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February 19, 2014 4:17 pm
The outlook for the European acquisition finance debt market looks much healthier now than it did 12 months ago, according to DLA Piper, the law firm.
Its fifth annual survey of the market found 70 per cent of respondents expected deal activity to increase this year, compared with 51 per cent of respondents the previous year.
The report said this would be driven by a continued high number of refinancing transactions in addition to an increase in M&A activity. Primary deal activity should accelerate due to the strengthening macroeconomic environment in the UK and Germany, Europe’s largest leveraged buyout markets.
While the volume of refinancings increased significantly in 2013, new money deals remained rare. Only 98 leveraged and management buyouts totalling €39bn were completed in 2013, a 3 per cent decrease on the number of buyouts in 2012.
This is in sharp contrast to the expectations of survey respondents 12 months ago, when secondary and tertiary buyouts were expected to be more frequent than refinancing transactions.
DLA Piper said the absence of primary and secondary dealflow was in some ways surprising, given the amount of money private equity funds have at their disposal and the high levels of liquidity. Private equity firms targeting Europe had $265bn of uninvested capital at the end of 2013, the largest sum since 2009, according to data compiled by Preqin.
However, the vital ingredient missing was investor willingness to sell. Graeme Delaney-Smith, head of European direct lending and mezzanine investments at Alcentra, the asset management firm, said this was being driven by a mismatch between the price expectations of buyers and sellers and a widely envisaged resurgence in the initial public offering market.
“Part of the problem is the price expectations of exiting investors,” he said. “They have a number in mind and will just do a refinancing if they don’t get it.
“Many investors are already well beyond their normal three to four year holds, and once you are seven to eight years in you might as well wait a bit longer. The strong IPO market has also resulted in some investors not selling at the larger end as they are planning to chance their arm with an IPO.”
Philip Butler, UK head of finance at DLA Piper, said 2013 would be remembered for the influx of new investment capital into the European high-yield market, a trend he expected to continue this year.
However, a large chunk of liquidity will exit the European market when the sizeable number of collateralised loan obligation (CLO) funds raised in 2006-07 hit the end of their reinvestment window. This issue remains a concern despite the number of successful new CLO issuances in 2013.
Mr Butler said 2013 brought increased activity, liquidity and competition.
“However, the continuing shortfall in new money activity, increasing leverage, looser covenants and reduced pricing could dampen activity – and that means cautious optimism continues to be the most favoured approach,” he added.
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