Private equity firms are not just breaking records in the U.S. this year. They’re also enjoying their strongest performance ever on the other side of the Atlantic.
Through the first three quarters of 2021, European PE firms have closed approximately 5,492 deals worth €548.7 billion ($637.1 billion), according to a PitchBook report. Both deal volume and deal count have hit annual historical records set in 2019 and 2018, respectively.
European private equity firms have also set new quarterly and annual records in terms of exit activity, the report added. They closed 425 exits in the third quarter, up by 96 percent from the same period last year. The exit value in Q3 reached €126.4 billion, up by 202.8 percent year-over-year. “The stellar exit value performance in 2021 can be attributed to a large uplift in liquidity events greater than €2.5 billion, driven by corporate acquisitions,” the report said.
“Right now is the best environment of private equity dealmaking [in Europe] ever,” said Dominick Mondesir, senior analyst at PitchBook.
European PE deals in financial services, media, and information services are showing excellent results. With one quarter left, financial services institutions have already attracted €38.3 billion across 247 deals with private equity firms, beating previous annual records of 239 deals in 2019 and €37.7 billion deal value in 2018. Media and information services companies have drawn €9 billion from PE firms across 143 deals, up by €7.5 billion across 129 deals last year and on pace to break the records of 2018 and 2019.
The strong deal activities are pumped by both monetary and fiscal stimulus plans in Europe, according to Mondesir. Because the European Central Bank has set the interest rates at low levels in response to the pandemic, private equity firms can finance their leveraged buyout projects at low costs. Various fiscal stimulus plans laid out by European governments such as furlough schemes, tax holidays, and cheap loans to small businesses have also boosted the investment confidence of private equity firms.
The driving momentum of the soaring PE activities in Europe is unlikely to continue in the final quarter of 2021, according to the report. This is partly due to the weakening macroeconomic outlook in the post-pandemic world. Inflation, for example, is “persistent at the moment and may not be as transitory as people think,” according to Mondesir. As the winter approaches, the Delta variant may also lead many European governments to reimpose lockdown measures, which would reduce business activities and undermine investor confidence.
The belligerent tone of central banks, especially the Bank of England, also makes investors wary of the coming risks, Mondesir added.
“The prospect of tightening fiscal and monetary policy is certainly here,” Mondesir said. “It is anticipated that [the Bank of England] is likely to raise interest rates before the end of the year by no more than 75 to 100 basis points. Is it going to have a material impact on financing private equity deals? Probably not. However, sponsors are wary of these risks. And this is likely to just put a little bit of slowdown on the frenetic dealmaking pace.”