DC Advisory's European Private Equity Mid-Market Monitor: Summer 2021 Round-Up

Date

October 05, 2021 • 5 min read

Summer 2021

DC Advisory presents our latest mid-market activity European update for the Summer 2021 period.

In this edition we explore:

European highlights
Who's been fundraising?
Regional commentary

European highlights

European private equity-backed M&A activity continued robustly in H1 2021, seamlessly following the resurgence in deals towards the end of 2020; H1 2021 deal volumes were up 79% compared to H1 2020, and at their highest H1 level since 2014[1]
The favourable M&A environment across the continent can largely be attributed to the economic recovery, which has been accelerated by the Covid-19 vaccination rollout
The European Central Bank has also recently raised its growth forecasts for the bloc, to 4.6% in 2021, in light of growing GDP rates and high consumer price index rates[2]. GPs will continue to be encouraged by the prospect of future growth, further whetting the appetite for M&A as confidence in the market improves
The technology and business & tech-enabled services sectors in Europe continue to lead the way in transaction volumes, with deals across the two sectors accounting for 49% of the region’s total Q2 2021 deal count[3]
Valuations for tech-enabled businesses unsurprisingly remain at a premium[4], particularly for ERP software and IT services companies that have proven resilient during the downturn. As flexible and remote working policies look set to continue as the pandemic resides, we believe continued consumer and business demand for e-commerce, cloud, cybersecurity and SaaS implementation platforms will only bolster future valuations in the space[5]
In other sectors, however, the post-lockdown recovery may be short-lived. Amidst a demand surge for goods and services as European economies move away from pandemic restrictions, supply chain backlogs and labour shortages are being experienced across many sectors[6]. This supply chain squeeze is feeding into higher costs for businesses, which in turn are being passed onto consumers, giving rise to inflation concerns across the European region[7]
European fundraising in H1 2021 remained buoyant, with levels of dry powder continuing to be at a record high[8]. The low interest rate environment, volatility in public markets, and the potential for high risk-adjusted returns in alternative markets, continued to boost the confidence of LPs and consequently, private equity allocations
However, whilst European fundraising remained active, first-time fund counts are heading towards their lowest level in a decade[9]. This indicates that challenges remain for less-established fund managers, as LPs continue to allocate capital to managers with prior relationships and/or proven track records. That said, looking forward to H2 2021 we might expect first-time fund counts to improve as travel opens up and LPs begin to search for new GPs that have developed niche strategies, and/or are well placed to capitalise on the post-Covid market[10]
As the pandemic forced funds to re-evaluate their role in an interconnected society, an increased focus on ESG considerations for investors is coming to the fore. Corporates and GPs are focusing more on ESG as part of the M&A processes and, going forward, we could expect that deal financing may be more difficult for investments that are not regarded as ESG friendly, and that valuations may be materially impacted by ESG limitations [11] [12]
Looking ahead to the remainder of H2 2021 and 2022, it could be expected that European M&A activity will remain bullish as the economic recovery in the region gains momentum, and GPs continue to deploy extensive levels of dry powder