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Roland Berger sees M&A drop.

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Munich: A tough financing environment will force Private Equity (PE) investors to concentrate on developing the companies already in their portfolios, according to "European Private Equity Outlook 2012", a new study from Roland Berger Strategy Consultants.

  • 73% of the survey respondents expect the number of M&A transactions involving PE companies to stagnate or drop
  • They expect to see the biggest reductions in activity in the Mediterranean area, in France and in the Benelux countries
  • The most interesting industries for corporate takeovers are pharmaceuticals and healthcare, consumer goods and retail, logistics and business services
  • There will be few large transactions due to the restrictive financing environment
  • Company valuations on the demand and supply sides are drifting apart. PE investors see the need to improve the attractiveness of the companies in their portfolios

After the recovery of the European private equity market in recent years, the industry now expects to see a drop in the number of M&A transactions involving private equity investors. This will be especially true in Greece, Italy and Spain, due to their financial instability, but France and the Benelux countries will also feel the crunch.

The study identified the pharmaceuticals and medical industry, consumer goods and retail, and logistics and business services as the target industries for private equity participations. It also found that large transactions of more than EUR 250 million will remain rare due to the volatile capital market and restrictive financing environment. PE companies see carve outs from company groups (76%) and majority holdings in family businesses (69%) to be the main source of acquisitions. But the focus of PE investors this year will be on active portfolio management. 94% of the study participants consider the further development of their portfolio companies to be of great importance, because this is the only way they can counteract the drifting apart of valuations on the supply and demand sides of the M&A market.

"After a revival of the private equity market in the last two years, the European market is now gradually beginning to lose some of its momentum," says Gerd Sievers, Partner at Roland Berger Strategy Consultants. "This is mainly due to the precarious economic outlook in many countries, and the difficult refinancing situation."

Reduction in M&A transactions with PE involvement

73% of the respondents expect to see a drop or at least stagnation in M&A transactions with PE involvement in 2012. The market will contract especially in the Mediterranean region, with PE investors participating much less in company takeovers in countries like Greece (-10%), Spain, Portugal and Italy (-7%). "The unstable economic situation in these countries is deterring investors," Sievers explains.

But also in France and the Benelux states, experts expect to see a 7% shrinkage of the PE market, and 3% in the DACH region. Great Britain, one of the most important markets for PE investors, will also experience a slightly negative trend (-2%). The CEE region and Scandinavia (+1%), and especially Poland (+4%) find themselves in a countertrend. Most of the M&A transactions will take place in the pharmaceuticals and healthcare (56%), consumer goods and retail (51%) and logistics and business services (37%) segments.

Focus on moderately-sized transactions

The number of M&A transactions in 2012 will depend greatly on the economic development as a whole. A third of those participating in the study held this opinion. Most of the private equity companies expect the economic outlook to continue to worsen. Accordingly, M&A transactions will tend to be more in the mid-cap market segment. 94% of the PE companies expect most takeovers to have a transaction volume of less than EUR 250 million. 60% expect transactions of less than EUR 100 million to be the focus.

"So large M&A transactions of more than EUR 500 million should remain the exception rather than the rule," says Sievers. "Because not only the difficult access to acquisition financing is burdening the industry," he says, "banks are still being very cautious when it comes to recapitalizations." What is more, almost two-thirds of the respondents expect competition for the procurement of equity capital in fundraising to continue getting tougher.

PE investors see carve outs from large corporations (76%) as being the main source of new acquisitions, as well as majority shareholdings in family enterprises (69%). Only half of those surveyed expect to see transactions from secondary buy-outs. 48% of PE companies show interest in insolvent or struggling companies.

Further development of portfolio companies the priority

But new investments will only play a minor role for the PE industry in the months to come. Indeed, 40% of the respondents intend to concentrate on further developing their existing participations. More than half of those surveyed acknowledge that PE companies should adjust their business model to the market environment. "Investors are primarily confronted with the problem that the valuations on the demand and supply sides are drifting apart," explains Sievers. "In order to obtain better prices when selling their portfolio companies, PE companies first have to make these enterprises more attractive to buyers. The active management of companies already in the portfolio is becoming ever more important."

94% of the European respondents consider active portfolio management to be necessary. 54% of the PE investors plan to implement strategic measures in their companies, with 34% planning ongoing operational actions such as cost reductions or outsourcing models to improve the companies' profitability. "Passive management of the portfolio companies as a kind of "controller" is no longer enough to improve the operating performance," Sievers says.

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