EMEA PRIVATE EQUITY - S&P Global...EMEA PRIVATE EQUITY MARKET SNAPSHOT Healthy Start to 2014 for EMEA GPs, Despite April Hiccup EMEA GPs have kicked off 2014 deploying on aggregate

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EMEA PRIVATE EQUITY Market Snapshot

JUNE 2014 │ ISSUE 2

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EMEA PRIVATE EQUITY MARKET SNAPSHOT

Editors’ Note

Welcome to the second edition of S&P Capital IQ’s new quarterly publication that focuses on the private equity (PE) market in Europe, the Middle East, and Africa (EMEA). In this edition, we examine how the EMEA private equity market as a whole has performed in the first four months of 2014 compared to January – April 2013. We found that whilst the first quarter of 2014 was strong compared to figures for Q1 2013, aggregate figures for January – April 2014 were down compared to those of 2013, which results in April being seen as a hiccup for EMEA based general partners (GPs).

At an industry level, the healthcare sector emerges as a rising star for capital realisation by EMEA private equity firms, and also seems to be attracting attention on the entry side with transaction volumes making this sector the most active for EMEA GPs. This edition of the EMEA Private Equity Market Snapshot includes a feature which, using S&P Capital IQ’s extensive transaction database and based on empirical predictions, presents a shortlist of five probable candidates for exits in the healthcare sector.

Underlying our analysis is the S&P Capital IQ platform which incorporates a database capturing more than 3.1 million historical transactions, including deal values and transaction multiples, target company fundamental data, sector-level financials and comprehensive private equity manager and firm data. As in each issue, in the appendix is a data pack which provides a top-down view of the market compared to its position at the same point in time last year. Included in the data pack are charts showing transaction numbers and volumes among EMEA-based PE and Venture Capital GPs and transaction numbers and volumes within EMEA-based acquisition targets in addition to sector level multiples for PE and the region’s broader M&A market.

As always, we hope that this edition of our EMEA Private Equity Market Snapshot provides readers with some analytical food-for-thought and a top-down view of the EMEA private equity market that may help to assist in your decision making over the remainder of the year. We look forward to receiving feedback and suggestions for additional analysis on regions and industries of interest. To subscribe or comment on the EMEA Private Equity Market Snapshot, email [email protected].

Authors

Silvina Aldeco-Martinez

Managing Director Product & Market Development EMEA, S&P Capital IQ

Paul Bishop

Senior Research Assistant, S&P Capital IQ

Ian Hazard

Team Leader, Private Equity Research S&P Capital IQ

mailto:[email protected]

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Healthy Start to 2014 for EMEA GPs, Despite April Hiccup

EMEA GPs have kicked off 2014 deploying on aggregate €23.2bn to new entry deals between January and April, down 4.5% on the same period for 2013. Deal counts remained steady at 1381 new deals, compared to 1439 for the same period in 2013. Interestingly, the trend for January to March 2014 showed significant growth on 2013’s figures, but is offset by weaker April 2014 figures. Deal volumes in April 2014 exits came in at only €4.2bn compared to €9.5bn in April 2013, suggesting an April hiccup in an otherwise healthy start to 2014.

The healthcare sector saw the largest volume of capital invested in Q1 2014, with an aggregate €5.8bn in capital invested into targets in this sector. Within healthcare, the sub-sector of pharmaceuticals has seen big gains this year with 25 new deals and €462mn in capital investment compared to €31.6mn across 15 investments in Q1 2013.

On the exit side, GPs located within EMEA produced marginally fewer exit deals in January to April 2014 but there was no major deviation from 2013’s figures. Exit counts declined by 8.6% and aggregate capital realised from investments also decreased by 8.5% to €45.4bn compared to the figures from January - April 2013. Healthcare was also the most active sector for exit activity, with €13.4bn realised from 45 exits, an increase of 231.3% on the value realised in Q1 2013. The biotechnology and healthcare equipment sub-sectors were the most active by number of realisations, accounting for 52% of deal counts each. The pharmaceutical sub-sector produced the largest volume of capital from exits accounting for €4bn of the €13.4bn in disbursements within healthcare, and it looks to be attracting the most entry and exit interest amongst GPs so far this year.

