PE deal activity to set a new high as Spacs arrive in Europe

Analysts at data provider PitchBook predict robust dealmaking in Europe for private equity, the rise of Spacs in the continent and a pick up in distressed investing.

Private equity deal activity in Europe will set a new high this year and top €480bn, according to analysts at PitchBook, as record dry powder, tepid inflation and low interest rates drive activity.

While the Covid-19 pandemic has resulted in additional lockdowns around Europe, impacting economic activity, Dominick Mondesir, EMEA private capital analyst at PitchBook anticipates the bulk of 2021 will be a year of reopening.

Many private equity managers have indicated robust deal pipelines coming into the year, and those that were not able to deploy capital in 2020 are ready to pull the trigger.

‘Managers will likely transact more as opportunities for industry consolidation across multiple sectors such as financial services, energy, healthcare and TMT occur,’ Mondesir wrote in PitchBook’s annual private capital outlook report.

‘We believe managers will utilise these opportunities to create European champions; drive scale, margins and distribution channels and seek to survive the market volatility.’

While the combination of all these factors will almost create the perfect environment for dealmaking, according to Mondesir, 2021 will also see special purpose acquisition companies (Spacs) cross over the Atlantic to emerge as a viable option in Europe.

Spacs – companies that list on the stock exchange with the sole purpose of acquiring a private business – became popular in 2020 with more than 220 listings in the US. However, there were only four Spacs that listed on European exchanges. Mondesir believes that the outsized activity in the US means a portion of the market will inevitable move to Europe.

Following the meteoric rise of Spacs, several European exchanges and regulators have started examining their listing rules to become more competitive and attract these so-called blank cheque companies. Nasdaq Nordic exchange for example is expected to soon launch a US-style Spac structure.

‘With the potential of an oversupply of US Spacs chasing fewer quality deals, the European target opportunity set is compelling. If one of the initial European Spacs in 2021 trades well post-acquisition, we expect others will quickly follow suit and a listing frenzy will begin,’ Mondesir said.

This year, Harvester Holdings is set to raise €750m and list on the London Stock Exchange. Depending on its performance, Mondesir said this can act as a catalyst for widescale adoption in the European market.

A larger European Spac market is not without its challenges. A thinner investor base, a perceived lack of credible managers and key structural challenges will continue to present hurdles, the analyst added.

Meanwhile, the long-awaited distressed opportunity boom is likely to take place this year. Although distressed activity has been kept at bay due to unprecedented government and central bank support, Mondesir believes this is likely to pick up.

‘We expect to see bankruptcies, defaults and downgrades swiftly spike for zombie companies, especially those in the small to mid-sized enterprise space,’ he said.

While less access to liquidity will further stress companies, particularly those that were troubled prior to the pandemic, the rise of private credit and direct lending in Europe may be able to fill a void left by the traditional banks.

There is €76.7bn in dry powder across European private credit strategies, which means that rescue or flexible capital solutions can be made available for SMEs.

‘Continued low interest rates and inflation, accommodative central bank policy, and the extension of government fiscal programmes should the recovery lose momentum could mean some zombie entities stay in business for longer and less distressed investing opportunities emerge.’

Source: City Wire