Private Equity has doubled since the nadir of 2009, while investment from Asian PE funds has only emerged as a genuine option for European vendors in the last two years.

This renewed confidence among overseas buyers is buoyed by:

• A Wall of Money• The Public Markets• Cheap Liquidity• Infrastructure Funds

And these factors are prompting European sellers to consider, or reconsider, their exit options.

In previous editions of DC Edge we focused on the few positive countertrends emerging from what was still largely a crisis-stricken economic climate.

In 2014, with deal volumes from US and Asian investors comfortably reaching 2.5x their 2009 levels, we can assuredly say that confidence in the European mid-market has returned.

Notably, while total inbound deal volumes have recovered, there has been an exponential increase in Asian trade appetite and, most recently, a growing number of overseas Private Equity (PE) investors. The volume of acquisitions in Europe by US

In Europe We Trust.

DC Edge Issue 4

USAUS PE investors are turning their attention to Europe as a result of a highly competitive home market. Europe’s recovery from economic crisis lags behind that of the United States and buyers are being enticed by the possibility of achieving better value for money in European auctions. While the annual number of investments by US PE into the European mid-market fell to just 22 in the lowest ebb of the financial crisis, that figure had more than doubled by 2011 and has remained comfortably at 40+ since.

US PE interest in Europe is not a new phenomenon, however such levels of interest are new to the mid-market. Larger global PE firms such as Blackstone (Rothesay Life), OMERS (Civica) and Bain Capital (Maison du Monde) are increasingly entering the mid-market fray as overall deal values tumble and large-cap deals remain scarce.

Volume of deals in Europe by US PE investors with no European office:

Wall of Money

ASIAAsian PE investors have emerged as acquirers of high-quality European businesses with strong growth potential in Asian markets, as demonstrated by deals such as New Horizon’s investment in Punch Powertrain and Jynwel’s acquisition of Myla. For Asian buyers, European assets not only offer greater access to IP, brands and global blue-chip customers (all of which are core competencies for driving growth potential in Asia) but well-established Western businesses with sophisticated management and governance in place are also considered “safer bets” than many local opportunities. Meanwhile, for the European target, an Asian PE investor provides access to a new and significant growth pathway: business owners can accelerate growth in emerging markets and achieve their international ambitions, before exiting from an ultimately global business.

Figures show that the average deal value by overseas PE in Europe, compared to pre-crisis figures, has decreased by 46%:

While many large-cap US PE firms have had a significant “on the ground” presence in Europe for some time, a number of mid-cap US PE firms are also now opening European offices (Centerbridge, Onex, Levine Leichtman). Most notable, however, is the increase in the number of US PE firms with no European footprint that are actively seeking to deploy capital here:

Certainly, the propensity and ability to invest in European assets still varies significantly among Asian PE investors. Qualified funds must have EUR/USD funds, be registered offshore and, importantly, have a team capable of executing cross-border transactions. The more experienced Asian investors may also act as a catalyst to facilitate transactions between the West and larger Chinese SOEs (State-Owned Enterprises) who are motivated and very well-funded, but may lack the necessary M&A skills to execute overseas transactions on their own.

2005 2006 2007 2008 2009 2010 2011 2012 2013

1013 15

11 9 1218

24 20

2007 2013

€584m€310m

US PE firms with no European office that invested in Europe in 2013:

Asian PE firms that have invested in Europe in the last two years:

* mid-market transactions or undisclosedSource: Mergermarket

Valuation benchmarks are being set by the equity capital markets. The resurrection of the IPO is generating column inches due to the dearth of listings in recent years. This revival is driving overall exit levels, offering a genuine alternative to M&A and increasing competition for sought-after assets; pricing in both single and dual-track M&A processes is being pushed

The Public Markets

Total exits IPOs and Private Placement

up because buyers recognise the need to pay a premium to keep an asset out of the public market. IPO exits by private equity have increased market share since the end of the financial crisis, culminating in a ten-year high of 15% in 2013.

The wave of flotations has continued so far in 2014, with 39 Europe-based companies making their debut on European stock markets in Q1. PE has clearly

2005 2006 2007 2008 2009 2010 2011 2012 2013

324

388

488

198

455392

472

307332

3848

50

17

3624

6

45

70

Exits of European assets by Private Equity investors:

Source: Mergermarket

been a driving force behind the trend as sponsor-backed companies accounted for 44% of all European Q1 IPOs.

Cheap Liquidity

2013 marked a turning point in the European debt markets. There was a manifest increase in liquidity, not only in the large buy-out market, but also in the mid-market. Numerous funds joined the clearing banks who previously had this market more or less to themselves. Initially, this drove higher leverage, looser covenants and more flexible structures, but later in the year it began to drive pricing down as well.

In 2014, therefore, we find ourselves in the most benign credit conditions for leveraged buy-outs since 2007, with ample liquidity, plenty of choice on structure, a number of potential lenders and competitive pricing.

Source: LCD Comps

* Basis points above Euribor.

