Roland Berger European Private Equity Outlook April 2011

8/6/2019 Roland Berger European Private Equity Outlook April 2011

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European Private Equity Outlook 2011_Final_010411.PPTX


Munich & Frankfurt, April 2011

European Private Equity

Outlook 2011


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2010 Roland Berger Strategy Consultants GmbH

Contents Page

2European Private Equity Outlook 2011_Final_010411.PPTX

A. The current private equity environmentEn route to recovery 6

B. A look at the European real economyIn and out of turmoil and back again? 11

C. A look at capital marketsNo full recovery yet 18

D. Outlook 2011 and beyondSituation improved, but complexities ahead 27


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While PE regains momentum after a disastrous year 2009,market conditions presented substantial challenges in 2010

> Situation 2010 PE market regaining strength after downturn in 2009 but still challenging

> In 2010, European PE activity is starting to regain momentum after a historical low in2009 PE investments have increased by 52% compared to previous year

> The European economy is starting to recover, but long-term prospects still uncertain> European governments fueled growth with deficit spending, which may hamper growth

in the long run and put the stability of the European financial system at high risk

> The capital markets environment has substantially improved but remains buoyed byconcerns about the sustainability of economic recovery

> Low loan availability and volatile markets limit acquisition and exit opportunities,leverage levels of around 3.5-4.0x EBITDA require high equity commitments in LBOs

> Margins have recovered despite sovereign debt woes. Due to low base rates, overallloan and bond pricing is below bull market levels

> With approx. EUR 173 bn in committed funds available, European general partners willhave to rethink how they can meet limited partners' return expectations in the future

Executive summary (1/3)


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Outlook for 2011 positive in a changing environment


> Outlook 2011 situation will improve with changes regarding type of investors, transactionsand pricing

Expected increase in PE relevant M&A activity esp. in the Automotive, Capital goods,Business services and Consumer goods sectors

M&A activity from strategic buyers is likely to increase as the corporate agenda shiftsfrom crisis to growth management. Also, we expect more activity from Asian buyers

Given the improvement in overall market conditions, we expect higher transactionsecurity for sellers

As debt capital markets have yet to recover, large deals are likely to remain seldom

Revival of dual track PE exits, as investors aim to increase transaction security andleverage the window of opportunity in the stock market


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European Private Equity Outlook 2011_Final_010411.PPTX 5European Private Equity Outlook 2011_Final_010411.PPTX

Challenges for the mid and long term perspective expected


> Medium/long-term perspective challenges in financing and redesign of business modelsexpected

Refinancings become increasingly complex, driven by the restraint of debt providers

As value creation via pure financial engineering becomes more and more exhausted, weexpect to see more business model innovation


6/40European Private Equity Outlook 2011_Final_010411.PPTX 6European Private Equity Outlook 2011_Final_010411.PPTX

A. The current private equity environment

En route to recovery



> In 2010, European PE activity is starting to regain momentumafter a historical low in 2009

> In 2010, EUR 36 bn were invested in Europe a 52% increaseyear on year

> With low deal volumes and average values, the M&A market is yetto recover buyers' and sellers' price expectations in

mismatch

> With approx. EUR 173 bn in dry powder1) available, general

partners will have to rethink how they can meet limited partners'return expectations in the future

> Also, PE funds must regain trust of their investors as fundperformance has suffered during the financial crisis

PE investments are gaining momentum in 2010 Risingvaluation levels are crucial to recovery

Return to soundvaluation levels

is key to the

PE market's

recovery

Current situation

Source: Roland Berger

1) "Dry powder" refers to committed, yet uncalled funds of private equity funds


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M&A volumes remain low, average deal values decline Mismatchbetween buyers' and sellers' price expectations

M&A volume in Western Europe [EUR bn]

Source: Thomson Financial

398

482

968991

785

477483

6,000

5,000

4,000

3,000

2,000

1,000

0

500

2,000

1,500

1,000

02010

2,917

2009

2,571

2008

3,962

2007

1,224

4,692

2006

4,478

2005

4,045

2004

3,433

2003

3,316

Value in EUR bn (left scale) Volume in no. (right scale)

8,560 9,059 10,102 11,526 12,946

thereof deals with an disclosed deal value:

1) Including those with undisclosed transaction value

11,961 9,341 9,964Total no.

of M&A

deals1)



Massive dry powder available But how can limited partners'return expectations be met in the future?

