- Financing maintained a high level of activity in Q3 2022, with 129 unitranche transactions closing during the period—a small decrease of 4% compared to Q2 2022
- The UK, Germany, and France dominated deal flow, while Benelux continued its strong performance as the other prominent region.
- Market share of debt funds and banks remained broadly unchanged in Q3 across Europe.
- Financing purposes were driven by new LBO financings in the core markets
of the UK, Germany, and France as well as the Benelux region.
LONDON/FRANKFURT — 16 November 2022 — Houlihan Lokey, Inc. (NYSE:HLI), the global investment bank, today announced its Q3 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 Q3 2022 showed a strong level of activity, with 129 transactions (compared to 135 in Q2 2022) and a 4% decrease quarter on quarter, though still ahead of the 109 deals completed in Q1 2022 and against the sustained backdrop of current macroeconomic and geopolitical headwinds.
Deals Landscape and Market Share—Status Quo
Out of the 129 unitranche deals in Q3 2022, the UK remains the most active market with 44 deals, followed by France with 29, Germany with 17, and Benelux with 25 (of which the Netherlands made up 19).
- Most European markets showed minimal change, bar a 26% decrease in Germany due to the greater impact of the key costs of energy and raw materials, and supply chain issues.
- Debt funds slightly increased their market share versus banks in Q3 2022 in the UK while Benelux and the Nordics sustained a very high market share of 82% and 83%, respectively. In Germany, banks were able to keep market share, while in France the split between banks and debt funds continued to be even due to banks’ competitive pricing.
Financing Purposes—a Strong Quarter for LBOs
During Q3 2022, new LBO financings dominated market share in the UK and all European markets (Germany, France Benelux, and the Nordics). In relation specifically to debt funds, they continued to actively pursue add-on acquisitions in Q3 2022, with 41 deals closing, led by sponsors looking to create additional value through buy-and-build transactions.
Sector Activity
Unsurprisingly, there is a defined gap in sector activity. Software, technology, and healthcare are attractive to both debt funds and banks and for all forms of financing purposes. Conversely, for the discretionary consumer, manufacturing, and industrial sectors, which are more impacted by key macroeconomic issues and the cost impact, lenders are continuing to adopt a more conservative approach.
“The high deal activity in the UK, and the pan-European market more widely, is illustrative of the levels of liquidity in the mid-cap market until late August. What is significant is the stability of financing from both debt funds and banks that has been sustained during Q3 2022. This is reflected in the mix of new financings and add-ons that lenders are providing and despite debt terms tightening during the period, the competition between the two demonstrates the continued sense of opportunity despite the economic downturn,” said Norbert Schmitz, Managing Director in Houlihan Lokey’s Capital Markets Group.
“In Germany, the number of deals was down. However, this is primarily in relation to an exceptionally strong second quarter, and both debt funds and banks showed significant market share with sustained financing activity and no evidence of the banks exiting the market,” added Mr. Schmitz.
Commenting on the UK and France, Charles Martin, Director in Houlihan Lokey’s Capital Markets Group, said, “Debt activity in the UK remained very strong in Q3 2022, especially until the end of the summer, with new financings replacing add-ons as the core financing. Refinancings and recap financings have declined as the recent tightening of debt terms has made these transactions less attractive.”
“In France, deal activity was up nearly 10% since Q3 2021, which was the highest level recorded, however, activity started to slow down in September. While banks and debt funds are becoming more selective and offering less borrower-friendly terms, they are still both very active in the region”.
Outlook for Q4 2022
“In the short-term, the UK and European markets are likely to be more challenging, at least until the end of the year due to economic headwinds and uncertainty in the M&A market. We would expect deal flow to slow down in Q4 2022 compared to the previous quarter. However, we think the public capital markets will still be volatile and see less primary LBO activity, compared to the more resilient mid-cap market,” said Mr. Schmitz.