- Q4 2022 saw 91 unitranche transactions closed, 28% below Q3 2022 due to challenging macroeconomic conditions and rising interest rates.
- Financing activity continued to be strong overall in 2022, with 461 unitranche transactions closed during the period—a marginal decrease of 5% compared to a record year in 2021.
- The UK, France, and Germany, together with the Benelux region, continued to remain key geographies, though activity declined in Q4 due to economic conditions. Only Germany increased deal completion by 11%, albeit following a weak Q3.
- Debt funds actively pursued add-on acquisitions in Q4 2022, with 40 deals closed, comprising 44% of overall activity due to focus on buy-and-build transactions and capital deployment into existing portfolio assets.
- Despite some positive signs—inflation and energy prices declining, interest rate increases stabilising, and direct lenders deploying new budgets—we expect European markets to remain challenging in the short term.
LONDON/FRANKFURT — 22 February 2023 — Houlihan Lokey, Inc. (NYSE:HLI), the global investment bank, today announced its Q4 2022 MidCapMonitor analysis of pan-European private equity (PE) sponsored debt financing activity across the UK, Germany, France, Benelux, and the Alpine and Nordic regions.
Pan-European unitranche financing activity showed a decrease during Q4, with 91 transactions (compared to 127 in Q3 2022), a 28% decrease quarter on quarter, against deteriorating macroeconomic conditions and continued geopolitical uncertainty.
The UK, France, and Benelux markets remain very active unitranche geographies, but in Q4 were negatively impacted by adverse events and the number of completed deals fell by 39%, 34%, and 22%, respectively, versus Q3. However, the 460 unitranche financings completed in 2022 are only 5% below the record year 2021 in terms of deal volume, when 486 transactions were completed.
Deals Landscape and Market Share
Out of the 91 unitranche deals in Q4 2022, the UK remains the most active market with 27 deals, followed by Germany with 21, France with 19, and the Benelux region with 14. Spain has been included for the first time in Q4 2022 as a key geography and completed six deals.
During Q4 2022, debt funds were able to maintain their market share versus banks in Germany, at 52%, but in both France and the UK, there was a meaningful decline in market share to 41% and 55%, respectively, as debt funds became much more selective during the quarter, having already deployed significant funds during the rest of the year.
Debt funds continued to pursue add-on acquisitions very actively in Q4 2022, with 40 deals closed (44%). This was driven by sponsors looking to create additional value through buy-and-build transactions and direct lenders keen to deploy capital into performing portfolio assets.
Financing Purposes
New financings dominated transactions in France and the UK, with 56% and 44%, respectively, which underlines the resilience of mid-cap M&A activity, whilst in Germany, add-on financings dramatically increased from 10% to 37% at the expense of new secondary+ transactions declining from 17% in 2021 to 9% in 2022, which may imply that PE sponsors have kept hold of their portfolio assets waiting out the economic downturn.
Sector Activity
The main market focus for debt lending in Europe continued to be the software, technology, and healthcare sectors, with reduced lending appetite for key cyclical sectors, such as discretionary consumer, industrial, and manufacturing. In Germany, software, technology, and healthcare deals still represented almost 50% of transactions in 2022, though a decline of 10% compared to 2021, while consumer products as well as services were able to regain some market share in 2022 and now represent 16% each., though in
“Debt market financing in Germany in Q4 2022 was challenging and has reflected the implications of continued economic uncertainty and the rise in interest rates from September 2022. However, even under these difficult circumstances, Q4 showed a strong quarter performance and year on year, the market outperformed 2021 and continues to demonstrate that the mid-market remains resilient. Debt funds as well as banks were keen to pursue growth opportunities through buy-and-build transactions, deploying capital into high-performing portfolio assets, which is reflected by a 40% rise in add-ons. In sectors, non-discretionary consumer products and services regained their market share in relation to software and technology, which had dominated since 2021,” said Norbert Schmitz, Managing Director in Houlihan Lokey’s Capital Markets Group.
Commenting on the UK, which continues to be the most active market for unitranche financing, and on France, Charles Martin, Director in Houlihan Lokey’s Capital Markets Group, said:
“As expected, we have observed a sharp decline of activity in both the UK and France during Q4 given the tough macroeconomic environment coupled with high interest rates and a slowdown in M&A activity. Overall, 2022 was still a very active year in both regions with a tremendous level of activity until the beginning of September. In the UK, the total number of transactions closed was near that achieved in 2021, which was an exceptional year. In France, activity was the highest recorded since we started tracking the region. This demonstrates the resilience of the M&A and debt mid-markets despite the challenging environment.”
Spain, a new market included in the MidCapMonitor, is led by debt financing but has different features from other key geographies. Martin Aleñar Iglesias, Director in Houlihan Lokey’s Capital Markets Group, explained:
“Spain continues to be a very active bank lending market. However, the number of direct lending deals has significantly increased over the past few years. We expect this trend to continue as local sponsors and corporates embrace the flexibility and features of direct lending and more direct lenders actively pursue mid-market opportunities in Spain. A particularly interesting feature of the Spanish market is that it is quite common to see banks and direct lenders participate alongside each other in blended structures, as opposed to the super senior/senior structures that we observe in other parts of the continent and in the UK.”
Outlook for Q1 2023
“Despite continued global economic and political uncertainty, the mid-cap LBO market has proven its robustness. However, in the final quarter of 2022, many direct lenders and private equity sponsors became very selective on new transactions and focused on managing their existing portfolios. The start of 2023 has shown some positive signs, with inflation and energy prices generally declining, interest rate increases stabilising, and direct lenders deploying new budgets. Nevertheless, the quality of the underlying asset is important and we expect European markets to remain challenging in the short term,” said Mr. Schmitz.