Source: EVCA, Prequin, Roland Berger Research

Private equity returns

> European PE funds raisedapproximately EUR 380 bn ofcapital in 2005-2010

> With dry powder of approx.EUR 173 bn, PE funds must find ahigh number of attractive targets tomeet investors' demand

> In the past, many funds have reliedentirely on deleverage to reachrequired IRRs

> In the current environment, PEfunds may have to rethink theirinvestment strategy

20102009

8.3

2008

11.1

2007

15.9

2006

12.7

2005

9.6

2004

8.2

2003

12.5

REMARKS

?

EUROPEAN BUYOUT, 5-YEAR ROLLING IRR [%]



B. A look at the European real economyIn and out of turmoil and back again?



> To overcome the financial crisis, European governments fueledeconomic growth with deficit spending most of them issuedgovernment bonds

> This inflated the volume of money in circulation and reducedthe interest rate pressure but for how long?

> The European economy is highly dependent on exports theappreciation of the euro dampened the recovery in 2010

> The high deficit might hamper growth in the long run

> The high risk that individual governments as in the case ofIreland or Greece might default on their high debt puts thestability of the entire European financial system at high risk

The real economy is recovering But pre-crisis levels will notbe reached in the short run

The Europeaneconomy is starting

to recover, but

long-term prospects

remain uncertain

Current situation



2007

2.8

2006

3.1

2008 2009p 2010p 2011p

0.4

-4.1

1.7

1.0

GDP change in the Eurozone [%] GDP growth of selected countries/regions [%]

Growth in Europe is sluggish and far behind emerging marketsand China

Source: IMF, EIU

2009 2010p 2011p

Global -0.6 4.8 4.2

Industrializedcountries

-3.5 2.5 2.1

Emerging markets 2.5 7.1 6.4

USA -2.6 2.7 2.2

Germany -4.7 3.4 1.8

Japan -5.3 3.5 1.2

Euro zone -4.1 1.7 1.5

China 9.1 10.2 9

Russia -7.9 4.0 4.0



Many currencies appreciate against the USD Governmentsincline towards fiscal intervention

Yuan

3.6

Won

9.7

Real

9.7

Baht

7.2

Yen

10.6

Euro

11.0

CHF

20.3

Source: Bloomberg

Appreciation against USD since June 1 2010 [%]

Quantitative Easing: USA eases pressure ontheir banks flooding the financial system withmoney

European measures to compete againstUS monetary policy are limited

High exchange rates slow down exports,restrictive monetary policy of manyemerging markets decelerates growth

Risk of competitive devaluation of currency countries want to increase competitiveness

New threat of protectionism?


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-35

-30

-25

-20

-15

-10

-5

0

-200 -190 - 180 -170 -160 -150 - 140 -130 -120 -110 - 100 - 90 -80 - 70 -60 - 50 -40 - 30 - 20 - 10 0

EurozoneEU-27

ChinaBrasil

UK Spain

Russia

Portugal

Mexico

Japan

Italy

Ireland

India

Greece

Germany

France

Budget deficit

Public debt

USA

Public budgets are falling into disarray No major industrialnation could fulfill the Maastricht criteria

Maastricht-criterion 60%

Maastricht-

criterion

3%

Public budgets 2010 budget deficit and public debt [in % of GDP]

Source: EIU


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Rising public debt leads to an increased risk of nationalbankruptcy Greece and Ireland are especially at risk

