (April 23 and May 7). Repricings hit a record high of €32.8bn to the end of the quarter, up from a total of €16.8bn in the fourth quarter. To put this in context, 51% of the performing European Leveraged Loan Index (ELLI) has been repriced over the last 12 months.

For the quarter, 53 deals were repriced — up from 33 in the fourth quarter of 2016. The average spread plus floor cut was 106 bps, a big rise from 82 bps in the fourth quarter of 2016. The time between the original deal and repricing stayed relatively consistent, however, at 1.1 years for the quarter, compared to 1.2 years for the fourth quarter, and 1.3 years for full-year 2016.

Power Play

Even away from repricings, and grabbing headlines, deals from Unilabs Diagnostics, Cerba, and Verisure all priced a single-B rated loan at E+300 with a 0% floor, which translates into historically the lowest yield to maturity (excluding cross-border facilities) since LCD started tracking yields in 2010. “Everything has got a lot more expensive for us,” says one investor. “The flow names are up above 101 in the secondary market – and we’re nearing the 275 bps spread level from 2007. We’ve come a long way in the last seven-to-eight months — too quickly for our liking.”

Overall average yields-to-maturity declined as issuers took the opportunity to slash borrowing costs at the point of new issue, with the YTM for TLBs rated single-B reaching 4.07% to the end of the quarter on a three-month rolling basis in Europe. This is down from the 2016-high of 6.19% in April. This rapid contraction in pricing is perhaps not surprising in a market that has seen an expanding investor base chase a disappointing number of new-money situations. And with several billions of euros in excess liquidity sloshing around the European marketplace, the power to set pricing firmly lies with borrowers. In March, for example, 15 flexes took pricing lower, while in March 2016, 100% of institutional flexes were up.

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The bald fact remains that despite higher volumes, issuance has not consistently kept up with CLO formation. In 12 out of the last 18 months, the institutional market experienced a supply shortage, as measured by new issues minus repayments tracked by the S&P European Leveraged Loan Index (ELLI), less CLO issuance. In each of January and February 2017, this shortfall totalled roughly €1bn, although in March the market experienced a €2.1bn surplus, the highest level since August. However, on average, each of the last 12 months saw a €390mn shortfall.


At €2.8bn, CLO issuance was much slower in the first quarter relative to the fourth quarter of 2016, when €5bn of deals were priced, though it is marginally more than €2.6bn issued in Q1 2016. Moreover, surpassing the Q4 2016 issuance tally was particularly hard as that was the highest level since the CLO market re-opened following the financial crisis.

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Fig. 11: Percentage of Institutional Flexes Moving Tighter/Wider

Chart shows what % of all flexes done in each month moved pricing higher or lower

-€5B

-€4B

-€3B

-€2B

-€1B

€0B

€1B

€2B

€3B

€4B

€5B

Oct 2015 Feb 2016 Jun 2016 Oct 2016 Feb 2017

Fig. 12: Institutional Market Supply Shortage*

* Based on (a) new issues minus repayments, minus (b) CLO issuance

14



But the CLO bid is not a complete picture of demand. Non-CLO funds are an increasingly larger proportion of the loan investor base, according to market participants. Syndicators estimate that much of current deal flow is being absorbed by funds other than CLOs, including managed accounts, or funds raised by some of the asset managers in the direct-lending space but targeted at the larger syndicated lending market. One banker estimated their allocation of funds to institutional investors was roughly two-thirds to managed accounts, and one third to CLOs. “The CLO bid, and that from other leveraged funds, is actually minimal at the moment,” confirms one investor. “Unleveraged and open-ended funds are becoming more dominant, as they are agnostic to pricing or ratings.”

Private debt managers complementing their direct-lending strategies with investments into the larger cap market include Alcentra, Ares,

Barings, Hayfin, Park Square, and Pemberton. Several of those have capital from separately mandated accounts that are happy with the lower yields of the larger-cap market in exchange for greater liquidity.

Possible Break?

