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European Private Equity Outlook 2016: Inexpensive debt financing and anticipated improvement in Europe's economic climate create a mood of cautious optimism in the industry

Munich, February 19, 2016

  • New pan-European Roland Berger study: 64 percent of PE experts anticipate more M&A transactions by PE firms in 2016
  • Highest growth expectations for Germany (+3.2%), followed by Iberia/Italy (3.1%) and United Kingdom (+2.9%); at the lower end of the rankings but still set to see growth come Switzerland/Austria (+1.0%) and, finally, Greece (-0.2%)
  • Attractive industries for M&A with PE involvement: technology and media (65%), pharmaceuticals and healthcare (62%) and consumer goods and retail (60%)
  • Political instability features for the first time as the most important factor ahead of economic development
  • Active portfolio management will grow increasingly in importance

The continued availability of inexpensive debt financing and positive sentiment concerning the overall economic situation in Europe serve to roll the cautiously optimistic mood in the private equity (PE) industry over into 2016. Almost two thirds (64%) of companies anticipate more M&A transactions with PE involvement, especially in Germany, Iberia and Italy. Growing numbers of PE managers also think that their industry is back to being as robust as it was before the financial crisis. Nevertheless, 40 percent of firms believe their business model still needs adaptation and improvement. These are the key findings of the "European Private Equity Outlook 2016", for which the experts from Roland Berger conducted a poll of industry professionals, as in previous years.

"As of the end of 2015, the PE industry appears to be rather unconcerned by the overall economic situation," said Roland Berger Partner Christof Huth, who interviewed investors across Europe with his Investor Support Team. "Most firms even expect this year to be a significant improvement on 2015." PE investors do not expect any reduction in the availability of cheap financing compared to 2015 either. "That said, our survey does indicate a growing concern about Europe's political stability. This is primarily what will influence how many transactions actually complete this year."

Positive sentiment in the European PE market
The highest year-on-year growth is expected in Germany (+3.2%). Besides the already mentioned factors of financing and the economy in Europe, the good level of consumer confidence is also instrumental here. By contrast, catch-up effects appear to be the main influences in the Iberia and Italy region, where anticipated growth is 3.1 percent. The UK, Europe's biggest market for corporate takeovers, is still expected by grow at 2.9 percent. Way down the rankings, though still showing growth, comes the region of Switzerland/Austria, which has been hard hit by Switzerland's currency revaluation. And bringing up the rear owing to the sustained weakness of its economy is Greece, where the PE experts expect to see a further fall of -0.2 percent.

The particularly attractive industries are technology and media according to 65 percent of the experts polled, followed by pharmaceuticals and healthcare (62%), and consumer goods and retail (60%). They anticipate fewer acquisitions in automotive (18%), chemicals (17%), energy and construction (14% each). "The rise in digitization/electronization is primarily what makes tech firms interesting takeover candidates," explained Christof Huth. "Many industries have been slow off the mark here and will find it easier to catch up with the benefit of acquisitions."

2015 was already a good year for private equity, but one third of professionals expect 2016 to offer even more attractive investment opportunities. The most important source of acquisition targets will be secondary buy-outs in the opinion of two thirds of respondents (67%), followed by majority shareholdings in family-owned companies (64%). This is a big part of the reason why most study respondents (83%) expect the majority of transactions to be valued at below EUR 250 million. But practitioners do not discount the possibility of an increase in large transactions starting from a low base point.

Divesting existing investments more important than developing portfolio companies for the first time
The top priority for professionals in 2016, as in previous years, remains investing in new companies (38%). Rising to second place this year, cited by one quarter of respondents (26%), is the sale of existing investments. Only 23 percent of those polled plan to focus mainly on developing portfolio companies – as against 31 percent in 2015. "This is the first time in the recent past that we are seeing PE investors focus more on divesting investments than on developing their portfolio," said Huth. "What this shows is that they have done their homework, strategically and operationally developing many of their portfolio companies to such a point over recent years that they are now in a position to take advantage of this favorable time to sell up."

This tallies with the fact that almost all of the PE managers polled consider active portfolio management to be indispensable: 97 percent of professionals think that passive investment is outdated; the key to success is for portfolio companies to be actively involved and to have a say in at least the major business decisions. Keen to boost the value of their investments even further in 2016, 31 percent plan to make additional acquisitions and 29 percent want to introduce new products or services into their portfolio companies. These two measures are rated as more important than last year (+9 and +14 percentage points). On the other hand, PE firms now consider cost reduction initiatives less important (12%, 2015: 21%). Approximately one third of all respondents cite weak change management capabilities as the main roadblock to the successful development of their acquisition targets. "Managers in the portfolio companies lack the skills in many cases. Active portfolio management is therefore going to be even more important in the future," said Christof Huth in summary.

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