Roland Berger European Private Equity Outlook April 2011
Transcript of Roland Berger European Private Equity Outlook April 2011
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European Private Equity Outlook 2011_Final_010411.PPTX
European Private Equity Outlook 2011_Final_010411.PPTX
Munich & Frankfurt, April 2011
European Private Equity
Outlook 2011
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European Private Equity Outlook 2011_Final_010411.PPTX
2010 Roland Berger Strategy Consultants GmbH
Contents Page
2European Private Equity Outlook 2011_Final_010411.PPTX
A. The current private equity environmentEn route to recovery 6
B. A look at the European real economyIn and out of turmoil and back again? 11
C. A look at capital marketsNo full recovery yet 18
D. Outlook 2011 and beyondSituation improved, but complexities ahead 27
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While PE regains momentum after a disastrous year 2009,market conditions presented substantial challenges in 2010
> Situation 2010 PE market regaining strength after downturn in 2009 but still challenging
> In 2010, European PE activity is starting to regain momentum after a historical low in2009 PE investments have increased by 52% compared to previous year
> The European economy is starting to recover, but long-term prospects still uncertain> European governments fueled growth with deficit spending, which may hamper growth
in the long run and put the stability of the European financial system at high risk
> The capital markets environment has substantially improved but remains buoyed byconcerns about the sustainability of economic recovery
> Low loan availability and volatile markets limit acquisition and exit opportunities,leverage levels of around 3.5-4.0x EBITDA require high equity commitments in LBOs
> Margins have recovered despite sovereign debt woes. Due to low base rates, overallloan and bond pricing is below bull market levels
> With approx. EUR 173 bn in committed funds available, European general partners willhave to rethink how they can meet limited partners' return expectations in the future
Executive summary (1/3)
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Outlook for 2011 positive in a changing environment
Executive summary (2/3)
> Outlook 2011 situation will improve with changes regarding type of investors, transactionsand pricing
Expected increase in PE relevant M&A activity esp. in the Automotive, Capital goods,Business services and Consumer goods sectors
M&A activity from strategic buyers is likely to increase as the corporate agenda shiftsfrom crisis to growth management. Also, we expect more activity from Asian buyers
Given the improvement in overall market conditions, we expect higher transactionsecurity for sellers
As debt capital markets have yet to recover, large deals are likely to remain seldom
Revival of dual track PE exits, as investors aim to increase transaction security andleverage the window of opportunity in the stock market
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Challenges for the mid and long term perspective expected
Executive summary (3/3)
> Medium/long-term perspective challenges in financing and redesign of business modelsexpected
Refinancings become increasingly complex, driven by the restraint of debt providers
As value creation via pure financial engineering becomes more and more exhausted, weexpect to see more business model innovation
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A. The current private equity environment
En route to recovery
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> In 2010, European PE activity is starting to regain momentumafter a historical low in 2009
> In 2010, EUR 36 bn were invested in Europe a 52% increaseyear on year
> With low deal volumes and average values, the M&A market is yetto recover buyers' and sellers' price expectations in
mismatch
> With approx. EUR 173 bn in dry powder1) available, general
partners will have to rethink how they can meet limited partners'return expectations in the future
> Also, PE funds must regain trust of their investors as fundperformance has suffered during the financial crisis
PE investments are gaining momentum in 2010 Risingvaluation levels are crucial to recovery
Return to soundvaluation levels
is key to the
PE market's
recovery
Current situation
Source: Roland Berger
1) "Dry powder" refers to committed, yet uncalled funds of private equity funds
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M&A volumes remain low, average deal values decline Mismatchbetween buyers' and sellers' price expectations
M&A volume in Western Europe [EUR bn]
Source: Thomson Financial
398
482
968991
785
477483
6,000
5,000
4,000
3,000
2,000
1,000
0
500
2,000
1,500
1,000
02010
2,917
2009
2,571
2008
3,962
2007
1,224
4,692
2006
4,478
2005
4,045
2004
3,433
2003
3,316
Value in EUR bn (left scale) Volume in no. (right scale)
8,560 9,059 10,102 11,526 12,946
thereof deals with an disclosed deal value:
1) Including those with undisclosed transaction value
11,961 9,341 9,964Total no.
of M&A
deals1)
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Massive dry powder available But how can limited partners'return expectations be met in the future?
