1. New Roland Berger study: Only 62 percent of players expect 2015 to feature more M&A transactions involving private equity firms – 20 percent fewer than 2014
2. UK remains the biggest M&A market (2.1%)
3. Acquisitions of mid-sized companies dominate: transaction volume no more than 250 million euros in 86 percent of cases
4. High liquidity levels lead to diminishing returns
5. Three quarters of PE experts see a need to adapt their current business model

Munich, February 18, 2015

The European private equity industry is looking to the new year with caution: whereas 82 percent of market players expected transaction numbers to rise in 2014, this year the figure is just 62 percent. And 18 percent even expect the market to shrink, according to the findings of the latest study, "European Private Equity Outlook 2015", by Roland Berger Strategy Consultants.

"Europe's private equity market is still growing, although the euphoria of last year has died down somewhat," says Roland Berger Partner Gerd Sievers. "The industry's success depends partly on the availability of attractive targets. But the volatility of the markets often has a negative impact on international acquisitions, too."

Conservative mood in the European PE market

The first signs of a cool-down surfaced back in 2014, with around one third of survey respondents closing fewer transactions than anticipated. Their main reasons were the lack of attractive targets (28%) and the worsening geopolitical development as well as the pricing of targets, both coming in at 22 percent.

The trend is continuing into 2015, with Europe's M&A markets set to see slower growth. The UK, the biggest market for corporate takeovers, is expected to see no more than about a 2 percentage point increase, with the Iberian peninsula and Italy each anticipating some 1.8 percent growth. The German acquisitions market is set to grow 1.7 percent. Bringing up the rear are France, Austria and Switzerland, where the PE experts anticipate no more than 0.5 percent growth in transactions. The only market set to grow slightly – for the first time in three years – is Greece (0.6%).

In terms of the industries deemed most relevant, pharmaceuticals and healthcare (49%), consumer goods and retail (48%), and technology and media (46%) remain the frontrunners. The automotive industry (10%) and the chemical sector (13%), on the other hand, feature fewer acquisitions. The energy sector is also very weak (22%). "The radical industry transformation that the changes in energy policy were expected to bring has so far failed to materialize," comments Sievers.

Mid-sized companies remain the focus

The PE industry is also cautious about transaction volumes. 86 percent of study participants anticipate most deals being in the range of up to 250 million euros. 61 percent even expect most transactions this year to be on a scale of below 100 million euros.

"The substantial focus on smaller transactions is predominantly down to the greater availability of mid-sized companies on the market," explains Roland Berger Partner Sascha Haghani. "Market volatility is surely also a factor: In times of major geopolitical and economic uncertainties investors do tend to be cautious."

Market players expect the role of the following factors to be very significant for the development of M&A activities in 2015: the availability of suitable targets (43%), the macroeconomic situation (33%) and the pricing of targets (23%). Investors do not view the euro crisis as nearly so significant (13%).

High levels of liquidity in the market lead to diminishing returns

PE firms plan to go on investing in new companies this year (34%) and to continue the strategic and operational development of companies in their portfolio (31%). Only one quarter of respondents currently have plans to sell some of their investments. The subject of fundraising is now more important than it was last year (17%), yet half of study participants fear a rise in the competition for fresh capital. "There is currently a great deal of liquidity in the market, but the often inflated pricing of targets has brought returns down to a level that's unattractive to PE investors," explains Sievers.

However, an even more pressing concern for the industry is the need to adapt the private equity business model in its current form. Three quarters of the respondents in the pan-European survey are now coming to the realization that their business model is outdated. "Pure financial investments just don't work anymore," warns Sievers. "In order to be successful, investors have to actively manage the companies in their portfolio. It's not just about operational measures like efficiency programs and outsourcing. Most of all it's about taking strategic steps like developing new markets. Because that's the only way portfolio companies will be able to move forward and grow their market value."