Record-breakers: European PE and VC hits new heights

August 2022  |  FEATURE | PRIVATE EQUITY

Financier Worldwide Magazine

August 2022 Issue

‘Record-breaking’ is a word that has largely been absent from the corporate lexicon over the past two-plus years – subsumed by an unprecedented pandemic that dealt a mighty blow to markets and businesses across the globe.

However, while everyone was at risk from coronavirus (COVID-19), all have not suffered equally. Indeed, one of the business arenas least affected by the ravages of the pandemic is the European private equity (PE) and venture capital (VC) community, which, in contrast to many, witnessed investment activity at the opposite end of the spectrum.

According to Invest Europe’s ‘Investing in Europe: Private Equity Activity 2021’ report – which features fundraising and investment data from over 1800 firms – 2021 saw a strong recovery in activity following the impact of COVID-19, with new investment records for buyouts, growth investments and VC.

Drilling down, European PE firms invested €138bn in Europe in 2021, registering an astounding 51 percent increase over 2020 and setting an all-time record in the process. A total of 8895 companies received investment, 13 percent above the average of the past five years. This activity underscores the PE industry’s pivotal role in providing support for companies to weather tough conditions.

Moreover, all PE segments witnessed strong investment growth and new records in 2021. Investment in buyouts increased by 28 percent to €79bn, growth investment soared 124 percent to €35bn and VC investment saw a 70 percent increase to €20bn.

In terms of specific sectors and industries, information communications technology, consumer goods and services, and biotech and healthcare accounted for two-thirds of investment, with capital flowing into companies that are driving innovation and seeking solutions.

“While the effects of the COVID-19 pandemic continued to be felt across Europe in 2021, with renewed lockdowns and restrictions, PE and VC firms engaged in record-breaking investments and fundraising – guiding entrepreneurs, backing companies and supporting Europeans across the continent,” observes Eric de Montgolfier, chief executive of Invest Europe.

In its analysis of the European PE and VC scene over the past 18 months – ‘European PE Breakdown: 2021 Annual’ – Pitchbook notes strong leveraged lending markets that stayed around the 3 percent mark all year, driven by institutional investors’ aggressive search for yield and low interest rates, which kept deals moving.

“The deals opportunity set increased, as sellers that previously shied away from PE became receptive to PE capital as cash flows were decimated by the pandemic,” explains Dominick Mondesir, a senior analyst at Pitchbook. “The industry’s heightened dry powder meant sponsors had the firepower to aggressively acquire companies and act like corporates.”

Key transactions

With robust deal activity over the past 12 months setting new records on both the deal value and volume fronts, such investment has done much to shape the PE and VC ecosystem across the continent.

In the largest deal of 2021, UK-based supermarket chain Wm Morrison was taken private by Clayton, Dubilier & Rice (CD&R) for €8.2bn. “Due to excessive competition for the deal, which saw bids from rival PE group Fortress, CD&R was forced to offer a whopping 60 percent premium to Morrisons’ share price to win the transaction, outlining general partners’ (GPs) willingness to write larger cheque sizes,” states Pitchbook’s 2021 Annual.

According to Invest Europe, in the first quarter of 2022, among the companies in Europe that raised super-sized fundings was London-based Checkout.com, which raised a $1bn Series D funding from a host of growth-stage investors, making it the second-most highly valued European private company at $40bn – below the 2021 valuation of Klarna at $45.5bn but ahead of Revolut valued at $33bn. Other large late-stage fundings include Turkey-based delivery company Getir and Estonia-based micro-mobility company Bolt.

Realism amid recovery

According to PitchBook’s analysis, deal flow in 2022 is unlikely to surpass the record high seen in 2021 but will nonetheless be buoyed by both large amounts of dry powder and robust debt markets. At the same time, external factors like higher inflation and the possible impacts of new COVID-19 variants are among the headwinds that could affect PE and VC activity in 2022 and beyond.

“We expect deal activity to remain extremely strong but believe it will slow from the outstanding 2021 for a few reasons,” states Pitchbook. “Sponsors have likely completed their dealmaking catch-up after 2020’s down year. Many GPs believe we have hit the peak of PE deal activity and moving forward, investment activity should begin to normalise at a higher level.”

Normal or not, challenges undoubtedly remain. “Europe, like the rest of the world, still faces intense challenges from the legacy of COVID-19, rising inflation and interest rates, and Russia’s attack on Ukraine, which is provoking a huge humanitarian crisis and shaking confidence in globalisation and the geopolitical order,” concludes Mr de Montgolfier. “However, despite this uncertainty and disruption, the PE and VC landscape is a community that is backing businesses, supporting investors and flourishing in every region of Europe.”

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BY

Fraser Tennant