Source: EVCA, Prequin, Roland Berger Research
Private equity returns
> European PE funds raisedapproximately EUR 380 bn ofcapital in 2005-2010
> With dry powder of approx.EUR 173 bn, PE funds must find ahigh number of attractive targets tomeet investors' demand
> In the past, many funds have reliedentirely on deleverage to reachrequired IRRs
> In the current environment, PEfunds may have to rethink theirinvestment strategy
20102009
8.3
2008
11.1
2007
15.9
2006
12.7
2005
9.6
2004
8.2
2003
12.5
REMARKS
?
EUROPEAN BUYOUT, 5-YEAR ROLLING IRR [%]
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B. A look at the European real economyIn and out of turmoil and back again?
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> To overcome the financial crisis, European governments fueledeconomic growth with deficit spending most of them issuedgovernment bonds
> This inflated the volume of money in circulation and reducedthe interest rate pressure but for how long?
> The European economy is highly dependent on exports theappreciation of the euro dampened the recovery in 2010
> The high deficit might hamper growth in the long run
> The high risk that individual governments as in the case ofIreland or Greece might default on their high debt puts thestability of the entire European financial system at high risk
The real economy is recovering But pre-crisis levels will notbe reached in the short run
The Europeaneconomy is starting
to recover, but
long-term prospects
remain uncertain
Current situation
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2007
2.8
2006
3.1
2008 2009p 2010p 2011p
0.4
-4.1
1.7
1.0
GDP change in the Eurozone [%] GDP growth of selected countries/regions [%]
Growth in Europe is sluggish and far behind emerging marketsand China
Source: IMF, EIU
2009 2010p 2011p
Global -0.6 4.8 4.2
Industrializedcountries
-3.5 2.5 2.1
Emerging markets 2.5 7.1 6.4
USA -2.6 2.7 2.2
Germany -4.7 3.4 1.8
Japan -5.3 3.5 1.2
Euro zone -4.1 1.7 1.5
China 9.1 10.2 9
Russia -7.9 4.0 4.0
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Many currencies appreciate against the USD Governmentsincline towards fiscal intervention
Yuan
3.6
Won
9.7
Real
9.7
Baht
7.2
Yen
10.6
Euro
11.0
CHF
20.3
Source: Bloomberg
Appreciation against USD since June 1 2010 [%]
Quantitative Easing: USA eases pressure ontheir banks flooding the financial system withmoney
European measures to compete againstUS monetary policy are limited
High exchange rates slow down exports,restrictive monetary policy of manyemerging markets decelerates growth
Risk of competitive devaluation of currency countries want to increase competitiveness
New threat of protectionism?