Loan investors have been naturally cautious about the market moving to such tight spread and yield levels. Adding to the pressure is that those funds not locked into a CLO funding structure have a higher tolerance for the lower yields on these repricings, as they are often benchmarked against government rates for a return target, say market participants. And with a negative rate environment in Europe — with even some investment-grade corporate issuers able to raise funds at negative rates — an average yield to maturity of 4.01% to end of March, which includes an interest-rate floor, can look attractive. “This is also a duration play as inflation picks up, as a hedge against a potential rising rate environment,” said one analyst.

Market participants say a concerted pushback is likely to come from CLOs. For while liability spreads have been tightening, they are not coming down as fast as asset spreads, which in turn means the arbitrage is under pressure.

The first quarter saw new record tight prints for triple-A notes of CLOs. The tightest print came as Credit Suisse Securities (Europe) Limited priced a €416.4mn CLO managed by PGIM Limited, with the triple-As paying just 85 bps, while NatWest Markets and GreensLedge printed the €413.7mn Harvest XVII CLO for Investcorp, with the triple-As at plus 87 bps. And Barclays priced the €389.35 million Aurium III CLO for Spire Partners with the triple-As at 88 bps — the first time this class of notes had dipped below 90 bps (the tight print last year for triple-As was 96 bps).

Despite falling liability spreads, the market remains focused on the

€0B

€1B

€2B

€3B

€4B

€5B

€6B

3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Fig. 13: Quarterly CLO Issuance

15


dwindling arbitrage. “Asset spreads are coming down faster than liabilities, so the arb is under greater pressure,” says a manager. “On the upside though loan supply has picked up in the last few weeks, so sourcing collateral isn’t as difficult it was. But it is all at a challenging price.”

Certainly, asset spreads are currently not helping. For the month ended March 31, the spread for single-B and not rated new issues has come down to E+368, versus E+403 in January. The all-in yield has fallen below 4% over the 30-day period as well — to 3.96%, from 4.5% in January.

CLO managers have noted recently that for the arbitrage to work well, the blended asset spread needs to be plus 400–425 (though some say plus 375 is manageable). One manager says that “at plus 375 you can still breathe,” while the view is that plus 350 generates single-digit returns, which is too low for CLO equity.

Still, a consequence of falling liabilities has been a marked pick-up in refinancings and resets over the first quarter. There were eight resets and nine refinancings in Europe in 1Q, versus two and 10, respectively, in all of last year. The tight print here saw Barclays price a €400.6mn refinancing of the CGMSE 2015-1 CLO for Carlyle, with the triple-As paying plus 78 bps.

Far to Fall?

The supply/demand imbalance has meant secondary prices continued to rise throughout most of the quarter, with the weighted average bid of the ELLI reaching 99.42 on March 8 — 427 bps above the low for the past 12 months, seen in February last year (95.14), and 376 bps higher than the weighted average bid a year prior.


In late March, however, the secondary loan markets suffered a brief sell-off, and by month-end the weighted average bid of the ELLI retreated to 98.96, which is 45 bps below February’s level. Moreover, the share of deals priced at 101 and above declined sharply, to 21% on March 24, the lowest level so far this year. This fall came just as investors were receiving allocations for the most tightly-priced allocations of the quarter, and it sent new loans from Cerba and Unilabs below their offer prices despite reverse-flexes for both deals during oversubscribed syndications.

It was this wobble that led some investors to think that pricing has reached a lower limit. “The market seems to have paused at this level,” one said.

“We are receiving smaller allocations on the more tightly priced deals, but we are OK with that as those are the names that will be hit if there’s market volatility post-Easter,” explains another investor. “We

95

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100

Mar2016

Apr2016

May2016

Jun2016

Jul2016

Aug2016

Sep2016

Oct2016

Nov2016

Dec2016

Jan2017

Feb2017

Mar2017

Fig. 14: Weighted Average Bid of S&P European Leveraged Loan Index

16


can hold onto that cash instead and potentially buy on the dip.”

Show Me the New Money

Looking ahead, the concern continues to be the lack of new buyout or add-on acquisition facilities. “The lack of new deals is frightening,” said one investor. Another commented that the reason the first quarter has been so dominated by repricings and refinancings is that the arranging banks have had little other business to keep them busy, and instead have been pitching these types of transactions to issuers and private equity sponsors.

