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European PE managers cautious but ready to 'get back to business'

In the immediate aftermath of the coronavirus lockdown, European private equity fund managers put in place liquidity management plans and drew down on revolvers to shore up their portfolio companies. A few months on, they are gearing up to invest in new assets.

"The phase that we're definitely in now is [one] of looking towards the horizon. We'd like to get on and get back to business," Inflexion Pvt. Equity Partners LLP partner Richard Swann said.

U.K. midmarket firm Graphite Capital Management LLP does not "want to sit on its hands," managing partner Markus Golser said. "We really need to make sure opportunities continue to be investigated."

Bolt-on deals are expected to be among the first to pick up. It is easier to do a deal through an existing investment than to start from scratch, and capital is likely to be more readily available as the purchasing company has already been financed, market sources said.

Inflexion completed two such deals during lockdown. Its fund and fiduciary administration services firm, Ocorian, acquired Allegro, and its corporate and personal foreign exchange provider, Global Reach, acquired key elements of Encore FX's Canadian operation. Discussions around the Allegro acquisition began prior to the outbreak of the pandemic, while talks about the Encore FX acquisition, a business the firm already knew through one of its portfolio management teams, began during the lockdown.

Inflexion intends to do more deals over the coming months, having, for the most part, secured its portfolio, Swann said.

Silverfleet Capital Partners managing partner Gareth Whiley said of bolt-on deals: "We're probably going to lose six to 12 months of what we were doing in a normal world ... realistically, we'd like to try and claw some of that value creation back faster."

The firm has had some approaches from companies that are in "mild trouble" and are exploring investment, but Whiley said he would like to see the firm's portfolio navigate "a bit more of COVID" before it makes investments.

Financing available

Financing for bolt-on deals will be readily available, said Alexander Griffith, a leveraged finance partner at law firm Proskauer Rose LLP. He said: "Many credit funds are very focused on buy-and-build strategies of their portfolio companies as it allows the credit fund to regularly deploy and grow their book with normally less effort and execution risk than financing new M&A.

"Provided the portfolio companies can meet the criteria in documentation to call on financing and make the bolt-ons, then the credit funds are happy to oblige."

This means these deals can be a good way to deploy capital, a debt fund manager who wished to remain anonymous said. "You know the credit because you are the incumbent lender, you know how the company reacts under the COVID pressure," the manager said, adding that smaller companies negatively affected by the pandemic are ripe targets for those seeking bolt-ons.

Deal-making does not stop at traditional buyout deals for some firms. Of Inflexion's £2.4 billion uninvested capital, its minority fund accounts for about £1.4 billion. "[The fund] has probably seen a disproportionately high number of situations over the last eight weeks, essentially where people are looking to plug balance sheets," Swann said.

Graphite Capital is looking for "any form of opportunistic investment," either in minority transactions, distressed opportunities or complete start-ups or development capital situations where "there is something to be gained from having an unencumbered asset," Golser said.

Carveouts from struggling corporates that need to sell assets to raise cash could also be worth considering, Silverfleet's Whiley said. Divisions that are not in trouble are being prepped for sale. The firm needs to be "nimble and awake" to see if there is an opportunity, he added.

Slow and steady

But while second-quarter valuations should provide some clarity, and there is an eagerness to resume investing, managers noted caution.

"I think there's a desire to do both [platform and bolt-on acquisitions]. But it's going to be incredibly difficult to find assets that can be properly valued, given they have in many cases been losing some profit and top line, the uncertainty around the speed of recovery, and the potential for a second wave of coronavirus which means there could be another lockdown scenario later this year," Graphite's Golser said.

There are also difficulties in assessing businesses both positively and negatively affected by lockdowns because it is unclear what life will look like once they are lifted, Whiley said.

And while finance is available for deals, there are fewer assets than normal going up for sale, Proskauer's Griffith said. "We are seeing a small number of new M&A opportunities but they are very much focused on sectors that are untouched in any material negative way by COVID-19," he said, adding that deals are underway in the healthcare, IT and business services sectors.

Further M&A opportunities in more sectors are likely to emerge later in 2020 once buyers and sellers are more comfortable about price. Properly valuing businesses is one of the most difficult tasks facing the market, Griffith added.

The debt manager echoed the sentiment: "Although the market seems to have a faint heartbeat again, the market has not yet established what are the best margins for direct lenders in time of COVID, insofar as there have not been many transactions."

It is also more difficult to bring new deals to investment committees and convince them it is the right time to do them, and to go back to the sponsor and convince them it is going to cost them 800 basis points or more, the manager said.