Coming of age amid crises: A year in Europe

"It was the best of times, it was the worst of times," runs the opening line of Charles Dickens' "A Tale of Two Cities." It also provides a fitting description of the past 12 months in Europe.

As with the rest of the world, the pandemic rages on, but with a side-helping of other problems that have included an energy crisis, supply chain disruptions and a dangerous stand-off on the Russian-Ukrainian border. Here in the UK, where I'm based, we get the added bonus of dealing with the fallout of Brexit.

Despite all this, the private markets are going great guns, not just recovering from 2020's post-outbreak fallow period but also setting new records for fundraising and investments. Will it last in the new year?
 

This article appeared as part of The Weekend Pitch newsletter. Subscribe to the newsletter here.

Coming of age

The European venture capital ecosystem has been growing in size and sophistication year-over-year, and 2021 has been no different. As documented in PitchBook's latest European Venture Report, the first three quarters of this year were the largest yet for European VC dealmaking, with €73.7 billion (about $83 billion) raised across 7,683 deals as of Sept. 30—a figure that's expected to exceed 8,000 by year-end.

Late-stage deals have dominated too, accounting for 73.6% of all VC deal value in the region through Q3. As Europe's tech startups come of age, European firms are raising a growing pool of late-stage capital to meet that demand. Notable examples include London-based Balderton Capital, which launched its maiden growth fund in June with a target of $680 million, and Paris-based Partech, which closed its second growth fund on €650 million in November. We may yet see more growth funds being raised locally in 2022 as the market matures even further.

From pop to flop

Big funding rounds have been followed by some big initial public offerings for VC-backed startups in Europe, but few have held on to their valuations. PitchBook data shows that 142 European and Israeli startups went public through Dec. 6, raising €92.7 billion, but two-thirds of those are currently trading below their listing prices. Two of the biggest disappointments are food delivery startup Deliveroo and money transfer specialist Wise.

When private goes public

It's not just Europe's unicorns that are making waves by going public—private equity firms are too. The trend that started about a decade ago by PE giants like KKR, Apollo Global Management and The Carlyle Group—and continues with TPG's recent IPO filing—has made its way across the pond. This year, both Paris-based Antin Infrastructure Partners and London-based Bridgepoint Advisers each held an IPO in their home markets. Unlike many of Europe's unicorns, shares of both of these firms are trading above their listing price, indicating a strong appetite among public market investors for private market assets. As such, these deals are setting the stage for more listings in the future, with France's Ardian and UK PE giant CVC Capital Partners reportedly also hatching plans to go public in 2022.

Brexit's first birthday

Soon the UK will have the first anniversary since its complete exit from the European Union. Under normal circumstances, the UK would have had time to reflect with some degree of clarity on what it had gained—or lost—from its historic decision to sever ties with its European neighbors. Unfortunately, circumstances being anything but normal, it's impossible to know if Brexit can be blamed for something such as poor public market performance.

What's clear is that Brexit has had some impact and it will continue to. For the private markets, this has been most evident in the UK's attempt to reform listing rules so that London can better compete with its European rivals as an attractive destination for IPOs. Perhaps in 2022, when the dust has cleared, we'll have a better understanding of Brexit's consequences.

The Great British Sell-off

One phenomenon that has been attributed to Brexit and the pandemic has been the proliferation of take-private deals in which well-funded PE investors target undervalued UK-listed assets. In the first nine months of 2021 alone, PE investors completed six such deals worth €12.1 billion in all, exceeding the total for all of 2020, and coming in just over a billion shy of 2019's peak of €13.6 billion. Among those transactions are security giant G4S' £3.8 billion (about $5 billion) buyout by PE-backed rival Allied Universal; TowerBrook Capital and Warburg Pincus' £219 million acquisition of roadside rescue service AA; and Clayton, Dubilier & Rice's £7 billion acquisition of supermarket chain Morrisons. Given that British stocks—according to Morningstar's Global Market Barometer—remain undervalued, more firms are going to be found with their heads buried in the discount bin of UK publicly traded assets in the coming year.

While many of the headwinds of 2021 will be carried over into 2022 (not least of all growing anxiety surrounding the spread of the Omicron variant), many of the tailwinds will too. According to PitchBook's 2022 European Private Capital Outlook, there is reason to anticipate even bigger VC records. We can also expect an even bigger flurry of global PE carveouts driven by—among other things—stock underperformance, especially in the UK, as it grapples with the ongoing impact of Brexit.

But it's also worth remembering that these are merely predictions. If these past two years have taught us anything, it is to expect the unexpected.

Featured image by Jeffrey Coolidge/Getty Images