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-35
-30
-25
-20
-15
-10
-5
0
-200 -190 - 180 -170 -160 -150 - 140 -130 -120 -110 - 100 - 90 -80 - 70 -60 - 50 -40 - 30 - 20 - 10 0
EurozoneEU-27
ChinaBrasil
UK Spain
Russia
Portugal
Mexico
Japan
Italy
Ireland
India
Greece
Germany
France
Budget deficit
Public debt
USA
Public budgets are falling into disarray No major industrialnation could fulfill the Maastricht criteria
Maastricht-criterion 60%
Maastricht-
criterion
3%
Public budgets 2010 budget deficit and public debt [in % of GDP]
Source: EIU
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Rising public debt leads to an increased risk of nationalbankruptcy Greece and Ireland are especially at risk
0
50
100
150
200
250
300
1/1/101/4/08 7/3/09
Ireland
Greece
1/7/111/2/09 7/2/10
Germany
France
Italy
Spain
Portugal
7/4/08
1) 10 year Government Bond, rebased
Source: Bloomberg; Roland Berger Research
Development of interest rate of government bonds, subscribed [01/2008=100]1)
Increased risk of default, especially forGreece, Ireland and Portugal
Spread of Greek government bondabout 800 base points above theeurozone average
Greece is still mostly on track withreforms, but a new wave of actions isneeded to ensure a long-term recovery
Ireland's credit ratings have been cutand worries about the health of theeconomy and banking system persist
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Activity in loan markets remains low Substantial influence ofmacroeconomic worries on bond markets in 2010
Source: SIFMA, Loanconnector, Bloomberg
> Worries about Europeangovernment borrowers such asGreece, Ireland, Spain, Italy or
Portugal are having a fundamentalimpact on markets in 2010
> Loan markets recover slightly in2010, but activity remains low
> Banks prefer borrowers they know:refinancing, corporates with strongcredit ratings, secondary buyouts
> Low loan availability is increasinglybecoming an issue for companieswithout bond market access
Development of European debt capital markets Availability
REMARKSDEVELOPMENT OF EUROPEAN BOND AND LOAN ISSUANCE [EUR bn]
115
295
149133116605675 4030626
42282819
201020092003 20082007200620052004
High yield bonds
Investment grade bonds
353312310
732
593
748
542391
846089
242218187106109
Leveraged loans
Investment grade loans
Bonds
Loan
s
-61%
+13%
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High-yield bond market still no alternative to loans for PERefinancing remains the primary aim of new bond issues
Source: SIFMA, S&P LCD, Roland Berger Research
Development of European debt capital markets Debt availability and purpose
EUROPEAN LEVERAGED LOAN VOLUMES [EUR bn, %] EUROPEAN HIGH YIELD BOND VOLUMES [EUR bn, %]
84
60
89
242
218
187
106109
0
50
100
150
200
250
2007 2009 20102006 20082003 20052004
0
50
100
150
200
1940
20092004 20072006
42
20102005
28
2008
3026286
2003
LBO Non-LBO
LBOshare,refishare
[%]
12 11 7 19 13 23 52 75
45 42 50 34 44 90 7 10
CAGR: -30%
CAGR: +15%
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Sponsors have to commit substantially more equity in LBOsTo reach IRR levels of the past, deleverage will not be enough
Source: S&P LCD
Development of LBO transaction structures
Total LBO loan transaction structures [%1)] AVG. EQUITY CONTRIBUTION IN LBOs [%]
1) Percentage of deals involving the specific instruments based on transaction count: e.g. in 2006, 29% of all deals had senior, 2nd lien and mezz structure
16
1270
0
30
0
76
0
24
0
23
5
65
7
28
24
20
28
27
11
33
29
38
50
2
48
0
52
0
44
35
2006200520042003
5
100%
2010200920082007
Sr onlySr + 2nd lienSr + mezzSr + 2nd lien + mezz
Deals with > 50% [%]
10 9 8 6 7 31 75 71
50
4542
3333333334
20102009200820072006200520042003
Average equity contribution in % of transaction value
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After almost no activity in 2009, the IPO market shows timidsigns of revival
> European IPO activity almostcame to a halt in 2009
> Despite sovereign debt crisis andthe uncertain pace of recovery,IPO activity has picked in 2010
> Key growth sectors so far: rawmaterials and utilities, stockexchange listings, PE-backedIPOs
> Q2 2010 has witnessed thereturn of IPOs in the >EUR 1 bnrange
EUROPEAN IPOs BY QUARTER [EUR bn, no.]