As a destination hub for global private equity firms, the EMEA region seems to have lost some of the appeal held last year. Aggregate deal volume fell to €20.5bn in January - April 2014 from €29.5bn for the same period in 2013 - a decline of 30%. However, deal counts have shown greater resistance to downward pressure, declining by only 6% to 1279 new entries in 2014 from the same period in 2013. In terms of exits, there was a more moderate decline of 4.7% to €37.4bn in aggregate deal volume, and 8% in deal counts compared to January – April 2013.

For Illustrative purposes only. Source: S&P Capital IQ. As at 13th June 2014

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Sub-Saharan Africa Heat Wave in Q1 2014

The strongest trend emerging in 2014 so far has been the increased activity in Sub-Saharan Africa1 (SSA), with the region prospering no matter which way you cut it. As shown in figure 1, private equity firms located in EMEA increased their entry capital allocation to SSA to €748.7mn, up 803.1% on the capital deployed January – April 2013 and mirroring a 41% increase in deal counts to 41. Taking a deep-dive into the region’s data the top three new deals undertaken by EMEA GPs totaled €697.2mn, the largest of which was IHS Nigeria, acquired for €398.2mn by a consortium of seven investors including Goldman Sachs, GIC, African Infrastructure Investment Managers and IFC. Adcock Ingram Holdings was the second largest new deal at €258mn by BB Investment Co. and Community Investment Holdings, and the third largest being Zambian Energy Corporation Limited at €41mn by Standard Chartered Private Equity Limited. On the exit side, large deals included the multi-seller €98.9mn exit of AFHCO Holdings by Old Mutual Investment Group, The Ideas Managed Fund and SA Retail Properties, and the €24.7mn exit of Surgical Innovations by Lereko Metier Capital Growth Fund.

As a destination for private equity firms globally, SSA activity increased by 38% in terms of deal counts and 262% in terms of invested capital (€807.6mn) compared to January – April 2013. EMEA-based GPs realised €131.4mn in January – April 2014 from SSA exits, an increase from €9.2mn in 2013. Exits from SSA target companies by GPs globally increased both in terms of count and capital extracted from the region, up 38% and 262%, respectively. Even the venture capital industry noted an uptick in entry and exit deals, with 33.3% more entry deals undertaken in SSA targets by global firms.

1 Sub-Saharan Africa: Angola, Benin, Botswana, Burkina Faso, Burundi. Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Congo (Brazzaville), Democratic Republic of Congo, Côte d’Ivoire, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea – Bissau Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Reunion, Rwanda, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, Sudan, Swaziland, Tanzania, Togo. Uganda, Zambia, Zimbabwe

For Illustrative purposes only. Source: S&P Capital IQ. As at 1st May 2014

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Figure 1: EMEA-based Firm Entry Deal Counts and Volumes in SSA, 2009 - April 2014

Aggregate Transaction Values (€mn) Count (Secondary Axis)

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The drivers behind the growth in private equity activity in the region have been numerous and complex. The SSA is growing from a low economic base and, according to the International Monetary Fund, the region is predicted to experience moderate and broad based acceleration in economic growth to around 5.5% over the 2013/14 period2. The region is rapidly moving from an agrarian to a consumer-based economy, largely due to its rapidly expanding middle class. The private equity market, in particular, is well-placed to capitalise on growth within the region due to its longer term investment horizon and ability to cope with some volatility in the region’s growth trajectory.

