Overview of, and outlook for European Capital Investment
Helped by a favourable environment combining historically low rates, an abundance of available capital and an economic cycle in its expansion phase, the European capital investment market has succeeded, in regularly producing a high level of financial performance for investors whilst providing growth, transformation and job creations for the SMEs and mid-tier companies benefiting from their investment.
An increasingly recognised asset class
Helped by a favourable environment combining historically low rates, an abundance of available capital and an economic cycle in its expansion phase, the European capital investment market has succeeded, in recent years, in regularly producing a high level of financial performance for investors whilst providing growth, transformation and job creations for the SMEs and mid-tier companies benefiting from their investment. This favourable economic context combined with the enactment of the AIFM* regulatory framework in 2014, in particular with the European marketing passport, have helped transform capital investment’s financial practices, thus far relatively confidential and local, into an institutionalised and international market activity.
* AIFM: “Alternative Investment Funds Managers” Directive
Increasing fund raising
The statistical analysis of activity published in 2018 by Invest Europe confirms this trend. The study is based on the consolidation of 2017 indicators and a sample of 1,250 fund management companies surveyed in Europe, covering 90% of the 640 billion euros of assets under management declared to the ESMA.
The survey shows funds raised of 91 billion euros, the highest figure since the record 112 billion euros recorded in 2006, as well as positive indicators in general, including a buoyant level of investment, at 72 billion euros, and divestment, at 44 billion euros. The management of “dry powder”, i.e. funds that have been raised but not yet invested, is better and better controlled by fund managers who are optimising the raising of funds through innovative bridge financing techniques. However, the still substantial levels of dry powder are having a non-negligible impact on asset acquisition prices, sometimes very high, especially as assets available for sale are becoming scarce.
A diversified and increasingly global investor base
The buoyant appetite for the European capital investment market is now coming from a diversified base of international institutional investors. Indeed, outside the European Union, a third of investors are from North America and a quarter from Asia. Their allocation strategy focused on alternative capital investment assets seems exponential. The “Alternatives in 2023” study carried out by Preqin in October 2018 even foresees an almost balanced geographical split in investors by 2023, with the significant arrival of investors from emerging countries.
The type of investor is also very diverse, with 30% consisting of pension funds, 20% of funds of funds, 15% of family offices and private investors. Banks and insurance companies also represent 15%. The growing influence of public players should also be noted, with the latter now accounting for 6% of the market, within the framework of Public-Private Partnerships (PPP).
Generally stable future yields despite an uncertain economic context
The financial market environment, particularly passive management, saw substantial volatility during the final quarter of 2018 and forecasts for 2019 are far from optimistic. Capital investment, on the other hand, is considered to be a portfolio active management practice for which investors are planning to increase their long-term exposure, whilst reducing average yield forecasts by around 0.5% in their models to 6.7%.
What about the impact of Brexit?
In 2019, responding to fund managers’ fears that they may no longer have access to the UK market to distribute their funds, BVCA* said that the post-Brexit effect should be put into perspective. The association says that a number of scenarios are currently possible and that a partial Brexit would be the eventual outcome rather than a hard Brexit. BCG*, meanwhile, says that the creation of new investment opportunities on the British market remains probable, notably via set-ups such as joint ventures or spin-offs. In particular, the industrial distribution, aeronautical and medical & social services sectors could be popular targets…
* BVCA: British Private Equity & Venture Capital Association
* BCG: Boston Consulting Group
Increasingly expensive targets…
The factors outlined above have introduced real competition in which acquisitions of unlisted assets in Europe have become major challenges, with such assets reaching valuation multiples of up to 9.5 times EBITDA. The main differentiating element is becoming sectoral and selective fund expertise and the ability to adapt to a backdrop of overvalued asset cost prices, with a decisive equity approach.
… particularly in venture capital
Accounting for 13% of raised funds*, venture capital has to be particularly careful to educate LPs*, and not deploy funds at any price in order to achieve their asset allocation targets, but truly invest in the economy. The EIF* has published revealing indicators regarding the average value of this segment: holding a 1% stake in a company (based on a sample of 4,000 companies) represented around 50,000 euros in 1997, 80,000 euros in 2007 and almost 100,000 euros in 2017.
* Invest in Europe Q4 2017
* LPs: Limited Partners
* EIF: European Investment Fund
Positive buyout momentum
Another market trend that was confirmed in 2018 in Europe on the buyout segment concerns the growth in LBO* refinancing operations, with a return to high interest rates in mind, and an increase in consolidation operations between funds domiciled in the European Union. Lastly, buyouts have seen the emergence of crowd lending*, with funds raised allocated to classic LBOs.
* LBO: Leveraged Buyout
* “Crowd lending” is where a large number of people participate in the development, in economic and financial terms, of a project
Confirmation of infrastructure funds
The European infrastructure fund ecosystem is also expanding and benefiting from the wave of operational projects developed in Public-Private Partnerships (PPP) and constructors’ desire to divest stakes to European alternative funds to get them off their balance sheet.
Private debt is gaining a foothold
With funds of around 30 billion euros raised in 2017*, the private debt segment is gradually gaining a foothold in the financing landscape, with offerings that are both innovative and flexible. It represents a way to diversify, given traditional bond allocation or the contraction in traditional bank loans.
* Preqin Fundraising update Q4 2017
In conclusion, 2019 will undoubtedly be a year that sees a consolidation of this industry, the development of crowd lending and direct lending* projects, and the creation of crypto asset projects, notably Securities Token Offerings. Eager to replicate the success of venture capitalists with their start-ups, we are seeing the emergence of development capital, with investment funds investing more massively in start-ups that have matured in order to help grow them faster. Lastly, investments will turn to emerging countries and assets that meet ESG* criteria, closely monitored by LPs.
* Direct debt granted by specialized alternative funds
* ESG: Environmental, Social and Governance
The SGSS teams dedicated to the pan-European alternative asset business line are working with their clients to provide them with their expertise and know-how. They are working in close cooperation with the other Societe Generale group teams specialising in financing or consultancy services in order to provide global solutions and best meet the capital investment industry’s many challenges.