The European Private Equity (PE) market is currently at its busiest it’s ever been, with an extraordinary amount of money being raised and number of deals taking place. This has led to certain sectors emerging victorious from the pandemic as well as specific trends emerging. With significantly more deals taking place, this has resulted in PE funds engaging in an increased number of Operational Due Diligences (ODD) and Technical Due Diligences (TDD) to evaluate value creation opportunities.

Managing Directors Amit Laud and Bob Rajan, two co-leaders of A&M Europe’s Private Equity Performance Improvement (PEPI) team, outline their views on current trends within the European Private Equity market.

Any specific trends across PE portfolio companies?

The pressure is on like never before. Industries and companies that have weathered through COVID-19 will now command even a higher multiple upon exit because they have proven their resilience, which is attractive to PE firms and investment management firms. Sectors like software and Fintech have done very well in this space specifically and are currently considered the ‘darlings’ of Private Equity. Overall, trends that are currently happening across PE portfolio companies are:

• Digital: Digital enablement has become a massive theme as the pandemic has pushed companies to prioritise digital transformations for optimal value creation. What were historically deemed as typical value creation levers in any transformation, are now being analysed with a digital lens to enhance and accelerate value creation.
• Speed: Deal lifecycle is being increasingly compressed, with an emphasis on driving value creation earlier than later in the deal process and reaching a high multiple in a quicker time frame. The market is hot, and firms are willing to pay a significant premium for companies. In today’s world, it is not only about revenue maximisation, but also margin expansion to safeguard value. Traditional cost cutting, while still important, needs to be coupled with sustainable commercial growth in order to generate value.
• Carve-Outs: Carve-outs are becoming more popular by the minute within the PE space, with significantly more taking place than in the previous two to three years. Specifically, ‘buy and build’ carve-outs have become popular, but why is this?
  • Corporates are carving out non-core businesses because they first and foremost require cash, but also these non-core business do not fit with their overall go-forward strategy.
  • For the PE firm, portfolio companies are drawn to carve-outs because of their significant value potential that can be attained not only from a stand-alone basis, but also merging the acquired target with an existing portfolio company and extracting synergies to drive value creation.
  • Lastly, we are seeing some of the largest fundraising in history from various funds, regardless of COVID-19, and the number of funds that are at record fund levels is unprecedented. In the next few months, there will be pressure to put this money to work.

Any expected trends upcoming across PE portfolio companies over the next 6 months?

Overall, post-deal transformation work hasn’t kicked off as much as expected as there is significant amount of unallocated funds in the market, and large cost-optimization projects we thought would happen have not yet been a focal point. Specifically looking ahead, COVID-19 has highlighted the necessity of moving towards digital and growing their business commercially.,

What steps should PE firms be taking now with those trends in mind?

Cash and liquidity forecasting is important and ensuring that it is robust to accurately plan for all potential outcomes. In anticipation of another wave of COVID-19, proper business continuity planning within a company’s supply chain is key. Every crisis teaches us the need and importance for a ‘Plan B’ and the pandemic has proven yet again how important contingency planning is.

A&M: Leadership. Action. Results.

A&M’s private equity-focused professionals understand the need for agility and the importance of speed to execution in order to prioritise the key areas of improvement that will positively impact EBITDA and ensure sustainable cash generation and shareholder value at the portfolio company level. Ensuring a successful transformation requires strong leadership at the top that can then be exemplified and reproduced throughout the organisation. Leadership requires definitive action, which then leads to positive results for all.