European PE Activity in 2019

January 22, 2020

It appears that 2019 was another very good year for the European Private Equity Industry.  The year set a new annual record for European PE fundraising with €86bn raised across 89 fund entities.

The year was also a good year for PE deal activity which in value terms was the second highest on record.  However, the number of deals was some way down on previous years.  One consequence of this was the fact that the median PE deal size in 2019 was the largest ever (by some margin), just exceeding €30m.

The whole thrust of what we are seeing in this sector seems to be that it is becoming more mainstream and more accepted as mainstream.  Those investors who once shied away from the asset class cannot afford to do so anymore.  It is particularly interesting to observe that a not insignificant number of PE investors who used to rely on the GP community or the fund of funds community to manage their PE allocation, have started to invest directly themselves.  Good examples of these are family offices, pension funds and sovereign wealth funds.

This has meant that the competition for deals has become greater as has the competition for talent.

One area that has not performed so well is exits.  The value of PE exits in 2019 was well down on 2018 and 2017 and was in fact the lowest it has been since 2013.  When looking at the exit routes used, secondary buyouts still account for a significant proportion of them although trade buyers were also pretty active.  The IPO markets however were not a happy hunting ground for exits.  2019 saw only 29 companies exit to public markets, registering the lowest IPO value and volume figures since 2012.

We have referred in the past to the seemingly ever-increasing demand for talent in this sector which shows no signs of abating.  This can only push up the salaries and the packages generally of the investment professionals, particularly at the senior associate and investment director levels.  Our 2019 survey indicated that salary and bonus levels were again on the rise, particularly for the middle and more junior ranking professionals and the expectations were that this would be happening again come 2020.

But one other area that PE fund managers may need to be looking at is the way that their long-term incentive plans are structured.  There does seem to be evidence that the industry is moving towards a longer typical holding period for their portfolio investments than used to be the case.  This is particularly true for those pension funds, sovereign wealth funds and family offices who have chosen to become direct investors in their own right.  These types of investors tend not to be so concerned about internal rates of return (“IRR”), but more about cash on cash money multiples and in some cases yield as well.

We have heard about some, and seen one or two first hand, carried interest plans that have been adopted recently, that have set their hurdle as a money multiple hurdle rather than an IRR hurdle.  This type of hurdle we believe is better suited to a PE investing business where the expectation is for longer term hold investments.  There are other attractions to this type of hurdle in a carried interest plan.  The methodology of calculating the hurdle and its likelihood of being achieved is more transparent and easier to communicate to participants.  The way the catch up mechanism works is also much more straightforward with this structure of hurdle.   We are envisaging that more and more carried interest plans will have this type of hurdle going forward.

For further information contact Nigel Mills.

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