But optimism persists that private equity is working hard to generate new deal flow because of the dry powder it holds, and the favourable financing conditions of the moment. “Arranging banks’ clients are very hungry for deals, and private equity firms know that they can get

attractive terms,” adds another investor.

Another possible source of new deal flow into the loan market is via refinancings of existing financing via the bond market. “Bond-to-loan refis will help to improve the loan universe,” says a market participant.

Looking ahead, the LBO pipeline is slowly filling with new situations; however, there are still not enough large-scale auctions on the horizon to satisfy market participants. The largest deal in the pipeline may come from the public-to-private acquisition of German drugmaker Stada, which could generate a debt financing package of up to €2.6bn.

For Illustrative purposes only. Source: S&P Capital IQ. As at 15/3/17 17

Data Pack

EMEA - Based Targets 1

1. The exit transaction averages have been calculated after removing the amount of the single largest transaction to avoid over-estimating the trend on the back of a single deal: Royal Dutch Shell plc (ENXTAM:RDSA) acquired BG Group plc (LSE:BG.) for €80bn in February 2016. Nokia Corporation (HLSE:NOK1V) acquired Alcatel-Lucent (ENXTPA:ALU) for €21.8bn.

0

50

100

150

200

250

January - 15 March 2016 January - 15 March 2017

Number of Private Equity Entry Transactions by Region January - 15 March 2016 vs. January - 15 March 2017

Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom 0

10

20

30

40

50

60

70

80

90

100


Number of Private Equity Exit Transactions by Region January - 15 March 2016 vs. January - 15 March 2017

Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom

0

2

4

6

8

10

12

14

16


Aggregate Private Equity Entry Transaction Values by Region (€bn)

January - 15 March 2016 vs. January - 15 March 2017

Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom 0

20

40

60

80

100

120


Aggregate Private Equity Exit Transaction Values by Region (€bn)


Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom


Data Pack

0

50

100

150

200

250

300

350


Average Entry Transaction Size by Region (€mn) January - 15 March 2016 vs. January - 15 March 2017

Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom 0

200

400

600

800

1000

1200


Average Exit Transaction Size by Region (€mn) January - 15 March 2016 vs. January - 15 March 2017

Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom

0

50

100

150

200

250

300

350

400

450

January - 15 March2016


Number of Private Equity Entry Transactions by Industry January - 15 March 2016 vs. January - 15 March 2017

Consumer Discretionary

Consumer Staples

Energy

Financials

Healthcare

Industrials

Information Technology

Materials

Real Estate

Telecommunication Services

Utilities 0

10

20

30

40

50

60

70

80

90


Number of Private Equity Exit Transactions by Industry January - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities


Data Pack

0

2

4

6

8

10

12


Aggregate Private Equity Entry Transaction Values by Industry (€bn)



Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities0

10

20

30

40

50

60

70

80

90


Aggregate Private Equity Exit Transaction Values by Industry (€bn)



Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities

0

50

100

150

200

250

300

350

400



Average Entry Transaction Size by Industry (€mn) January - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities

0

200

400

600

800

1000

1200

1400



Average Exit Transaction Size by Industry (€mn) January - 15 March 2016 vs. January - 15 March 2017 1


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities


Data Pack

EMEA – Based GPs 2

2. The exit transaction averages have been calculated after removing the following transactions to avoid over-estimating the trend on the back of a single deal: Royal Dutch Shell plc (ENXTAM:RDSA) acquired BG Group plc (LSE:BG.) for

€80bn in February 2016. Nokia Corporation (HLSE:NOK1V) acquired Alcatel-Lucent (ENXTPA:ALU) for €21.8bn and Abbott Laboratories (NYSE:ABT) acquired St. Jude Medical Inc. (NYSE:STJ) for €26.7bn

0

50

100

150

200

250


Number of Private Equity Entry Transactions by Region January - 15 March 2016 vs. January - 15 March 2017

Africa

Asia

BeNeLux

France

Germany

Indian Sub-Continent

Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom0

10

20

30

40

50

60

70

80


Number of Private Equity Exit Transactions by Region January - 15 March 2016 vs. January - 15 March 2017

Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom

0

2

4

6

8

10

12

14

16


Aggregate Private Equity Entry Transaction Values by Region (€bn)


Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom

0

20

40

60

80

100


Aggregate Private Equity Exit Transaction Values by Region (€bn)


Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom


Data Pack

3. The entry transaction averages have been calculated after removing the following transactions to avoid over-estimating the trend on the back of a single deal: Glencore Plc (LSE:GLEN) along with Qatari sovereign wealth fund of

Qatar Investment Authority acquire 19.5% stake in Public Joint Stock Company Rosneft Oil Company (LSE:ROSN) for €10.5bn

0

50

100

150

200

250

300

350


Average Entry Transaction Size by Region (€mn)January - 15 March 2016 vs. January - 15 March 2017 3

Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom0

200

400

600

800

1000

1200

1400

1600


Average Exit Transaction Size by Region (€mn) January - 15 March 2016 vs. January - 15 March 2017

Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom

0

50

100

150

200

250

300

350

400

450

500



Number of Private Equity Entry Transactions by IndustryJanuary - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities

0

10

20

30

40

50

60

70

80

90

100



Number of Private Equity Exit Transactions by Industry January - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities


Data Pack

0

2

4

6

8

10

12


Aggregate Private Equity Entry Transaction Values by Industry (€bn)



Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities0

10

20

30

40

50

60

70

80

90


Aggregate Private Equity Exit Transaction Values by Industry (€bn)



Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials


Utilities

Real Estate

0

20

40

60

80

100

120

140

160



Average Entry Transaction Size by Industry (€mn)January - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities

0

200

400

600

800

1000

1200

1400



Average Exit Transaction Size by Industry (€mn) January - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities


Data Pack

VC EMEA – Based GPs

0

20

40

60

80

100

120


Number of Venture Capital Entry Transactions by Region January - 15 March 2016 vs. January - 15 March 2017

Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom

0

50

100

150

200

250

300

350



Number of Venture Capital Entry Transactions by Industry January - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities

0

200

400

600

800

1000

1200

1400

1600


Aggregate Venture Capital Entry Transaction Values by Region (€mn)


Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom

0

200

400

600

800

1000

1200

1400

1600

1800



Aggregate Venture Capital Entry Transaction Values by Industry (€mn)



Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities


Data Pack

VC EMEA – Based Targets

0

10

20

30

40

50

60

70

80


Average Entry Transaction Size by Region (€mn) January - 15 March 2016 vs. January - 15 March 2017

Africa

Asia

BeNeLux

France

Germany


Latin America

Middle East

Nordics

North America

RoE

Southern Europe

United Kingdom0

10

20

30

40

50

60




Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate


Utilities

0

20

40

60

80

100

120


Number of Venture Capital Entry Transactions by Region January - 15 March 2016 vs. January - 15 March 2017

Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom0

50

100

150

200

250

300


Number of Venture Capital Entry Transactions by Industry January - 15 March 2016 vs. January - 15 March 2017


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate

Utilities


Data Pack

0

500

1000

1500

2000


Aggregate Venture Capital Entry Transaction Values by Region (€mn)


Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom 0

200

400

600

800

1000

1200

1400

1600


Aggregate Venture Capital Entry Transaction Values by Industry (€mn)



Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Real Estate

Utilities

0

10

20

30

40

50

60

70


Average Entry Transaction Size by Region (€mn)January - 15 March 2016 vs. January - 15 March 2017

Africa

BeNeLux

France

Germany

Middle East

Nordics

RoE

Southern Europe

United Kingdom 0

10

20

30

40

50

60

70

80

90




Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials

Utilities

Real Estate


Data Pack

Multiples Table

Implied Enterprise Value/EBITDA EMEA Private Equity Exits 15/03/2016 - 15/03/2017

