- Financing activity continued to be strong in Q2 2022, with 130 unitranche transactions closing during the period—an increase of 25% compared to Q1 2022.
- The UK, Germany, and France continue to dominate deal flow at country level, though Benelux continues its strong performance.
- Debt funds have built a strong hold in the UK, Benelux, and Nordics markets, while banks continue to claim significant market share in France and the Alpine region, closing the gap in Germany.
- Across Europe, debt funds continued to actively pursue add-on acquisitions in Q2 2022, with 50 deals closing (38%). Add-ons continue to lead in the UK, Germany, and Benelux, while the market in France has been primarily driven by new financing activity.
LONDON/FRANKFURT — 22 August 2022 — Houlihan Lokey, Inc. (NYSE:HLI), the global investment bank, today announced its Q2 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 during Q2 2022 showed a strong level of activity, with 130 transactions (compared to 104 in Q1 2022) and a 25% increase quarter on quarter, though still short of the 139 deals completed in Q4 2021 and against the backdrop of continued current macroeconomic and geopolitical headwinds.
Deals Landscape and Market Share
Out of the 130 unitranche deals in Q2 2022, the UK remains the most active market with 42 deals, followed by France with 29, Germany with 23, and Benelux with 16 (of which the Netherlands made up 14).
- Compared with Q1 2022, most European markets showed minimal change, bar the UK and France, which showed a near 40% increase in the number of deals.
- Debt funds increased their market share in Q2 2022 in the UK, Benelux, and Nordics versus banks, though in Germany and France, banks continued to show their relative market strength.
Financing Purposes
During Q2 2022, the financing purposes for senior and unitranche showed a mixture of the different types of funding: Add-ons increased market share in the UK, Germany, and Benelux, while new financings have continued to drive the activity in France.
Sector Activity
The trend of an ever-increasing share of software, technology, and healthcare deals has slowed in 2022. While they remain challenging sectors, lenders have shown their appetite to finance deals in industrials, consumer, and business services, albeit at more conservative leverage levels and increased pricing.
“Although liquidity in the mid-market has somewhat reduced over recent weeks, in our view, the Q2 2022 development is testament to the fact that the European mid-cap LBO market is highly resilient with significantly less volatility compared to the capital markets. We consider traditional direct lenders currently rather cautious and selective with respect to new financings, whereas more opportunistic debt funds see the current market environment as an excellent opportunity,” said Norbert Schmitz, Managing Director in Houlihan Lokey’s Capital Markets Group.
“In Germany, deals were up nearly 20%, and banks showed their relative strength in the market versus debt funds as they claim 48% of all Q2 2022 deals. Even though banks have also become more conservative in terms of leverage, they are in general open for business, albeit regularly with increased pricing,” added Mr. Schmitz.
Commenting on the UK and France, Charles Martin, Director in Houlihan Lokey’s Capital Markets Group, said, “The debt activity in the UK has remained strong in Q2 2022, with a market mostly supported by add-on financings rather than new LBO financings.
“In France, the activity has been close to record levels this quarter, which is impressive given the current macroeconomic backdrop. In addition, this activity has continued to be primarily fuelled by new LBO financings, demonstrating the intense M&A activity in the region this year.”
Outlook for Q3 2022
“The mid-market has a track record of being more resilient and less volatile than the large-cap market, and that should in principle provide a good tailwind for the next quarter, though rising interest rates and raw material and energy costs will have an even greater effect in the next six months. It will be increasingly hard to gauge at what juncture the macroeconomic headwinds will impact activity,” said Mr. Schmitz.