Development of European equity capital markets IPOs
Source: Bloomberg
REMARKS
130
868979
6144281864
68
133
72
233
183
258
139
0
100
200
300
400
500
600
-15
-10
-5
0
5
10
15
20
25
30
10.1
Q310
2.5
Q210
9.0
Q110
4.7
Q409
5.0
Q309
1.4
Q209
0.5
Q109
0.0
Q410
1.2
Q308
1.6
Q208
9.2
Q108
1.9
Q407
29.1
Q307
12.6
Q207
28.0
Q107
10.6
Q408
Volume [no., left scale]Value [EUR bn, right scale]
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Improved asset quality
hot sectors 2011Comeback of strategic buyers
Higher transaction security
Focus on mid-size deals
Increase in Asian bidders
More dual-track auctions
Asset quality and transaction security will improve in 2011 over the medium term, we expect new challenges ahead
Private equity outlook 2011 and beyond
SHORT-TERM TRENDS 2011
12
3
4
5
6
Complex refinancingsIncreasing business model innovation
MEDIUM TO LONG-TERM TRENDS 2012+
89
SHORT-TERM TRENDS 2011
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In 2011, we expect more strategic buyers in an improving dealenvironment Also, auctions will become more competitive
Key trends in the 2011 PE environment (1/2)
TREND
1 IMPROVED ASSET QUALITY
- HOT SECTORS
2
3
4 FOCUS ON MID-SIZE DEALS
ASSESSMENT
> After focusing on navigating the turbulences of the crisis and the often rapid recoveryin 2010, growth is back on the corporate agenda in 2011
> In many industries, leading corporates have amassed substantial amounts of cashand thus represent strong competition in PE auction processes
> Substantial number of auctions in 2010, but many have not been completed> Transaction multiples stabilize - banks may commit to slightly more risk towards H2> Driven by the improvement in overall market conditions and most business'
performance, we expect higher transaction security for sellers
> As debt capital markets have not recovered yet, large cap deals are likely to remainseldom
> In line with a likely recovery throughout the year, the return of larger deals is possiblein the long-term
> We expect a substantial increase in PE relevant M&A activity in the Automotive,Capital goods, Business services and Consumer goods sectors
> In the broader M&A market, we are looking forward to an increase in transactions inFinancial services
COMEBACK OF STRATEGIC BUYERS
PE buyers Corporatebuyers
HIGHER TRANSACTION SECURITY
Lowconversion Highconversion
Small cap Large capMid cap
AutomotiveCapital goods
Business servicesFinancial services
Consumer Goods
SHORT-TERM TRENDS 2011
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Increase in Asian bidders expected Capital marketsenvironment likely to be used for more dual tracks
Key trends in the 2011 PE environment (2/2)
TREND
5
6
INCREASE IN ASIAN BIDDERS
MORE DUAL-TRACK AUCTIONS
ASSESSMENT
> Increase in activity from Asian and Middle Eastern buyers expected in Europe particularly from Chinese strategic buyers
> Also, securing access to Chinese markets is a key issue for many European
companies> While the stock market may provide windows of opportunity for corporates in search
of financing, high volatility may prove a serious obstacle for some> In search of increased transaction security, we expect Private Equity investors to
increasingly opt for dual track processes
Domestic IntercontinentalIntra-European
Privateequity
Public equity
DUAL TRACK EXITS
MEDIUM-TO-LONG-TERM TRENDS 2012+
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In the medium/long term, solving refinancing issues will becomemore complex We also expect more business model innovation
Key trends in the 2012 PE environment and beyond
TREND
8 COMPLEX REFINANCINGS
9 INCREASING BUSINESS MODEL
INNOVATION
ASSESSMENT
> Enhanced focus on operational improvement within the portfolio companies becausethe value added based on f inancial engineering is limited
> Return to the performance level of the original business plan> Closer look on new technology/market combinations> PE should try to bring their portfolio company to a new phase in its life-cylce
> Balance sheet constraints in portfolio companies support the need for refinancing> Increasing complexity in refinancing, driven by the restrained behavior of debt
providersNon-
