Podcast: Megadeals – PE Dealmaking Surge of 2021 Has One More Record in its Sights

The Real Deal Podcast

The European private equity boom

European private equity activity got off to a record-breaking start in 2021. To learn more about the boom, host Julie-Anna Needham spoke with William Cain, senior analyst for Dealreporter, and Jonathan Klonowski, research editor for Mergermarket. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you'll hear about:

  • Private equity (PE) dealmaking in the first half of 2021.
  • The types of targets PE firms are focusing on.
  • The surge in large-cap transactions this year.


JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A Podcast presented to you by Mergermarket and SS&C Interlinks. I'm Julie-Anna Needham.

This week, we're talking about European private equity activity. We just got off to a record-breaking start in 2021. I'm joined by William Cain, senior analyst for Dealreporter, and Jonathan Klonowski, Research Editor of EMEA at Mergermarkets.

Hi, Will. Hi, Jonathan.



JULIE-ANNA NEEDHAM: So Jonathan, starting with you, can you set the scene? What have you seen so far this year in 2021 in terms of private equity dealmaking?

JONATHAN KLONOWSKI: Yeah, and it's a really interesting trend in private equity actually. I mean, if we first take a look at 2020, despite everything that happened with global dealmaking, private equity was still fairly robust and actually, reached its highest, highest point by value and volume since the financial crisis last year. And that trend has just continued into 2021.

So we've actually reached the highest year-to-date point by both value and by value on the Mergermarket record this year. We've seen a number of high-value transactions by private equity firms. So it's basically just a continuation of trends that we've seen over the last few years continuing into this year.

JULIE-ANNA NEEDHAM: But there is one watermark that hasn't yet been exceeded. Can you tell me what that is?

JONATHAN KLONOWSKI: Yeah, so that's the largest LBO in Europe. So that's still the KKR backed take private of Alliance Boot back in 2007.

Now, we've had some deals that have been fairly close, and we've seen private equity firms continue to make these huge transactions over $10 billion. But that's still one watermark that we haven't quite broken yet.

JULIE-ANNA NEEDHAM: And Will, coming to you, how close is that deal to being broken or that watermark to being broken? And which of these deals that are coming close to it?

WILLIAM CAIN: Well, I think that's clearly the Walgreens Boots takeover by KKR back in 2007 was a really exceptional transaction in the era that it was completed right before the financial crisis in a LBO boom in private equity. What we've been seeing are similarities to that period in time today.

So last year, there was a huge carve out of a ThyssenKrupp subsidiary, ThyssenKrupp elevators, which was bought by a private equity consortium for USD 17.2 billion. So just a few million lower than the Boots take private.

And we're also seeing evidence of other really substantial transactions in the 12 months following that ThyssenKrupp deal as well. So we're getting really close. And it's really probably only a matter of time before we exceed those pre-financial crisis levels.

JULIE-ANNA NEEDHAM: And so what are the other big targets on the private equities radar? Are they focused mainly on those large-cap deals, or is it across the size spectrum?

WILLIAM CAIN: Well, what we've been seeing, and Jonathan, I think, kind of covered this a little bit in his earlier point, is that there is a deal-making surge in the kind of large-cap bracket but for private equity funds at the moment. So historically, a lot of the dealmaking is kind of small, kind of mid-market, dealmaking.

But we've seen a real surge in deals between the USD one billion and USD five billion threshold, which has driven the deal values year to date up, and is evidenced by the kinds of stories that you'll be seeing in the news at the moment about private equity bids for listed companies. And there are a huge number of those being announced almost weekly at the moment.

In terms of your point around what are the big targets, there is one deal in the market, which could possibly exceed the Boots take private, and that is KPN. KPN received bids from private equity, which it rejected a couple of months ago.

And there's a bit of uncertainty as to whether those private equity companies are going to come back with improved bids. But if they do bump their off of a KPN and succeed with the transaction, and that would be the largest ever take private in Europe by private equity fund.

JULIE-ANNA NEEDHAM: And Jonathan, coming back to you, what's the average deal size? We've touched on some of these large-cap deals, but what's the average deal size? And how does that compare to previous years looking at private equity takeovers?

JONATHAN KLONOWSKI: Yes, I think, I mean, this is something that Will hast kind of just alluded to with that with the average deal size increasing. So this year, it's skyrocketed up to around USD 500 million. And we've still got six months to go, but that's higher than in all previous four-year averages.

I mean, just to compare, last year was around USD 325 million. And in the middle of year, just before the financial crisis, and it was again, around USD 300-USD 330 million. And so as I said, there's still a few months to go. I mean, that's one of the main reasons as to why private equity activities has skyrocketed to the level that it's at today.

JULIE-ANNA NEEDHAM: And kind of building on that, what's driving this trend in big deals being undertaken by private equity? We know that they've been sitting on record levels of dry powder for some time. Is it that the main driver?

JONATHAN KLONOWSKI: Yeah, I think it is. I mean, even during the pandemic, we saw that fundraising was still fairly healthy for the private equity firms. And as you said, we know they're sitting on record levels of dry powder, and that's money that they need to deploy.

And I think, we've also kind of got this perfect storm, where, and as Will alluded to earlier, you're getting these corporate carve outs. You're getting corporates looking to divest certain areas of their business that need a little bit of love and care.