However, two of the key barriers that may constrain further SSA growth for the EMEA private equity universe are the lack of developed equity markets within the region and the restricted availability of leverage within the region compared to the more developed EMEA regions such as Europe. As shown alongside in figure 2, to underscore the scale of the region’s nascent equity markets we can see that cumulative exchange capitalisation for the entire SSA region is only 32.8% that of Germany. As a result, private equity exits via IPOs within SSA are difficult and exit deals tend to be via trade sales. Of the 30 SSA-based target company exits over the previous 12 months, only a single exit - Ascendis Health Limited - was via IPO. In addition, of the four IPOs within Sub-Saharan Africa since 2009 only one of these was outside the comparatively developed South African market in Uganda.

Moreover, the availability of leverage within the region is severely restricted compared to that of more developed EMEA regions such as Europe. Public companies within SSA have an average total debt/equity ratio of 128.8% compared to 349.3% for their peers in European Developed Markets3. This limits the ability to use capital for refinancing or as a value lever as typically used by private equity firms. These factors coupled with financial and political volatility within the SSA region means that growth within the region will likely be bumpy rather than smooth across all asset classes, not just private equity.

2 International Monetary Fund Regional Economic Outlook: https://www.imf.org/external/pubs/ft/reo/2013/afr/eng/sreo0513.htm 3 European Developed Markets: Andorra, Austria, Belgium, Channel Islands, Cyprus, Denmark, Finland, France, Germany, Gibraltar, Greece, Greenland, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, Monaco, Netherlands, Norway, Portugal, San Marino, Spain, Sweden, Switzerland, United Kingdom, Vatican City

For Illustrative purposes only. Source: S&P Capital IQ. As at 19th May 2014

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Figure 2: Developed Europe Vs. Sub-Saharan Africa Cummulative Exchange Capitalization

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Healthcare Feature: Top Five Targets Ripe for Exit From our initial private equity market analysis, healthcare has been identified as the star sector in terms of capital realisation and investment levels in 2014. Based on further analysis below, the healthcare sector is seemingly offering compelling conditions for exits. Using S&P Capital IQ data, five likely divestments over the coming 12-24 months have been identified focusing on 2009 vintage, late stage development healthcare portfolio companies.

1. PROMETHERA Biosciences S.A./N.V (Biotechnology/Entry Oct ’09 @ €5.3mn)

Discovers, develops, and commercializes products based on stem cell technology to treat liver diseases. The company was founded in 2009 and is based in Mont-Saint-Guibert, Belgium. Buyer: Capital & Croissance; Life Sciences Research Partners; Limburgse Reconversie Maatschappij; Nivelinvest; Société Régionale d'Investissement de Wallonie S.A; Sopartec SA; Vesalius Biocapital Partners S.à r.l

2. Evgen Limited (Biotechnology/Entry Nov ’09)

Develops glucosinolate-based products for the prevention and treatment of human diseases.The company was founded in 2007 and is based in Manchester, United Kingdom. Buyer: Enterprise Ventures Limited; South Yorkshire Investment Fund; RisingStars Growth Fund II, L.P.

3. Probiodrug AG (Pharmaceuticals/Entry Oct ’09 @ €36mn)

Biopharmaceutical company, engages in the discovery and development of oral drugs for the treatment of age related diseases. The company was founded in 1997 and is based in Halle, Germany with an additional office and a subsidiary operation in Munich, Germany. Transaction Date: October 31st 2009. Buyer: BioDiscovery 3; Biogen Idec New Ventures, Inc.; Edmond de Rothschild Investment Partners S.A.S.; GoodVent Beteiligungsmanagement GmbH & Co.KG; HBM Healthcare Investments AG; Life Sciences Partners BV; TVM Capital GmbH; CFH Beteiligungsgesellschaft mbH

4. Institut Biophytis SAS (Pharmaceuticals/Entry June ’09 @ €3mn)

Develops, produces and markets organic health ingredients for nutraceutical, pharmaceutical, and food industries. It also provides organic health dietary supplements. The company was founded in 2006 and is based in Paris, France. Buyer: CM-CIC Capital Privé SA; Seventure Partners

5. Nyken B.V. (Pharmaceuticals/Entry July ’09)

Bio-pharmaceutical company which engages in the development of drugs to treat atrial fibrillation.The company was founded in 2009 and is based in Groningen, Netherlands.Buyer: Kennis Conversie Fonds B.V.; Noord Tech Ventures CV; RUG Houdstermaatschappij B.V.

