CAPITAL THINKING: US POISED TO POUNCE IN EUROPE – BUT IT IS NOT ONE-WAY TRAFFIC

t first glance, 2019 has seemingly been a lacklustre year for US private equity firms investing across the Atlantic.T here were just 385 completed A transactions for US private equity firms in Europe over the first three Stephens quarters of 2019 - far below the average of 691 over the previous five calendar Contacts: years. The drop off seems understandable, considering the uncertainty in the UK and Europe stemming from the Brexit negotiations. Slowing economic growth in key European economies, such as the export powerhouse Germany, will also Brian Bratcher have weighed on deal-making activity. Managing Director and Head of Financial Sponsors Group However, the current private equity landscape is certainly more nuanced than Stephens Inc. the headline transaction numbers suggest. While the volume of US-into-Europe Little Rock Office deals has fallen so far this year, the value of transactions has held up in 2019 – with the median deal size for US private equity firms investing in Europe at [email protected] $126m. This is in line with the average median deal size between 2014 and 2017 – excluding the outsized year of 2018.

So, US private equity firms are continuing to find appealing opportunities in Europe, despite the ongoing economic and political uncertainty. This seems logical, particularly with US private equity multiples at elevated levels relative to Europe. The four-quarter rolling median EV/EBITDA buyout multiple in Simon Tilley the US was 12.4x at the end of Q2 2019, compared to 10.3x in Europe. Managing Director Financial Sponsors Group

International Appeal Stephens Europe Limited London Office Aside from valuations, we see several other drivers of additional activity for US [email protected] private equity groups in the UK and across Continental Europe. In the near term, currency may be a factor. Sterling weakness versus the dollar – which has been a hallmark of the three years since the UK’s decision to leave the European Union – only increases the buying power of US private equity firms.

Longer term, more and more US middle-market private equity firms are seeking to grow the international reach of portfolio companies. Historically, Europe has stephens.com/investment-banking/

been a positive first step on this journey.

STEPHENS INVESTMENT BANKING 1 Brian Bratcher, Head of the Financial Sponsors Group at Stephens, PE Buyout EV/EBITDA Multiples (four-quarter rolling median) comments: “This is an exciting development for the US mid-market private equity industry. Many domestically-proven PE-owned 14x businesses – which are now on their second, third and even fourth private equity backer – are seeking to enter and grow in other 12x large markets around the world, such as Europe.”

10x Debt providers, particularly private debt funds, have also significantly internationalised, which is an additional supportive 8x factor. This is allowing private equity firms to capitalise on strong debt fund relationships in overseas markets. 6x

Entering The US 4x

While numerous major US private equity groups – such as 2x Blackstone, Carlyle, Summit and General Atlantic – have had long-established operations across the Atlantic, we are starting to x 2016 2017 2018 Q2 2019 witness more and more European mid-market private equity firms establishing offices in the US to support existing portfolio businesses US Europe and make platform investments.

For example, leading European mid-market specialist investor Median Deal Size of US PE Firms Acquiring in Europe HgCapital, which has existing bases in London and Munich, opened a New York office earlier this year. The group, which has a focus on investing in software and services businesses, now boasts $250.00M three US-headquartered portfolio companies – Litéra, Mitratech and Sovos. $200.00M

London-based mid-market group Inflexion also established an $150.00M office in Boston earlier this year. Its US headquartered portfolio company Halo actually began as a UK company, ProLabs, before $100.00M Inflexion combined the group with AddOn Computer Peripherals in 2017. $50.00M

Simon Tilley, European Head of Financial Sponsor Coverage for $0.00M 2015 2016 2017 2018 2019 Stephens, adds: “We have a growing number of financial sponsor clients in Europe with portfolio companies seeking to make a step- change in their international reach. This is particularly the case Deal Count of US PE Firms Acquiring in Europe in sectors such as financial services, aerospace and defence, industrials, software and tech services. Establishing a presence in 800 730 712 690 the US is a natural extension for mid-market European investors 700 681 644 seeking to support strategic growth in their portfolio.” 600

500 462 459 Transatlantic Expertise 435 385 400 371 365

Irrespective of where the transactions take place, it is imperative 300 257 for private equity investors to have strong connections on 200 both sides of the Atlantic to support portfolio companies 100 and management teams, as well as to deal with unforeseen 0 developments. This is where Stephens adds considerable value. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Deal Count Building on a track record dating back to the 1930s, Stephens established its European footprint five years ago with the opening of offices in London and Frankfurt. This enabled the formation of Source: Pitchbook Data Inc. international sector teams, which work seamlessly across the US and Europe. The growing team in Europe has since swelled to Stephens Inc. | Member NYSE, SIPC more than 40 senior professionals. This material has been prepared solely for informative purposes as of its stated date and is not a solicitation, or an offer, to buy or sell any . It does not purport to be a complete description of the securities, markets or developments referred to in the material. Information included in the material was obtained from external sources which we consider reliable, but we have not independently verified such In addition to capitalising the group’s scale to provide a breadth information and do not guarantee that it is accurate or complete. Such information is believed to be of views, the highly experienced international sector teams draw accurate on the date of issuance of the material. No subsequent publication or distribution of this material shall mean or imply that any such information or opinion remains current at any time after the stated date on intimate local knowledge and relationships to provide true of the material. We do not undertake to advise you of any changes in any such information or opinion. Additional information is available upon request. © 2019 Stephens Inc. impartial and independent advice to clients considering key strategic investment and growth decisions.

STEPHENS INVESTMENT BANKING 2