The public-to-private (P2P) market in Europe has more than doubled in the past five years. With many European corporates remaining undervalued, we see several scenarios in which private equity could find superior returns with P2Ps.
Private equity firms have amassed a record $1 trillion globally in dry powder allocated toward buy-out, with a significant portion for investments in Europe. The P2P market is an increasingly important area to deploy capital as sales of PE investments have been delayed in recent years.
In Europe, P2Ps by private equity firms have been resilient even as interest rates rose after the pandemic. The number of such deals remained relatively stable at about 20-30 a year over the interest rate hardening we have seen since 2021.
Deal value is also increasing. P2Ps are a small share of all European PE deals, about 5% by volume, but they represent about 20% of value. Furthermore, private equity firms are increasingly focusing on larger deals, with about 40% of 2024 deals valued at $1 BN or more.
Although PE firms can face hurdles with these deals, including challenges with due diligence, financing, and completing the transaction, it is worth examining the common types of deals and the key factors driving success so far.
Over the past five years, most P2P deals fell into one of five categories. Turnarounds, recapitalizations, and strategic breakups such as Cobham’s acquisition by Advent and Aareal Bank’s acquisition by Advent/Centerbridge, both of which unlocked value through carve-outs from the acquired business.
Two other archetypes use PE as a lever to accelerate growth or as a strategic partner to integrate with an existing business. KKR’s acquisition of Devoteam, an IT services provider, and Searchlight’s acquisition of alternative asset manager Gresham House show PE’s ability to provide the capital and strategic support needed to drive expansion and long-term investment. And Brookfield’s acquisition of Network International illustrates how PE can serve as a strategic partner, as the firm brought its complementary asset in the region to the deal.
Across the board, we see three primary situations where a P2P can be particularly compelling to investors from a value-creation perspective.
When a P2P means less competition and better valuations than private processes
Assets that are misunderstood by public investors struggling to value different components of the business or benchmarking to inappropriate valuation multiples can benefit from a P2P. These deals present an opportunity to acquire an asset at an attractive price and reposition it at more attractive multiples of EBITDA on exit.
When publicly listed assets need the transformation tools available in private markets
For some companies, the risk and scale of the costs of transformation can put off public investors. Depressed share prices will prevent capital raising. When combined with an over-leveraged balance sheet, these factors can drive some good companies to ‘delist or die.’ This presents a unique opportunity for private investors to step in. Moreover, the ability of PE to impact strategy, capital allocation, and capital structure can dramatically improve equity returns and become a powerful catalyst of a P2P.
When private equity can bring specific capabilities not available to public investors
Publicly listed businesses, particularly midsize ones, can struggle to access the special skills or experience they need to unlock value. Large PE firms can bring these capabilities through expert advisors, operating partners, or managers the business has worked with before. This is often the case with global trends such as developing ecommerce sites or transformation through artificial intelligence (AI), where a PE firm that has experience in one region can roll it out in other areas.
As we look ahead, public-to-private deals in Europe remain fertile ground for investment, and many more funds are becoming comfortable with such deals. We see this trend only getting stronger as the interest rate environment continues to improve and funds face pressure to deploy dry powder.
Chris McMillan is a London-based partner at consultancy Oliver Wyman and head of its European Private Capital practice. Pepijn Meewis also contributed to this article.
