Europe Private Equity Forecast 2022

As the European private equity market looks hopefully to another strong year, industry players remain realistic about the challenges that could further disrupt a still fragile recovery in the global economy.

According to PitchBook 2021 European EP Annual Breakdown, deal flow in 2022 is unlikely to surpass last year’s all-time high – which totaled nearly €755 billion (about $856 billion) invested in nearly 7,200 deals – but it will nevertheless supported by both large amounts of dry powder and robust debt markets.

That said, external factors such as higher inflation and the possible impacts of novel coronavirus variants are among the headwinds that could affect private equity investors and their portfolios in 2022. industry give their perspective on what they expect for the next 12 months.

1. A record fundraising year?

Despite the slight slowdown in private equity fundraising in 2021, with around €90bn raised across 145 funds compared to €93bn across 199 funds the previous year, LPs are expected to remain positive about their allocations private equity, especially when engaging with GPs with a solid track record.

“Around half of the industry will be actively in the market in one form or another, and that is, I think, unprecedented,” said Till Burges, London-based managing director of fund of funds HarbourVest Partners. He also expects new and existing investors to increase their exposure to private equity.

“German institutions, for example, have been very cautious in embracing private equity, but they are now increasing their allocations, and many other institutions are now entering the asset class for the first time,” Burges said.

As has been the trend in recent years, much of this new capital is expected to go to less funds. Last year, more than 41% of total capital raised came from just four mega-funds: EQT IX, Apax X, Ardian Buyout Fund VII and a Partners Group buyout fund, according to the European PE Breakdown 2021. Burges said noted that in addition to favoring proven managers, LPs will also gravitate toward those that offer greater diversity.

“I think over the last few years there have been a lot more multi-strategy managers, which is particularly appealing to some LPs who want to build concentrated portfolios but still aim for good diversification across more strategies,” added Burges.

2. The windfall of buyouts continues

“Last year was a record high for broader M&A activity and also from a private equity deployment perspective, and 2022, particularly for Europe, is expected to be an incredibly strong year,” he said. said Anu Sharma, managing director and head of European banking at Investment bank William Blair.

Pent-up M&A demand in Europe and a huge amount of dry powder should keep this trend strong. Investments in the technology sector should be particularly important.

Sharma noted that while the pandemic has accelerated the growth of tech companies, it has also forced non-tech companies to seriously consider how they can integrate technology into their business. For many companies, he said, it’s not just a matter of growth, but of survival.

“We are only at the very beginning of what is going to be a long-term disruptive trend that will continue to drive mergers and acquisitions, investment and growth, namely the convergence between industries and the role that technology will play into that,” he added.

Meanwhile, we can expect more corporate carveouts in Europe as companies reassess their core businesses and long-term strategies. PitchBook’s European Private Capital Outlook 2022 forecasts that the global value of carveout deals, which exceeded €171 billion last year, will reach a new high of €200 billion in 2022.

3. Dark clouds loom

“I think in a year from now we will be in a better position than today, but there is still a fair amount of uncertainty over the next few months,” said Daniel Lopez-Cruz, head of the European group of private equity from Investcorp. “You have to invest in the highest quality companies possible, as predictable as possible and as defensible as possible.”

Among the possible risks Lopez-Cruz cited are supply chain frictions, retention and hiring of talent, and inflationary risks, adding, “I don’t think anyone 12 months ago would have anticipated this. would be the challenges they are.”

Prices have already soared across the region. Inflation in the euro zone reached 5% in December, a record level. Meanwhile, in the UK, Europe’s largest economy outside the eurozone, inflation hit 5.4%, the highest in 30 years.

“Availability of attractive companies is not an issue, and availability of funding is not an issue,” said Richard Swann, Partner at Inflexion. “So it’s really about the price environment and the trading environment for the companies we invest in.”

As pressure mounts on central banks to raise interest rates, the stakes are higher for companies that rely on debt as part of their business model. Lopez-Cruz said manufacturing companies will see cost inflation both in raw materials and in the price of products in general. Meanwhile, the supply chain issues that rocked business in 2021 could linger well into 2022.

“In a lot of businesses you see the demand, but actually how to deliver those services, or those goods, has become the real challenge, and that’s going to take time to normalize,” Lopez-Cruz said.

Featured image by Dimitri Otis/Getty Images

Mary I. Bruner