A shift of strategy among sponsors ahead of the UK’s vote to leave the EU saw the region lose a third of its deal value compared to one year earlier. “Most European PEs are sitting on the fence regarding UK deals,” said a London-based lawyer, acknowledging that a number of ongoing UK deals have been put on hold while the markets assess Brexit's full ramifications.

Europe recorded 542 private equity deals worth €38.5bn during H1, according to Mergermarket data. While a 32.8% drop in value reflects a sense of pre-Brexit nerves, the number of deals remained strong, recording 21 more than during the same period 12 months ago as France, Germany, Italy and Switzerland emerged with a stronger H1 activity.

European private equity map redrawn

A year since the UK accounted for 42.7% of private equity value in Europe, the island has lost its lustre, slipping to fifth from first position with an 11.3% share in H1 - behind Italy, Switzerland, Germany and France. Italy occupied the top spot, hosting 15.1% of Europe’s buyout deal value. France, meanwhile, was home to the highest number of buy-outs in Europe with 102 deals followed by the UK’s 100 transactions. 

Fund managers had the foresight to second-guess the UK leaving the EU, making it the country with the highest amount of PE exits so far this year. The largest deal was executed by Bain Capital’s sale of UK-based Brakes Group for €2.7bn to Sysco Corporation. The UK also hosted Advent International’s exit of €1.97bn Priory Group to Acadia Healthcare Company and Argus Media’s primary buy-out by General Atlantic, priced at a hefty 20x EBITDA, valuing the Nasmyth family’s 50% stake sale at EUR 1.3bn.

Germany hosted four of the top 10 deals in H1 – Blackstone’s €1.6bn exit of the WindMW GmbH to China Three Gorges; KKR’s €1.58bn sale of WMF to Groupe SEB SA; EQT’s €1.44bn exit of EEW Energy to Beijing Enterprises and a EUR 1.4bn primary buy-out of Building and Facility division from Bilfinger SE by EQT.

Stable year-on-year exit activity in Ireland pushed it into the top 10 for Europe's most active markets. 

Brexit domino effect

The European market has been a sponsors’ selling ground with high valuations supported by high levels of liquidity and availability of dry powder. This in turn has pushed buyers into paying hefty prices for some assets. At the beginning of 2016, we saw some buyers particularly concerned about high valuations, which kept them aside. Especially some North European and UK processes have seen some very high valuations. 

While Brexit and the subsequent sterling depreciation may lower UK valuations, making them cheaper for dollar and euro funds, advisers fear there may be less assets available in the short term amid market uncertainty.

A number of deals have reportedly been placed on hold since the 23 June vote. Cinven has postponed plans to sell UK-based web hosting firm Host Europe Group due to market uncertainty following the UK’s vote to leave the EU, Mergermarket reported. The GBP 1bn-plus sale of UK-based storecard provider, NewDay, was also reported to be temporarily cancelled by owner Varde Partners due to uncertainty about the UK's economy.

According to sources, the overall Brexit affect may play out by sector, adding that financial services, which will largely be dictated by regulation, and retail and consumer, shaped by consumer confidence, may be most affected.

Yet for Continental European deals, it seems to be business as usual. One of the largest ongoing primary deals for private equity funds – Total’s €3bn-plus disposal of its German specialty chemicals subsidiary, Atotech - seems to be on track. 

Modest H2 expectations

While the UK and its place within the European trading community has occupied most attention of late, other upcoming events could also determine European deal making in the second half of the year. October’s referendum in Italy and elections in the US, France, Spain and Germany could affect M&A as well as planned listings. Further dual-tracks are likely to take place as capital market volatility could make it less attractive to only assess IPOs.

This article is an extract from Mergermarket's European private equity roundup originally published 15 July 2016. 

Maryna Irkliyenko Editor Debtwire