Europe's PE forecast: Investors eye 2022 with cautious optimism

As the European private equity market looks ahead with hope for another strong year, industry participants remain realistic about the challenges that could yet upset a still-fragile recovery for the world economy.

According to PitchBook's 2021 Annual European PE Breakdown, deal flow in 2022 is unlikely to surpass the record high seen last year—which totaled nearly €755 billion (about $856 billion) invested across almost 7,200 deals—but it will nonetheless be buoyed by both large amounts of dry powder and robust debt markets.

That said, external factors like higher inflation and the possible impacts of new coronavirus variants are among the headwinds that could affect PE investors and their portfolios in 2022. Below, industry participants offer their perspectives on what they expect for the next 12 months.

1. A record fundraising year?

Despite PE fundraising slowing slightly in 2021, with around €90 billion raised over 145 funds versus €93 billion for 199 funds in the previous year, LPs are expected to remain positive about their PE allocations—especially when making commitments to GPs with a strong track record.

"Roughly half of the industry will be actively out in the market in one shape or another, and that is, I think, unprecedented," said Till Burges, a London-based managing director with fund-of-funds HarbourVest Partners. He also expects new and existing investors to increase their PE exposure.

"German institutions, for example, have been very careful in embracing private equity, but they are now increasing their allocations, and many more institutions are now entering the asset class for the first time," Burges said.

As has been the trend in recent years, much of this new capital is expected to go to fewer funds. Last year, more than 41% of the total capital raised came from only four mega-funds: EQT IX, Apax X, Ardian Buyout Fund VII and a Partners Group buyout fund, according to the 2021 European PE Breakdown. Burges noted that, along with favoring proven managers, LPs will also gravitate toward those offering greater diversity.

"I think over the last few years there have been many more multistrategy managers, which are particularly attractive for some LPs who want to build concentrated portfolios but nevertheless aim for good diversification across more strategies," Burges added.

2. The buyout bonanza continues

"Last year was a record for broader M&A activity and also from a private equity capital deployment perspective, and 2022—particularly for Europe—is set to be an incredibly strong year," said Anu Sharma, managing director and head of European banking at investment bank William Blair.

Both pent-up demand for M&A in Europe and a tremendous amount of dry powder are expected to keep this trend going strong. Investments in the technology sector are anticipated to be particularly prevalent.

Sharma noted that while the pandemic accelerated growth among tech companies, it also forced non-tech companies to look seriously at how they can integrate technology into their business. For many companies, he said, this is not just a matter of growth, but of survival.

"We're just in the very early innings of what's going to be a long-term, disruptive trend that's going to continue to drive M&A, investment and growth, which is the convergence across industries and the role that technology will play in that," he added.

Meanwhile, more corporate carveouts can be expected in Europe as companies reassess their core operations and long-term strategies. PitchBook's 2022 European Private Capital Outlook predicts that global carveout deal value, which surpassed €171 billion last year, will hit a new high of €200 billion in 2022.

3. Dark clouds loom

"I think in a year we will be in a better place than we are today, but there's still a fair amount of uncertainty over the next few months," said Daniel Lopez-Cruz, head of Investcorp's European private equity group. "One needs to invest in companies that are as high-quality as possible, as predictable as possible and as defensible as possible."

Among the possible risks that Lopez-Cruz cited are supply chain friction, retaining and hiring talent, and inflationary risks, adding: "I don't think that anybody 12 months ago would have anticipated that these would be the challenges that they are."

Prices have already soared all over the region. Inflation in the Eurozone rose to 5% in December, a record high. Meanwhile in the UK, the largest European economy outside the Eurozone, inflation hit 5.4%, the highest in 30 years.

"The availability of interesting businesses is not an issue, and the availability of finance is not an issue," said Inflexion partner Richard Swann. "Therefore it's really about the pricing environment and the trading environment for the businesses that we're investing in."

As pressure mounts on central banks to raise interest rates, the stakes are higher for companies that rely on debt as part of their business model. Lopez-Cruz said that manufacturing businesses will see cost inflation both in raw materials and in the price of the products in general. All the while, supply chain problems that roiled business in 2021 could persist well into 2022.

"In many businesses, you see the demand, but actually how to deliver those services, or those goods, has become the real challenge, and it's going to take time to normalize itself," said Lopez-Cruz.

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