Sluggish M&A and IPO markets have put the brakes on private equity exit activity across Europe, but as pressure builds to clear the backlog of unsold portfolio companies, firms are taking innovative approaches to selling businesses
Europe’s private equity firms have a large backlog of unsold portfolio companies sitting on their books, and the pressure to find buyers for these assets and make distributions to investors is building.
During the last 36 months, rising interest rates have seen strategic M&A, secondary buyouts and the IPO markets—the core exit pathways for PE managers—slow significantly as buyers stepped back from paying full valuations for companies against an increasingly uncertain economic backdrop.
Rather than offloading portfolio companies, many of which were acquired at high prices when the market peaked in 2021, PE firms have opted to wait for the cycle to move back in their favor. This has seen average hold periods stretch out to 6.7 years—well above the average of 5.7 years recorded in the last two decades, according to McKinsey analysis. This backlog now represents a greater share of portfolios than at any time since 2005, with companies held in GP portfolios for four years or more accounting for 61 percent of all PE-owned assets.
However, PE managers can only hold assets for so long, and during the next 12 months will have to start exiting portfolio companies at the faster rate. Failure to do so will make an already-tight fundraising market even tougher, as investors want to see capital and distributions return from current allocations before recycling capital into the next vintage of funds.
According to McKinsey, PE fundraising fell 24 percent year on year in 2024, the third consecutive year of decline. Accelerating exit activity will be crucial to reversing the trend and putting fundraising back on an upward trajectory.
Light at the end of the tunnel
As challenging as the exit market has been, PE managers have still managed to return cash to investors. In 2024, distributions outpaced capital contributions for the first time since 2015, according to McKinsey. This is partly down to low overall fundraising, but GPs have shown agility in finding creative ways to unlock liquidity in portfolio companies to make distributions to their LPs.
The good news is that EMEA’s IPO markets gradually began to reopen in 2024, with IPO deal value growing from US$29.1 billion in 2023 to US$34.5 billion in 2024, according to Dealogic.
Private equity firms have taken advantage of these green shoots. EQT-backed Swiss skincare business Galderma successfully listed in Switzerland in the fourth-largest IPO in the world in 2024, while CVC Capital Partners completed its listing in Amsterdam.
There is further scope for IPOs to provide an exit pathway for more PE-backed companies in 2025, with a cluster of large sponsor-backed companies in the pipeline for listings in Europe this year.
However, sponsors will have to exercise restraint on pricing and terms to ensure that IPOs are successful and sustainable. Historically, PE-backed IPOs have not always performed well post-listing in Europe, and investors will be highly selective when sponsor-backed listing candidates are brought forward.
M&A markets: Time for a turnaround
In addition to an ongoing uptick in IPO exits, sponsors will also want to see M&A markets return to life.
PE firms deployed capital in European M&A buyout deals in increasing volumes in 2024, with buyout and secondary buyout deal value improving from US$175.3 billion in 2023 to reach US$250.7 billion in 2024, moving back in line with pre-pandemic levels.
Private equity activity by value 2019 – 2024
Target locations: Central and Eastern Europe and Western Europe Bidder location: Global Sectors: All Sectors
Private equity deal type(s): Exit, Buyout and Secondary Buyout
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Effective July 1, 2023, the underlying Mergermarket data supporting the M&A Explorer was consolidated with Dealogic data to produce an even more complete picture of the M&A marketplace. M&A Explorer commentary published before July 1, 2023 may reference data that does not reflect this consolidation.
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Exit activity, however, has been muted, with European exit value falling for the third year in a row to US$75.4 billion in 2024—the weakest year for exit deal value since 2013. An increase in exits via M&A processes will be a crucial lever for selling portfolio companies that have been held for prolonged periods of time.
Innovative options
Even as mainstream exit routes begin to reopen, sponsors will continue to use alternative routes to liquidity in the next 12 months.
Sponsors have made increasing use of nascent debt products to not only keep portfolio companies financed through prolonged hold periods, but also to make distributions.
The rise in uptake of net asset value (NAV) financing—in which loans are made to PE funds and secured against the underlying portfolio companies in the fund—has been particularly prominent.
With liquidity tight, the NAV finance market more than doubled between 2020 and 2023, and is expected to grow into a US$145 billion market by 2030, according to specialist fund finance lender 17Capital.
As NAV finance is secured against a portfolio of assets in a fund, it can be cheaper than raising capital on a company-by-company basis and is seen as a good option for financing businesses when fund lives run for longer than anticipated.
Managers have also seen the opportunity to take out NAV loans and use the proceeds to make distributions to LPs prior to securing exits of portfolio companies. This has to be done transparently and with care, as raising extra leverage can be a concern for investors, but GPs have been able to use the tool effectively.
Continuation funds move into the exit mainstream
Another innovation that has grown in popularity is the continuation fund structure.
In this scenario, a GP will take a select asset or pool of assets into a new fund structure and offer existing LPs the option to either roll their stakes into the new fund or take liquidity and secure an exit.
Prior to interest rate hikes, continuation funds were mainly used when GPs wanted to extend the hold periods of prized assets, but the tool has proven flexible, offering an alternative route to exit in flat M&A and IPO markets.
According to Jefferies, the popularity of continuation vehicles has been such that continuation funds accounted for 13 percent of sponsor-backed exit volume in 2024.
The use of NAV finance and continuation funds as a matter of necessity through the last 36 months has proven the credibility of these structures as alternatives to conventional exit off-ramps.
Even when IPO and M&A markets do rally, GPs will continue to take advantage of this added exit optionality to make up for lost time after a period of limited exit opportunities.
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