M&A 15/03/2016 - 15/03/2017

Consumer Discretionary 11.9 11.0

Consumer Staples 13.9 10.7

Energy 13.1 8.7

Financials 11.7 12.7

Healthcare 13.6 13.0

Industrials 10.2 9.3

Information Technology 15.6 13.0

Materials 9.1 8.0

Telecommunication Services 9.5 7.6

Utilities 9.4 9.8

Real Estate 25.9 20.9

Implied Equity Value/LTM Net Income EMEA Private Equity Exits 15/03/2016 - 15/03/2017

M&A 15/03/2016 - 15/03/2017

Consumer Discretionary 19.2 16.6

Consumer Staples 20.5 18.8

Energy 21.3 8.1

Financials 23.1 16.8

Healthcare 30.3 18.1

Industrials 20.4 18.5

Information Technology 22.0 20.6

Materials 20.7 14.4

Telecommunication Services 26.7 17.7

Utilities 15.5 16.5

Real Estate 8.5 13.3 *Multiples highlighted in bold & italics represent the sector average over a 2 year time horizon in order to provide a more comprehensive sector average


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Previous Issues

Issue 1, March 2014

• EMEA-Based Private Equity Market Settles into a New Normal Post-Financial Crisis

• Information Technology Remains Attractive for PE and VC Firms

Issue 2, June 2014

• Healthy Start to 2014 for EMEA GPs, Despite April Hiccup

• Healthcare: Resilient or Overheating? We examine PE activity pre and post-financial crisis

Issue 3, September 2014

• Pressure from Strategic Buyers Slowing EMEA GPs’ Pace of Investment in Q2

• Asia Capital Sun Rising over Europe: Asian PE investors show growing interest in EMEA-based

targets

Issue 4, January 2015

• 2014: EMEA Still Attractive to Global Private Equity

• IT & Finance heat up - The IT sector attracted the most deals over the course of 2014, with 1701

investments worth €12bn of capital. €33.2bn was invested into the Financial sector in 2014, a 29%

increase in deal volume compared to 2013

• Germany: Has the Mittelstand lost its quintessentially strong profile?

Issue 5, April 2015

• UK North-South Divide: Who is Benefitting from UK Private Equity Investments?

• Fall of Oil & Gas Prices: Potential PE Dealmaking Territory

• Private Equity: What’s the Deal with Tax Havens?

Issue 6, July 2015

• European Leveraged Lending: How are PE Firms Taking Advantage of Conditions in the European

Leveraged Finance Market?

• Consumer Confidence Conundrum – EMEA PE Skeptical about Consumer Confidence Outlook?

• Middle East Sovereign Wealth Funds – Perfect Partners for Mega-Deals

Issue 7, September 2015

• Investment into EMEA Wanes as Regional Issues Accumulate

• Private Equity Shifts Focus Towards Internet Retailers

• Private Equity Exits: Secondaries and IPOs – Buffers and Bull Markets

Issue 8, February 2016

• EMEA Becomes Increasingly Attractive to Global GPs

• EMEA Healthcare Checkup

• The Rise of Cyber Power in Germany

• Have Buyout Holding Periods Reached their Peak?

Issue 9, April 2016

• 2016: Slow Start for EMEA Entries but Exits Skyrocketing

• France: La Belle Vie for Private Equity

• Spanner in the Works for Industrials

• Will Private Equity Push through High-Yield Bond Market Volatility?

Issue 10, July 2016

• Is Investment into EMEA Running Out of Steam?

• Sweden: Still ahead in the Nordic Private Equity Market?

• IT in EMEA Losing Ground to the U.S. and Asia

• Private Equity Sponsors Tap Powerful Direct-Lenders in Bid to Raise Larger Unitranches

Issue 11, October 2016

• EMEA Emerging Markets Flourish Despite Brexit Jitters

• Specialist Mid-Market GPs Face Stiff Competition

• EMEA Consumer Products Losing Ground to US Targets

• UK Large Caps, UK Mid-Caps: Spot Any Difference?

Issue 12, February 2017

• EMEA Fails to Attract Global Private Equity Capital in 2016

• Russia, Czech Republic and Poland lead the way for CEE

• Real Estate and Private Equity: An Affair to Remember

• Asia-Pacific Investors favour North America over Europe


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emea private equity - s&p global · firms into emea-based targets reached €30.1bn during the...

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