Europe is in the depths of a challenging dealmaking environment, for both buyers and sellers – but it could turn into a vintage to rival that of 2010 or 2002, according to Jean-Baptiste Wautier, partner and chief investment officer, private equity, at BC Partners.
Macro uncertainty and a quasi-shutdown of debt markets in Europe are behind the difficult conditions, Wautier, who is also a member of the management committee, told affiliate publication PE Hub Europe.
“We continue to be incredibly disciplined and to actively explore a healthy pipeline of opportunities because there will be a point at which the market reopens,” he said. “If there is a major repricing, then this is likely to be one of the best vintages you’ve seen on the PE side for many years, just like 2010 or 2002.”
That reopening could come as soon as next year, if financial market history repeats itself, said Wautier. “When we’ve had periods of quasi closures like this, for example post-Lehman, it’s usually for less than a year because the system cannot stop functioning for too long. Banks need revenues to exist, and to get revenue they need to lend money. Institutional investors need returns to meet their liabilities such as pension payments.
“Financing markets started closing in Q2, so we might cautiously expect them to reopen in Q1 next year – not necessarily a full return, but functioning.”
In the meantime, however, the difficulties in the debt financing market are causing problems on both sides of the balance sheet.
“Exit optionality remains limited,” said Wautier. “Valuations are not necessarily fully factoring in underlying company fundamentals and are more a reflection of dislocation in capital markets. Even if valuation expectations are revised down, financing is still required in most cases to properly execute.”
Uncertainty over the direction of prices is also forcing a reappraisal of the industries worth targeting.
“We’ve been incredibly selective either buying or selling because you don’t want to be on the wrong side of a repricing,” said Wautier. “We spend a significant amount of time focused on defensive sectors, such as healthcare or healthcare-related space.”
But certainty around pricing and financing are not the only factors that dealmakers need for confidence to return, said Wautier. “Another is reducing the range of potential outcomes. There are many variables, such as the effects of a European crisis when it comes to spreads, the response of US and European central banks, and the energy situation in Europe. Greater clarity on these issues limits the range of possible outcomes, and helps guide on pricing.”