Weighted Average New-Issue Spreads in Europe*Q1 2013 vs. Q1 2014:

Q1 2013 Q1 2014

444

375 379

442

TLA / RCF TLB / TLC

15% decrease in the cost of borrowing from

Q1 2013 to Q1 2014

190%

Average size of an unlisted European infrastructure

fund increased by

on the previous year

New Infrastructure Funds

Equity capital is also flowing into the Infrastructure sector, driven by increasing investor understanding of a stable and highly defensive sector, inflation protection offered by assets and low real interest rates offered by government bonds.

Figures published by Preqin in October 2013* (the latest available) revealed that the average size of an unlisted European infrastructure fund had increased by a staggering 190% on the previous year, rising from €263m to €762m. This last figure dwarfs any levels seen since 2008 and nears the €826m average of 2007.

Perhaps the most marked increase in competition for assets will be in the hybrid-infrastructure space. As core-regulated assets are increasingly bid at single digit returns by aggressive direct investors (including pension funds and insurance companies), capital will be deployed in more esoteric sectors which have not traditionally been targeted by infrastructure funds. Examples of the widened pool of investee targets include Antin Infrastructure’s acquisition of the crematoria business Westerleigh, and the wave of investment in Telecoms assets across Europe, such as Alinda’s acquisition of Emitel from Montagu.

Average Unlisted Infrastructure Fund Size 2007-2013*:

Annual Europe-Focused Unlisted Infrastructure Fundraising 2007-2013*:

*Source: Preqin 2013 figures as at 22 October 2013

2007 20102008 2009

€6.7bn€2.2bn

€11.6bn €9.6bn

2011 20132012

€9.1bn€4.8bn€2.6bn

The amount of available capital is also on the rise in the debt markets with a number of new dedicated debt funds providing effective competition to traditional bank and bond financing alternatives. Institutional investors continue to raise new infrastructure debt funds, Macquarie being the latest to announce a dedicated vehicle to finance infrastructure businesses. This, combined with an increasing return of banks to the lending market, will sharply increase the supply of debt financing, tightening margins and driving M&A deal flow.

2007 20102008 2009 2011 20132012

€354m€383m

€826m

€375m

€762m

€263m€259m

US PE investment in a UK business

Case studies

Bord Gáis Energy Signed March 2014, completion pending Bord Gáis Energy, the energy arm of the state-owned utility Bord Gáis Éireann, is one of the leading energy providers to homes and businesses throughout Ireland. firmus Energy, part of the Retail Supply business of Bord Gáis Energy, is a regulated gas distribution network and supply company in Northern Ireland which was majority owned by the Irish Government. In May 2013, the Irish government announced the sale

Callcredit February 2014

Callcredit is a leading UK provider of integrated Credit and Marketing Solutions serving over 3,000 customers, including all of the clearing banks; several major international lenders; media communications businesses; and petroleum, automotive, power and retail organisations. The Company also has offices in Japan and Lithuania and operates across international markets.

Punch Powertrain January 2014

Punch Powertrain NV is a developer and manufacturer of innovative clean powertrain technologies headquartered in Belgium. Having pioneered continuously variable transmission (CVT) technology in Europe in the 1970s, Punch Powertrain began to export to Asia less than 10 years ago. The Company now has manufacturing facilities in both Belgium and China, with its main clients being automotive OEMs in China and South East Asia. Punch Powertrain’s CVT technology means that it is well positioned to benefit from the increasing focus on fuel efficiency and emission reduction in global automotive markets, particularly in growing urban traffic.

After a successful holding period, Callcredit’s private equity owner Vitruvian Partners launched a competitive auction process for the business in Autumn 2013. Callcredit was acquired by GTCR, a Chicago-based private equity firm focused on investing in growth companies in the Financial Services & Technology, Healthcare and Information Services & Technology industries, which has invested more than $10 billion in over 200 companies. DC Advisory provided financial and debt advice to GTCR on the acquisition, along with sector expertise, on-the-ground intelligence and strategic advice throughout the process.

DC Advisory was appointed by Punch Powertrain to secure an Asian minority investor to work alongside management and shareholders to facilitate the next chapter of the company’s Asian growth strategy.

Working closely with Daiwa colleagues across Asia, the DC Advisory team provided unique insights into Asian private equity houses’ appetite and culture. In January 2014, New Horizon Capital, a leading Chinese private equity fund based in Beijing, acquired a 30% stake in Punch Powertrain.

of Bord Gáis Energy, as part of the programme of asset disposals agreed with the EU/IMF troika.DC Advisory provided M&A and Debt advice to iCON Infrastructure on the acquisition of firmus Energy as it bid alongside Centrica (Irish gas and electricity supply and CCGT) and Brookfield (renewable energy) as a consortium for Bord Gáis Energy. The consortium acquired Bord Gáis Energy for €1.1 billion (£920 million), with the

US PE investment in a UK business

Asian PE investment in a Belgian business

Infrastructure Investment

The Last Word

The opportunity to attract the interest of overseasbuyers of European assets is real, bringing with it the potential to capture incremental value. More international buyer interest means more complexity in designing and managing an effective sale process. Genuine international reach and real ‘local’ relationships with overseas bidders is a critical component. You must identify early, then educate, filter and focus.”

Simon TilleyManaging DirectorDC Advisory, London

DC Edge | Issue 4