And that's perfect for private equity firms. It's something that we've seen over the last few years in some of these companies. Like the ThyssenKrupp deal, last year are really quite sizeable.

JULIE-ANNA NEEDHAM: And well any thoughts on that?

WILLIAM CAIN: Yeah, I think that-- the initial driver because I mean, as well as seeing a lot of deal value and volume in this first half of 2021. And bear in mind, that's against a very weak first half of 2020, where there was very few deals. I mean, notwithstanding, it is record levels, I think, Jonathan, this year to date.

So I think there was a bit of a glut, particularly the second half of 2020, where a lot of deals weren't done because of coronavirus first off of 2020. So there was a bit of a backlog for them to get through the dry powder, record funding levels, which is also kind of a knock-on from ultra low interest rates very loose liquidity from Central banks. And also, quite substantial fiscal stimulus from governments is driving asset prices higher and creating quite easy financial conditions.

At the same time, a lot of businesses, on the stock market, in particular, are still really trying to recover from the economic fallout of the coronavirus pandemic. So when you have low prices in some areas of the market, and you have really easy financing conditions, and lots of capital available, that's kind of, exactly as Jon, described a perfect storm for deal-making opportunities and private equity buyouts in particular.

JULIE-ANNA NEEDHAM: And can we look at which sectors are experiencing the most activity? You've mentioned the ThyssenKrupp deal a couple of times. That's a huge deal for ThyssenKrupp.

I know they've been looking to do for some time. Which sectors are seeing that activity? And will we see more, huge carve-outs like that? And if so, which industries will that be in?

JONATHAN KLONOWSKI: So I think I mean, it seems as though say this every time we talk about any sort of trends. But it's tech. Corporates and private equity firms alike are always looking to invest in tech at the moment. And I mean, if we look at the data, it's just over a quarter of private equity deals have targeted the tech sector.

But as well as the industrials, business services, pharma medical, and biotech-- they're the sectors, the private equity firms have continued to look. And it's those traditional sectors. Again, I mean, like industrials-- I think, we've seen a few carve-outs there and consumer as well. But yeah, it's still tech, which is the main driver.

JULIE-ANNA NEEDHAM: And so that leads me on to the kind of final area. Can it continue? What are you expecting to see for the rest of 2021 and going into 2022?

WILLIAM CAIN: So I think it's been a very fast start to the year. It would be incredible if it did continue at this pace. I think what Jon and his colleagues on the data side have been working on shows that it's reasonably likely that a lot of records are going to be shattered in 2021.

Whether the second half can kind of keep up the pace that we've seen so far, I think it'd be quite a big ask. But given the kind of market environment that we have at the moment, you wouldn't want to rule it out.

JULIE-ANNA NEEDHAM: And I guess, there are lots of unknowns at the moment. We've got the job retention schemes. We've got the fiscal stimulus. Those things-- coming to an end. And so the impact of that on the currently booming economy is we don't know. And that might have a negative impact on dealmaking towards the end of this year.

JONATHAN KLONOWSKI: Yeah, I mean, potentially, but then you've got to remember. We alluded to earlier about the levels of fundraising with private equity, and that's money that needs to be deployed.

We've seen that deals in that sort of USD 500 million to a billion range is-- there's a lot of competition there. And that's why we've seen private equity firms look to spend a little bit more to be able to deploy that capital. So private equity always seems to find a way through these times.

JULIE-ANNA NEEDHAM: And what do you say that private equity funds are changing in terms of their approach in their strategy?

JONATHAN KLONOWSKI: Yeah, I think they kind of have to just by the very nature of the fundraising with this. I think with these larger deals, we might see companies held for a little bit longer.

It's certainly something that they need to think about in terms of an exit strategy later on because if they were to sell it, there's only a limited number of potential buyers. So yeah, I think there are certainly a lot of questions for the private equity firms to divest themselves going forward certainly, with this level of fundraising and the changes in investment that we don't see.

JULIE-ANNA NEEDHAM: Great. Any final thoughts from you, Will?

WILLIAM CAIN: Yeah, I would just add on that we've definitely seen an element of change that Jon mentioned in terms of the strategy-- where are they deploying their capital? So there are slight changes there because we are seeing a lot more tech deals than we might have done historically. And then other sectors, like industrials and chemicals for example, are still quite strong.

There's been a reduction, a big reduction, in consumer dealmaking because of the obvious challenges that retail, for example, faces. And then we've also seen some change in strategy as well as the cycle has progressed from the start of the coronavirus pandemic, where I think, private equity take privates in particular, were being focused very much on deals that could definitely be done.

For example, PE funds already had a stake in a of list business, which they could take private opportunistically at a good price. And they've also been having to contend more with dissident shareholders, essentially, who saw the first few take privates go through last year and the markets rebound, have now become a little bit skeptical whenever they see a private equity fund making a bid for an asset, which is struggling.

There's now a lot more resistance from shareholders. And so private equity funds are having to do things like hostile takeovers or using other strategies to manage to get their deals over the line.

JULIE-ANNA NEEDHAM: Great, Will and Jonathan. Thanks very much.


WILLIAM CAIN: Thank you.

JULIE-ANNA NEEDHAM: That was William Cain, senior analyst for Dealreporter, and Jonathan Klonowski, research rditor for EMEA at Mergermarket. Thank you for listening to this week's episode of deal cast presented by merging Mergermarket and SS&C Intralinks.

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