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Healthcare: Resilient or Overheating?

The analysis shows that pre-crisis entry transaction volumes within the healthcare sector reached €95billion and €92billion in 2006 and 2007, respectively, before retreating significantly to €34.9billion in 2008 and €33.3billion in 2009. However, unlike other sectors, investment in healthcare subsequently showed a large upturn to above half the value of pre-Global Financial Crisis levels, reaching €59.6 billion for 2010 (+78% from 2009) and remains around this transaction volume, achieving €52.3 billion in 2013 (55% of 2006 volume). The remaining volume gap can in part be explained by a lack of high profile healthcare M&A impacting deal volumes since the crisis.

Interestingly, from a deal count perspective the sector has been resilient with transaction levels anchored around 1,500 deals throughout the crisis (2007-2013). Pre-crisis deal counts reached 1,511 in 2008, dipping to 1,328 in 2009 (-14%), but subsequently peaking at 1,632 deals in 2011 (+8% from 2008). This, amongst other factors, would indicate a continued belief in healthcare companies as investment targets. The top three sub-sectors in terms of the number of completed transactions over the last decade (2004-2014) are healthcare providers and services, healthcare equipment and supply, and pharmaceuticals. They account for a total of 4,284, 3,070 and 2,708 deals, respectively, with Western Europe as the focus of investments both in deal count and deal values.

Remarkably, traditional healthcare hubs in the United Kingdom (3,369 transactions), Germany (1,670) and France (1,624) showed no decrease in market share post-2009 and account for over half of all deals. The UK also saw the highest total deal value, followed by France and Germany, with €131billion, €103billion and €83billion, respectively.


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Figure 3: Deal Counts by Sub-Sector, Q1 2013 - Q1 2014

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Figure 4: Average Multiples for Acquisitions of Public Healthcare Companies, 2009 - 2014 YTD

Average Implied EV/EBITDA Average Implied Equity Value/LTM Net Income

As reflected in figure 4 alongside, multiples within the industry have been trending upwards since 2011/12, with average implied enterprise value/EBITDA and implied equity value/LTM net income multiples at record post-crisis highs. In 2014 YTD, average implied enterprise value/EBITDA multiples stand at 24.8x whilst implied equity value/LTM net income multiples average 23.7x. This trend suggests that continued appetite within EMEA for healthcare investments is driving multiples higher in company acquisitions whilst deal count is resistant to downward pressure.

Overall, based on S&P Capital IQ data, this suggests that the sector appears to be heating up as multiples reach close to pre-crisis highs and deal counts begin to creep upwards in certain sub-sectors. With indications from industry participants of potentially significant funds waiting for the appropriate opportunities in the traditional European healthcare industries, this seems unlikely to change in the short term. However, the question for this industry remains whether enough high value opportunities are currently available to support this trajectory over the long term.

Methodology Behind the Analysis

The analysis performed to shortlist five potential PE-backed healthcare companies due for exit within EMEA over the coming 12-24 months was based on quantitative and qualitative data. It is important to note that whilst the five companies we selected according to the criteria outlined below are prime candidates, this is a small sample of portfolio companies that met our criteria and represent the candidates we think are most likely to exit over the coming 12-24 months.

1. The first step was to screen for the overlap between EMEA healthcare entry transactions and their related exit transactions on S&P Capital IQ’s transaction database.