complex
Complex
Product /market-combination
Revenuemodel
Valuechain
Statusquo
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COMEBACK OF STRATEGIC BUYERS2
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Great cash reserves imply that M&A activities of strategicinvestors will increase Enhanced competition for PE
M&A VOLUMES WESTERN EUROPE [#, EUR bn]NON-RESTRICTED CASH OF EUROSTOXX 50COMPANIES1) [EUR bn]
482
968881
785
477483398
2010200920082007
1,224
2006200520042003
Source: Thomson Financial, Roland Berger Analysis
Corporate investors share by deal volume [%]
250
2010
200
2009
150
100
0
105
2005
216
184
2008
174
2007
141
2006
101
2004
97
2003
84
Indicators for increasing competition from strategic investors
> Cash levels have substantially increased from pre-crisis levels> Cash financing of transactions thus becomes much easier
CAGR: 19.9%
> Decreased share of strategic bidders since the beginning of thecrisis in 2008
> During the crisis, many companies have abstained fromacquisitions and have limited capital expenditure
1) Excludes financial services companiessuch as Allianz SE, BNP Paribas, Deutsche Bank, Mnchener Rckversicherungs AG, and others
79.2 82.0 81.0 79.482.0 79.4 78.2 79.4
HIGHER TRANSACTION SECURITY3
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European M&A market shows decreasing conversion ratessince 2008 Transaction security likely to improve 2011
EUROPEAN ANNOUNCED VS COMPLETED DEALS [# '000]
Source: Thomson Financial
Conversion [%]
81.5 80.4 74.5 73.980.1 82.5 85.2 82.8
Transaction completion and pricing
2010
13.5
18.3
2009
12.5
16.8
2008
13.617.0
2007
14.2
17.4
2006
12.5
15.1
2005
10.912.8
2004
9.7
11.7
2003
9.5
11.9
Closed dealsAnnounced deals
> Since 2008, deal conversion has constantly decreased> Due to the improved business performance of most targets and a
positive economic outlook, we expect transaction security to increasein 2011
EUROPEAN EV/EBITDA TRANSACTIONS MULTIPLES
12.6x12.3x10.8x
20102009200820072006200520042003
12.2x10.3x
13.5x14.6x13.1x
Transactions [# '000]
14.2 14.0 12.5 13.59.5 9.7 10.9 12.5
> Stabilization of pricing in M&A markets> Investors are likely to take advantage of low valuations in stock
markets. However, volatilityis still high
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7 COMPLEX REFINANCINGS
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Pressing need to refinance debt burden from bull market years sustainable concepts and stakeholder management are vital
> Until 2015, leveraged loan volumes of morethan EUR 100 bn will have to be refinanced
> Without debt markets at full speed,refinancings are difficult, costly, andincreasingly complex:
Loan-to-bond refinancing or amend-to-extend agreements are expensive
Equity investors demand solid balancesheets in rights issues
Mitigation of varying stakeholder interests
Time constraints vs. time requirements
> Refinancings increasingly demandsustainable concepts in non-sustainableenvironments
REMARKS
Refinancing trends
Source: Standard & Poors
LEVERAGED LOAN MATURITY PROFILE [EUR bn]
0
5
10
15
20
25
30
35
40
45
50
2016 2017201520142013201220112010
Loan maturities as of June 2010
8 INCREASE IN BUSINESS MODEL INNOVATION
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While making additional investment necessary, rethinking aportfolio company's business model often is a viable option
Framework for business model innovation
Source: Roland Berger
PERFORMANCE VS. ORIGINAL PLAN BUSINESS MODEL INNOVATION FRAMEWORK
THREE POSSIBLE RESULTS OF SUCCESSFUL BUSINESS MODEL INNOVATION
A Return to original business planperformance level
> Sustainable increase of sales orprofitability
> Higher EBITDA upon exit increasesreturns
B Establish new technology / marketcombination
> Change in the level playing field> Higher exit multiple possible due to
new peer group
Reach a new phase in thecompany's lifecycle
> Bringing the company from maturityto a new growth phase
> Benefits for all stakeholders
Product / market-combination
Revenuemodel
Value chainStatus
quo
B
Do nothing
A
Acquisition Exit 2009 2010
OR
A
B
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It's character
impact!that creates