0

50

100

150

200

250

300

1/1/101/4/08 7/3/09

Ireland

Greece

1/7/111/2/09 7/2/10

Germany

France

Italy

Spain

Portugal

7/4/08

1) 10 year Government Bond, rebased

Source: Bloomberg; Roland Berger Research

Development of interest rate of government bonds, subscribed [01/2008=100]1)

Increased risk of default, especially forGreece, Ireland and Portugal

Spread of Greek government bondabout 800 base points above theeurozone average

Greece is still mostly on track withreforms, but a new wave of actions isneeded to ensure a long-term recovery

Ireland's credit ratings have been cutand worries about the health of theeconomy and banking system persist


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Activity in loan markets remains low Substantial influence ofmacroeconomic worries on bond markets in 2010

Source: SIFMA, Loanconnector, Bloomberg

> Worries about Europeangovernment borrowers such asGreece, Ireland, Spain, Italy or

Portugal are having a fundamentalimpact on markets in 2010

> Loan markets recover slightly in2010, but activity remains low

> Banks prefer borrowers they know:refinancing, corporates with strongcredit ratings, secondary buyouts

> Low loan availability is increasinglybecoming an issue for companieswithout bond market access

Development of European debt capital markets Availability

REMARKSDEVELOPMENT OF EUROPEAN BOND AND LOAN ISSUANCE [EUR bn]

115

295

149133116605675 4030626

42282819

201020092003 20082007200620052004

High yield bonds

Investment grade bonds

353312310

732

593

748

542391

846089

242218187106109

Leveraged loans

Investment grade loans

Bonds

Loan

s

-61%

+13%


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High-yield bond market still no alternative to loans for PERefinancing remains the primary aim of new bond issues

Source: SIFMA, S&P LCD, Roland Berger Research

Development of European debt capital markets Debt availability and purpose

EUROPEAN LEVERAGED LOAN VOLUMES [EUR bn, %] EUROPEAN HIGH YIELD BOND VOLUMES [EUR bn, %]

84

60

89

242

218

187

106109

0

50

100

150

200

250

2007 2009 20102006 20082003 20052004

0

50

100

150

200

1940

20092004 20072006

42

20102005

28

2008

3026286

2003

LBO Non-LBO

LBOshare,refishare

[%]

12 11 7 19 13 23 52 75

45 42 50 34 44 90 7 10

CAGR: -30%

CAGR: +15%


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23/40


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Sponsors have to commit substantially more equity in LBOsTo reach IRR levels of the past, deleverage will not be enough

Source: S&P LCD

Development of LBO transaction structures

Total LBO loan transaction structures [%1)] AVG. EQUITY CONTRIBUTION IN LBOs [%]

1) Percentage of deals involving the specific instruments based on transaction count: e.g. in 2006, 29% of all deals had senior, 2nd lien and mezz structure

16

1270

0

30

0

76

0

24

0

23

5

65

7

28

24

20

28

27

11

33

29

38

50

2

48

0

52

0

44

35

2006200520042003

5

100%

2010200920082007

Sr onlySr + 2nd lienSr + mezzSr + 2nd lien + mezz

Deals with > 50% [%]

10 9 8 6 7 31 75 71

50

4542

3333333334

20102009200820072006200520042003

Average equity contribution in % of transaction value


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After almost no activity in 2009, the IPO market shows timidsigns of revival

> European IPO activity almostcame to a halt in 2009

> Despite sovereign debt crisis andthe uncertain pace of recovery,IPO activity has picked in 2010

> Key growth sectors so far: rawmaterials and utilities, stockexchange listings, PE-backedIPOs

> Q2 2010 has witnessed thereturn of IPOs in the >EUR 1 bnrange

EUROPEAN IPOs BY QUARTER [EUR bn, no.]

