Europe Hits $10.4 Billion In VC Invested; Bolt-Ons 49.5% Of All Buyout Activity – ValueWalk Premium

Europe Hits $10.4 Billion In VC Invested; Bolt-Ons 49.5% Of All Buyout Activity

Europe Hits $10.4 Billion In VC Invested; Bolt-Ons 49.5% Of All Buyout Activity by PitchBook


Europe presents a complex prospect for private investors currently looking to cut deals. GDP growth remains weak, driven primarily by slowly expanding private consumption. The European Central Bank seems likely to either expand its quantitative easing program or cut interest rates even further, or both. The European Capital Markets Union initiative, which could help make private financing more accessible, seems to be gaining more and more steam. Given recent swings in financial markets worldwide, combined with China’s slowdown, many reports point to investment momentum swinging back toward more developed markets. And, to cap it all off, the U.S. Federal Reserve’s potential decision to diverge in monetary policy from what has been the norm for the past few years has helped support the dollar against the euro, which will likely keep encouraging investment from abroad, particularly the U.S.

Such a dynamic macro environment is only rendered further challenging by the state of the private equity buyout and venture capital industries. Worldwide, the former is still sitting on an abundance of dry powder that will have to be invested at some point. Even though we’ve seen multiples begin to decline in the U.S., and Europe never got quite that heated, high prices remain a stumbling block, and not only for buyout firms. Highly priced deals have contributed to the steep decline in venture activity across Europe, even as capital invested in what rounds are still closing remains hefty.

In short, the European scene is complicated, but still presents opportunities, as the sheer breadth and variety of its businesses encompasses not only innovative startups in need of capital but also mature businesses ripe for takeovers. Analyzing the present is the surest method to making sense of what is most important. To provide as clear a picture as possible of the primary trends driving private investment currently, we’ve assembled a comprehensive overview of buyout, growth and venture activity across regions, sectors and more.



Surveying European PE deal flow by both year and quarter, it’s likely 2014 will remain a high-water mark for private investment for some time. In terms of capital invested by both buyout and VC firms, persistently high asset prices have kept numbers fairly elevated, but the more telling trend is the slide in overall private investment count. The swell of activity appears to have peaked in the first quarter of 2014 at 1,534 deals, and since has subsided by close to 36% to hit 985 in the most recent quarter. Heightened valuations have taken a toll on activity, even if they have yet to truly affect overall value.

Since a peak in 1Q 2014, private investment count has fallen nearly 36%.


The question is the extent to which activity will fall, as well as what will happen when overall value inevitably declines. Countervailing forces are at work here, especially for PE buyout firms. Although regulations are still a deterrent to the riskier forms of lending, interest rates could plunge even deeper. But at the same time, European lending markets are not as varied or broad as those in the U.S., so the availability of financing from alternate lenders, when it comes to buyouts, is considerably less. PE buyout shops have plenty of dry powder to work with, however—one of the reasons why asset prices remain elevated. Meanwhile, the supply of companies in the market remains considerable on a sector-by-sector and a region-by-region basis. Pockets of distressed middle-market companies or businesses ripe for operational enhancement in an era of sustained sluggish growth, as well as owners looking to retire, have kept the pipeline of prospects relatively full over the past few years—those drivers should continue to keep it full going forward. And, as long as the eurodollar disparity remains attractive to U.S. investors, American PE firms may well help boost buyout numbers.

For venture capital investors, Europe’s startup ecosystem is still largely a network of fairly active hubs, such as Stockholm, London and Berlin. In those locations, the surge in late-stage numbers that has been the primary story-line of venture investment over the past few years are easily seen. What’s easier to miss is the toll such round size inflation can take on early-stage numbers. Highly active government institutions and programs such as the European Investment Fund have helped prop up venture activity, but as has often been noted, significant obstacles to strengthening the Eurozone’s network of startup activity remain. Perhaps they will be overridden in future, but for now, European VC remains even more regionally affected than other forms of private investment.


In fact, that remains one of the most important factors to bear in mind when looking at continent-spanning numbers. Regional shifts are key to investment dynamics—for example, as we noted in the last edition of this report, the U.K.’s middle market overtook Germany’s acclaimed Mittel stand for the first time in terms of revenues, which signals the U.K. may well see its dominant  share of buyout activity expand even more in the coming decade.


Venture Capital


Much of the conversation centered around the European Capital Markets Union involves how such a pan- European financing model could help nourish the continent’s startup scene. Looking at how venture activity has plummeted over the past several quarters, it’s easy to see why concerns have arisen. From 1Q 2014 to 3Q 2015, the count of VC financings dropped by over 50%; from the second quarter of 2015 to 3Q alone the decline in the overall number of European venture rounds exceeded 20%. Yet, even as activity has plunged, the past three quarters have each hit or cleared Euro 3 billion in VC invested, putting the year as a whole at nearly Euro 9.5 billion invested already, eclipsing even last year. The gargantuan sum invested this year has been skewed heavily by Spotify’s massive $526 million funding as well as Delivery Hero’s continued success in raking in late-stage financing. Between them, those two account for Euro 1.1 billion in VC financing this year, or close to 11% of total VC invested through the end of September in European startups. Such a top-heavy dispersion of VC has its roots in the venture industry’s dramatic acceleration of late-stage numbers over the past few years, as well as the relative lack of depth in the European startup ecosystem.


It stands to reason that if there is an imbalance of late-stage investment flooding a select group of hyped startups in the U.S., Europe would see a similar overweighting. The issue with the spread of VC funding is that many fear there is a lack of necessary capital infusions at earlier stages. That may not necessarily be the case, as breaking down venture activity by stage reveals there is still plenty of money flowing at the early stage, and a reasonable chunk of euros devoted to angel/seed activity. But the decline in round counts across the board suggests spread issues on a smaller scale at even the early stage, with cautious investors plying only the best-prepared startups with wads of cash in order to keep up with current round and valuation inflation, to the detriment of smaller companies that warrant investment but miss out by a small margin of risk. An increase in caution isn’t necessarily a bad thing, but it’s worth stressing that a pullback in general funding could potentially diminish the pipeline of fledgling companies that will be the Delivery Heros or Spotifys of the next decade. Also, as more and more money is put into late-stage companies, investors risk paying a disproportionately high amount for a chance at hyper-growth, which isn’t guaranteed. In some ways, it’s trading one type of risk for another—yet smaller, earlier investments have a more favorable risk/reward ratio. So,
if fears of the current heated venture climate continue to proliferate, as they have in the U.S., perhaps round sizes will return to more reasonable figures, allowing for more levelheaded allotments of VC.

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