Private Equity Remains Optimistic – Strong Focus on Operational Improvements

Following very strong performance in the previous year, the private equity sector in Europe once again grew in 2015. A full 51 percent of investment fund companies took advantage of the continued favorable financing conditions to increase their new investment levels, compared with 81 percent in the previous year. Over the course of the year, the number of transactions in Europe as a whole rose by three percent, with a rise of six percent in Germany, Austria and Switzerland. The majority of private equity firms expect to see an upturn in the market in 2016. German funds, especially, are very optimistic. The volume of transactions is expected to remain stable or rise slightly. These are the conclusions drawn by the “Private Equity Trend Report 2016”, for which PwC surveyed 250 private equity firms across Europe.

Particularly in the second half of 2015, macroeconomic uncertainty, sustained high levels of competition around new investment, and high price expectations meant that banks and investors approached new deals with increased caution. Private equity firms increasingly focused on analyzing potential transactions, above all when considering equity stories. “Investors have clearly shown that they have learned from the financial crisis and proven that they won’t just buy at any price”, said Steve Roberts, Private Equity Leader at PwC in Germany. “If deals aren’t well prepared and the equity story isn’t convincing, they either fail or are delayed until excessive price expectations have cooled down.”

Where a deal is signed, the sector focuses on active portfolio management and introducing operational improvements within the companies in its portfolio in order to achieve the desired returns. Decisions on new investments are influenced just as much by potential improvements in operations as they are by efficiency increases, procurement optimization or working capital management. This is a trend that is likely to continue in 2016. As many as 93 percent of the firms surveyed said that their investment decisions will focus more on operational improvements in 2016.

Other findings from the survey at a glance:

• Competition increasing further: Around 85 percent of the firms surveyed reported increasing competition around new investments in 2015. The strong US dollar is fueling interest on the part of US and Chinese investors.
• Lower risk appetite: For 43 percent of the firms surveyed, the share of lending used to finance deals (debt to equity ratio) stood at between 40 and 49 percent. German companies generally prefer a lower ratio.
• Majority of firms satisfied with companies in their portfolio: A good 57 percent of the firms surveyed in 2015 were happy with the performance of the companies in their portfolio. Twenty-nine percent did not expect the companies in their portfolio to breach any loan covenants during 2016.
• Germany the most attractive market: According to 62 percent of the firms surveyed within Western Europe, Germany is the most attractive market and is able to capitalize on well-developed infrastructure and a large number of qualified workers.
• Long-term challenges: The implementation of new regulations and growing fee pressure for private equity funds were cited as the greatest challenges for the next five years.