At face value, European private equity appears to be in good shape.
Despite soaring borrowing costs and tighter leverage conditions, new Pitchbook data underscored a near-record level of PE fundraising across continental Europe, the UK and Ireland.
Nearly €120 billion (£1.3 billion) in capital was raised across 117 funds and while deal value was down 26.5% year on year, this at least made for a resilient year given prevailing macroeconomic conditions.
Furthermore, deal value was still 10% to 20% higher than pre-2021 levels, “which shows the overall resilience of PE as an asset class through its continued growth regardless of the macroeconomic headwinds”, said Pitchbook analysts.
A lot has been said of the recent trend towards take privates amid lower public market valuations, particularly in Britain’s biotech sector.
No more was this exemplified than when Sweden’s PE giant EQT plucked Dechra Pharmaceuticals off the London Stock Exchange for €5.1 billion (£4.4 billion).
Dechra shares hollowed out in May when adverse trading conditions led the veterinary specialist to issue a profit warning.
This put Dechra into bargain territory, though management conceded at the time that EQT’s takeover deal was “fair and reasonable”.
Software was another sectoral focus for multinational PE vultures, with Silver Lake buying out German IT group Software AG and Goldman Sachs (NYSE:GS) Asset Management leading a take private of Norwegian edtech platform Kahoot! for 17.2 billion Norwegian kroner (£1.3 billion).
Megafunds ≠ megadeals
But these surprisingly strong figures belie the record level of concentration in the PE market, with more than half of all capital raised going to just five megafunds managed by the usual suspects: CVC Capital Partners, Permira, KKR, PAI Partners and Bain Capital.
“The concentration of capital raised within megafunds has hit an all-time high in 2023 as investors focused on experienced managers from established fund houses with proven track records as shown by the fact that these funds have all had at least five previous funds in their fund family,” said Pitchbook.
Analysts determined that “the current macroeconomic climate makes it difficult for first-time managers to raise funds, and we expect this to continue being the case in 2024”.
In short, small and mid-sized firms are being muscled out, while megafunds are skewering the fundraising data to the upside.
Yet even this record level of concentration among the megafunds is failing to translate into megadeals.
In fact, €1 billion-plus PE deals hit a nine-year low in 2023, while the €500 million to €1 billion bracket was the only bracket to exhibit growth (12.1% higher year on year, to be precise).
Dechra, Software AG et al were the exception, not the rule, it seems.
Why does this all amount to? Dry powder, and lots of it.
Fund managers amassed serious amounts of dry powder in the ultra-low post-Brexit interest rate environment, but the dearth of big-ticket deals means this dry powder has remained piled high since.
This is not just a European trend - global PE dry powder hit a remarkable $4 trillion by the end of 2023, with European PE contributing about €400 billion.
That’s a lot of unspent capital that is likely to be held onto until market conditions improve, even though fund managers are being pressured into deploying this unspent capital, with 54.7% of deals in 2023 comprising add-ons, the highest figure in recent years.
Only when big-ticket megadeals return will we see this excess capital be put to work.