European Leveraged Buyouts: Historical Trends and Upcoming Challenges
October 19, 2006
Buyout markets in the U.K. and continental Europe have experienced remarkable growth during the past ten years. A recent Journal of Applied Corporate Finance article reviews the developments in fund-raising, deal sourcing, deal structuring, offer premiums, exit mechanisms, and returns in both the U.K. and continental Europe, and concludes by discussing the challenges confronting the buyout market as a whole.
In the U.K., buyouts accounted for half of total M&A activity (measured by value) in 2005. And as in the U.S. during the 1980s, the greatest number of U.K. buyouts in recent years have been management- and investor-led acquisitions of divisions of large corporations. In continental Europe, by contrast, the largest fraction of deals have involved the purchase of family-owned private businesses. But in recent years, increased pressure for shareholder value in countries like France, the Netherlands, and even Germany has led to a growing number of buyouts of divisions of listed companies. Like the U.K., continental Europe has also seen a small but growing number of purchases of entire public companies (known as private-to-public transactions, or PTPs), including the largest ever buyout in Europe, the €13 billion purchase this year of the Danish corporation TDC. Given the record levels of capital raised by European private equity funds in recent years-which, until 2005, exceeded the amounts invested in any given year-we can expect more growth in private equity investment in the near future. In continental Europe, the prospects for buyouts remain especially strong, given both the pressure from investors to restructure larger corporations and the possibilities for adding value in family-owned firms. But today's private equity firms face a number of challenges in earning adequate returns for their investors. One is increased competition. In addition to the increased activity of U.S. private equity firms, local private equity investors are also facing competition from hedge funds and new entrants such as government-sponsored operators, family offices, and wealthy entrepreneurs. Another major challenge is finding value-preserving exit vehicles. Although an IPO is an option for the largest buyouts with growth prospects, most buyout investments are harvested either through sales to other companies or, increasingly, other private equity firms. The latter transactions, known as “secondary” buyouts, now account for a significant share of new funds invested by private equity firms across Europe. To learn more on recent trends in the private equity markets, the featured topic of the current issue of the Journal of Applied Corporate Finance, click here.
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