Having enjoyed a three-year rise in capital commitments thanks to a buoyant market and low-interest rates, signs suggest the European private equity bubble could be about to burst.
On the surface, things look rosy: having already raked in €60 billion in the year to August, European PE funds are on track to beat the prior year’s total value of €83.1 billion. If this pace were to keep at the same rate, it would make for a monumental 12 months of capital raising.
There’s just one problem: the number of large vehicles left in the continent is dwindling, and many feel as though this could be the catalyst that sparks a downturn in the market. What’s more, several industry figureheads including PE investors themselves predict an imminent downturn in response to the recent string of sky high deal multiples.
No matter how much PE’s must spend, this would be a significant problem: general partners may be forced to sell existing portfolio companies into a depressed market because of their mandates, meaning lower-than-expected prices and returns. Of course, it’s still a little early to jump to conclusions: PE fundraising is a cyclical business, after all; it depends entirely on the supply of capital and the demand for new or available funds.
However, one area that could potentially act as a saving grace for private equity firms is the European insurance market, where total deal value this year has already surpassed the total value of those completed in 2017. Faced with vast technological change, low interest rates, challenging operating ratios and an increasing amount of government red tape, insurance companies are seeking ways to gain a competitive advantage. For most firms, this will require additional capital – something private equity firms are happy to offer.
“Europe’s private equity firms have loaded up in the good times and filled their coffers to the rafters and are now set to be scouring markets for deals at a time when potential targets could be caught cold by a widely expected economic downturn. They’ll be expected to spend it, however, opportunities for larger deals may be few and far between. Instead, they could look to pick up struggling companies on the cheap in order to nurse them back to health or wait for better times…if their LPs let them.”
Eric Burg, Sean Lightbown – Pitchbook