2. Averages and median holding periods over a 1 year, 3 year, 5 year and 10 year horizon were subsequently calculated, see figure 5 below, Empirical historical observations in the last 10 years indicate that the median holding periods4 for healthcare sector portfolio companies have remained constant between 4.6 and 5.5 years over the past 10 years; maintaining this trend at the 1, 3 and 5 year medians.

4 The holding period is defined as the period from initial entry transaction to final exit transaction from a private equity firm. The calculation does not factor in bankruptcy proceedings but does incorporate currently held portfolio companies as described in the methodology. The initial sample incorporates transactions with entry-exit investments tagged.


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3. In order to obtain the most accurate holding period, the median calculation was then performed including current portfolio companies yet to be exited from the past 10 years, specifically those which had surpassed the initial sample’s average holding period of 5.1 years. When factoring in these currently held investments (calculating the end of the holding period as the 1st May 2014), the median holding period for healthcare investments by private equity firms becomes 4.6 years, with an average holding period of 4.1 years.

4. Following this analysis we then selected companies that have been held for a period within 90 days of the median 4.1 year marker as potential candidates to perform further in-depth analysis on.

5. In order to estimate the likely size of future exits, the exit transaction sizes were analysed. As a result, figure 6 above shows that the majority of healthcare exit transactions from our sample5 fall under €100mn in exit size.

6. Portfolio companies that fell within this range of exit size were selected and further analysed on a quantitative and qualitative basis to select the final shortlist of five upcoming portfolio companies.

7. Applying the trends reported in the previous section, the analysis was then narrowed down to the most active geographies - i.e. Western Europe and sub-sectors, such as biotechnology and pharmaceuticals.

8. The qualitative analysis was aimed at spotting portfolio companies that have displayed signs of impending exits. The analysis entailed taking a deeper look at the profile of these companies on the S&P Capital IQ platform, as well as other data and information held. For instance, the companies’ key developments provided indications on events promoting the company at investor/industry events, rumours, and press releases focusing on the profitability of the business or strengthening of the finance team.

5 The sample size for exit transaction ranges excludes currently held investments which were included in calculation of median/mean industry holding periods above.



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Figure 6: Exit Transactions by Ranges (€mn)

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Western Europe


18

DATA PACK

0.0

100.0

200.0

300.0

400.0

500.0

600.0

Q1 2013 Q1 2014

Aggregate Venture Capital Entry Transaction Values by Region (€mn) - Q1 2013 vs. Q1 2014


0.0

10.0

20.0

30.0

40.0

50.0

60.0

Q1 2013 Q1 2014

Average Entry Transaction Size by Region (€mn)


0.0

100.0

200.0

300.0

400.0

500.0

600.0

Q1 2013 Q1 2014

Aggregate Venture Capital Entry Transaction Values by Industry - Q1 2013 vs. Q1 2014


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials


Utilities

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Q1 2013 Q1 2014

Average Entry Transaction Size by Industry (€mn)


Consumer Staples

Energy

Financials

Healthcare

Industrials


Materials


Utilities


19

DATA PACK

Multiples Table

Implied Enterprise Value/EBITDA

M&A Q2 2013 - Q1 2014

EMEA Private Equity Exits Q2 2013 - Q1 2014


13.2 13.3

Consumer Staples 20.2 36.3

Energy 7.8 6.6

Financials 16.7 22.0

Healthcare 17.8 20.1

Industrials 9.3 10.0


10.6 13.2

Materials 8.6 7.5


6.0 7.5

Utilities 17.1 11.9

Implied Equity Value/LTM Net Income

M&A Q2 2013 - Q1 2014

EMEA Private Equity Exits Q2 2013 - Q1 2014


25.3 37.6

Consumer Staples 29.0 24.3

Energy 30.1 107.1

Financials 20.0 24.3

Healthcare 34.7 59.5

Industrials 23.5 23.9


34.3 49.0

Materials 22.1 18.1


15.2 21.2

Utilities 34.2 71.0


20

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