Over the past 18 months, the market turbulence has created a window of opportunity for the Private Equity (PE) sector, reaching unprecedented levels of deal activity across Europe. In 2021, A&M’s Private Equity Performance Improvement (PEPI) team will complete c. 2.5x number of due diligence assignments compared to prior years, highlighting this record year for deal activity.

Mike Trenouth, Managing Director and co-leader of A&M’s PEPI team in Europe, outlines his current view on the European deal market and upcoming trends as the market emerges from the immediate aftermath of COVID-19.

What do you currently see happening across the deal market?

Within recent deal activity, carve-outs have become a key trend. COVID-19 has put intense pressure on many large international firms, and the trend towards selling off non-core assets has accelerated significantly in the last 18 months. However, these carve-outs are non-trivial for PE. The operational reality of standing up operations in multiple geographies, alongside new technology platforms and often complex supply chain and manufacturing migrations is very demanding. We are seeing situations where as many as three years after closing, the new entities are struggling to stand alone.

Do you see increased activity in certain sectors vs others?

COVID-19 has brought certain sectors into sharp focus for PE, and there has been a very high level of activity in the following areas:

• Technology/Software businesses: The pandemic has pushed forward the adoption of technology, in areas such as ecommerce and communications.
• Food and Ingredients: Whilst Covid has been tough for suppliers to HORECA* it has been great for key categories in home consumption. As a result, we have seen a large number of deals around categories such as biscuits and ready meals due to the shift of consumers eating at home compared to eating out in preCOVID times. Historically, food ingredients have been a highly fragmented area but with current strong demand, PE firms have been buying and building in this sector to create strong regional and global players.
• Industrial: Industrial businesses remain attractive to PE, as many industrial subsectors have seen demand remain broadly intact during COVID19. Due to this stability, PE sees these as good investments that become very attractive if there is a credible growth strategy of a meaningful operational improvement opportunity.
• Travel and Leisure: For those PE investors that are more comfortable with stressed or distressed situations, there has been a focus on specific situations where COVID19 has caused significant disruption, but it is anticipated that demand will return over the next 2-5 years. This has resulted in some key investments in travel and leisure where PE is seeking to invest smartly and emerge from the crisis with increased market share and streamlined operations.

*HORECA: Horeca (also HoReCa, HORECA) is the Dutch, German, Italian, Romanian and French languages term for the food service and hotel industries (Hotel/Restaurant/Café)

What trends are you expecting from deal activity in the next 6 months? What steps should PE firms be taking now with those points in mind?

Over the next 6 months we are expecting to see a continuation of the high level of deal activities that we have seen over the last 18 months. Within this, we expect to see a couple of clear trends. Firstly we expect there to be an increase in public-to-private deals. The turbulent times have thrown up several public companies that have long been of interest to PE but now have more realistic valuations – I expect a number of these situations to crystallise over the next few months. Also, whilst pandemic remains a challenge there is no doubt that some of the hardest hit sectors such as travel and hospitality will be of interest to PE as they start to emerge from the deep crisis they have endured.

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