Development of European equity capital markets IPOs

Source: Bloomberg

REMARKS

130

868979

6144281864

68

133

72

233

183

258

139

0

100

200

300

400

500

600

-15

-10

-5

0

5

10

15

20

25

30

10.1

Q310

2.5

Q210

9.0

Q110

4.7

Q409

5.0

Q309

1.4

Q209

0.5

Q109

0.0

Q410

1.2

Q308

1.6

Q208

9.2

Q108

1.9

Q407

29.1

Q307

12.6

Q207

28.0

Q107

10.6

Q408

Volume [no., left scale]Value [EUR bn, right scale]


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27/40


28/40


Improved asset quality

hot sectors 2011Comeback of strategic buyers

Higher transaction security

Focus on mid-size deals

Increase in Asian bidders

More dual-track auctions

Asset quality and transaction security will improve in 2011 over the medium term, we expect new challenges ahead

Private equity outlook 2011 and beyond

SHORT-TERM TRENDS 2011

12

3

4

5

6

Complex refinancingsIncreasing business model innovation

MEDIUM TO LONG-TERM TRENDS 2012+

89



29/40


In 2011, we expect more strategic buyers in an improving dealenvironment Also, auctions will become more competitive

Key trends in the 2011 PE environment (1/2)

TREND

1 IMPROVED ASSET QUALITY

- HOT SECTORS

2

3

4 FOCUS ON MID-SIZE DEALS

ASSESSMENT

> After focusing on navigating the turbulences of the crisis and the often rapid recoveryin 2010, growth is back on the corporate agenda in 2011

> In many industries, leading corporates have amassed substantial amounts of cashand thus represent strong competition in PE auction processes

> Substantial number of auctions in 2010, but many have not been completed> Transaction multiples stabilize - banks may commit to slightly more risk towards H2> Driven by the improvement in overall market conditions and most business'

performance, we expect higher transaction security for sellers

> As debt capital markets have not recovered yet, large cap deals are likely to remainseldom

> In line with a likely recovery throughout the year, the return of larger deals is possiblein the long-term

> We expect a substantial increase in PE relevant M&A activity in the Automotive,Capital goods, Business services and Consumer goods sectors

> In the broader M&A market, we are looking forward to an increase in transactions inFinancial services

COMEBACK OF STRATEGIC BUYERS

PE buyers Corporatebuyers

HIGHER TRANSACTION SECURITY

Lowconversion Highconversion

Small cap Large capMid cap

AutomotiveCapital goods

Business servicesFinancial services

Consumer Goods



30/40


Increase in Asian bidders expected Capital marketsenvironment likely to be used for more dual tracks

Key trends in the 2011 PE environment (2/2)

TREND

5

6

INCREASE IN ASIAN BIDDERS

MORE DUAL-TRACK AUCTIONS

ASSESSMENT

> Increase in activity from Asian and Middle Eastern buyers expected in Europe particularly from Chinese strategic buyers

> Also, securing access to Chinese markets is a key issue for many European

companies> While the stock market may provide windows of opportunity for corporates in search

of financing, high volatility may prove a serious obstacle for some> In search of increased transaction security, we expect Private Equity investors to

increasingly opt for dual track processes

Domestic IntercontinentalIntra-European

Privateequity

Public equity

DUAL TRACK EXITS

MEDIUM-TO-LONG-TERM TRENDS 2012+


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In the medium/long term, solving refinancing issues will becomemore complex We also expect more business model innovation

Key trends in the 2012 PE environment and beyond

TREND

8 COMPLEX REFINANCINGS

9 INCREASING BUSINESS MODEL

INNOVATION

ASSESSMENT

> Enhanced focus on operational improvement within the portfolio companies becausethe value added based on f inancial engineering is limited

> Return to the performance level of the original business plan> Closer look on new technology/market combinations> PE should try to bring their portfolio company to a new phase in its life-cylce

> Balance sheet constraints in portfolio companies support the need for refinancing> Increasing complexity in refinancing, driven by the restrained behavior of debt

providersNon-

complex

Complex

Product /market-combination

Revenuemodel

Valuechain

Statusquo


32/40

COMEBACK OF STRATEGIC BUYERS2


33/40


Great cash reserves imply that M&A activities of strategicinvestors will increase Enhanced competition for PE

M&A VOLUMES WESTERN EUROPE [#, EUR bn]NON-RESTRICTED CASH OF EUROSTOXX 50COMPANIES1) [EUR bn]

482

968881

785

477483398

2010200920082007

1,224

2006200520042003

Source: Thomson Financial, Roland Berger Analysis

Corporate investors share by deal volume [%]

250

2010

200

2009

150

100

0

105

2005

216

184

2008

174

2007

141

2006

101

2004

97

2003

84

Indicators for increasing competition from strategic investors

> Cash levels have substantially increased from pre-crisis levels> Cash financing of transactions thus becomes much easier

CAGR: 19.9%

> Decreased share of strategic bidders since the beginning of thecrisis in 2008

> During the crisis, many companies have abstained fromacquisitions and have limited capital expenditure

1) Excludes financial services companiessuch as Allianz SE, BNP Paribas, Deutsche Bank, Mnchener Rckversicherungs AG, and others

79.2 82.0 81.0 79.482.0 79.4 78.2 79.4

HIGHER TRANSACTION SECURITY3


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European M&A market shows decreasing conversion ratessince 2008 Transaction security likely to improve 2011

EUROPEAN ANNOUNCED VS COMPLETED DEALS [# '000]

Source: Thomson Financial

Conversion [%]

81.5 80.4 74.5 73.980.1 82.5 85.2 82.8

Transaction completion and pricing

2010

13.5

18.3

2009

12.5

16.8

2008

13.617.0

2007

14.2

17.4

2006

12.5

15.1

2005

10.912.8

2004

9.7

11.7

2003

9.5

11.9

Closed dealsAnnounced deals

> Since 2008, deal conversion has constantly decreased> Due to the improved business performance of most targets and a

positive economic outlook, we expect transaction security to increasein 2011

EUROPEAN EV/EBITDA TRANSACTIONS MULTIPLES

12.6x12.3x10.8x

20102009200820072006200520042003

12.2x10.3x

13.5x14.6x13.1x

Transactions [# '000]

14.2 14.0 12.5 13.59.5 9.7 10.9 12.5

> Stabilization of pricing in M&A markets> Investors are likely to take advantage of low valuations in stock

markets. However, volatilityis still high


35/40


36/40


37/40

7 COMPLEX REFINANCINGS


38/40


Pressing need to refinance debt burden from bull market years sustainable concepts and stakeholder management are vital

> Until 2015, leveraged loan volumes of morethan EUR 100 bn will have to be refinanced

> Without debt markets at full speed,refinancings are difficult, costly, andincreasingly complex:

Loan-to-bond refinancing or amend-to-extend agreements are expensive

Equity investors demand solid balancesheets in rights issues

Mitigation of varying stakeholder interests

Time constraints vs. time requirements

> Refinancings increasingly demandsustainable concepts in non-sustainableenvironments

REMARKS

Refinancing trends

Source: Standard & Poors

LEVERAGED LOAN MATURITY PROFILE [EUR bn]

0

5

10

15

20

25

30

35

40

45

50

2016 2017201520142013201220112010

Loan maturities as of June 2010

8 INCREASE IN BUSINESS MODEL INNOVATION


39/40


While making additional investment necessary, rethinking aportfolio company's business model often is a viable option

Framework for business model innovation

Source: Roland Berger

PERFORMANCE VS. ORIGINAL PLAN BUSINESS MODEL INNOVATION FRAMEWORK

THREE POSSIBLE RESULTS OF SUCCESSFUL BUSINESS MODEL INNOVATION

A Return to original business planperformance level

> Sustainable increase of sales orprofitability

> Higher EBITDA upon exit increasesreturns

B Establish new technology / marketcombination

> Change in the level playing field> Higher exit multiple possible due to

new peer group

Reach a new phase in thecompany's lifecycle

> Bringing the company from maturityto a new growth phase

> Benefits for all stakeholders

Product / market-combination

Revenuemodel

Value chainStatus

quo

B

Do nothing

A

Acquisition Exit 2009 2010

OR

A

B


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