巴黎银行-欧洲-投资策略-公转私交易更看重价值-20190711-10页 (2).pdf

Embarrassment of riches,but few targets:Global private equity firms today sit on a record USD2.44trn in funds at end-Q1 2019,according to financial data firm Preqin(Figure 1),having raised a cumulative USD4.8trn from 2013 to 2018.But,according to management consultancy Bain&Co.,they are struggling to find enough targets to invest this cash.Buyout volumes up,but far from 2007 highs:Thus far in 2019,global buyout deals have already eclipsed 2018 in value terms at USD260bn,but are far from the record USD425bn hit at the height of the last leveraged buyout(LBO)boom in 2007(Figure 2).Private market valuations very high:Just as the number of publicly-listed companies has shrunk,the private markets net asset value has grown to USD5.8trn globally as at end-2018,with private equity more than half of this total,according to management consultancy McKinsey.As a result,private equity valuations have expanded,with the average deal done at 11.1x EV/EBITDA in 2018.Value factor could benefit:We think a boom in public-to-private deals of the sort recently seen with Merlin Entertainments,BCA Marketplace,Axel Springer and Osram Licht could once again prove a potent catalyst for the value factor.Between the start of 2006 and September 2007,when LBO volumes grew sharply,the BNP Paribas Equity Value Europe index rose 46%,beating the STOXX Europe benchmark by 12%(Figure 3 overleaf).16/05/2019 1 FOCUS|EUROPE 11 July 2019 KEY MESSAGES We think an acceleration in public to private deals could lead to an outperformance of value stocks and those attractive to buyout.Consider our new European LBO custom basket and the BNP Paribas Equity Value Europe ETF.Private equity firms have record-high levels of dry powder to invest,largely in leveraged buyout funds.Public-to-private private equity deals have started to accelerate,with Merlin and Osram announced recently.Leveraged loans(yielding on average 4%)remain in high demand,given the proliferation of negative-yielding sovereign bonds and credit globally.During the last LBO boom in 2006-07,the Europe value factor gained 46%and outperformed the benchmark by 12%,with LBOs proving a catalyst.Fig.1:Record amount of private equity dry powder EQUITY&DERIVATIVES TRADE IDEAS Buy the BNPP European LBO custom basket.Buy BNPP Equity Value Europe ETF(EVAE FP)Ref:EUR121.4The risk of buying an ETF is limited to the notional invested Source:Preqin Edmund Shing,Global Head of Equity&Derivative Strategy BNP Paribas London Branch Public-to-private deals could favour Value Fig.2:Private equity buyouts hit post-2007 high Source:Refinitiv Please refer to important information and MAR disclosures at the end of this report 050010001500200025002004 2006 2008 2010 2012 2014 2016 2018Private equity funds:uncommitted cash$bnLeveraged BuyoutsOther Sectors42526001002003004002004 2006 2008 2010 2012 2014 2016 2018Global LBO deal value$bn|FOCUS 16/05/2019 2 EQUITY&DERIVATIVES Strong capital raising,now time to invest:Global private equity firms have been very successful in raising fresh capital from institutional investors such as pension funds over the last five years,with over USD3.7trn raised from 2014 to 2018(Figure 4).This dwarfs the USD2.5trn raised before and during the pre-crisis LBO boom between 2004 and 2008.Private equity deals get more expensive:at the same time,private equity firms are struggling to find investable assets at attractive valuations,reflected in the rise in the median valuation of PE deals to 11.1x EV/EBITDA last year,very close to the 11.3x median achieved in 2007(Figure 5).Note however that the leverage used in the median transaction was 100%(ie 50%debt,50%equity),a far cry from the 140%(58%debt,42%equity)leverage employed in PE deals back in 2007.Leveraged loans still popular with investors:on the debt side,there seems to be no lack of investor appetite for a variable-rate debt category that is still yielding close to 4%(on a 3-month rolling basis)for new loan issues as of end-2018,according to S&P Capital IQ LCD.Since 2010,this asset class in Europe has delivered average annual returns of 5%(Figure 6),ahead of both Euro sovereign bonds and BBB credit,but behind European high yield credit.Given that we expect the Federal Reserve to reduce the Fed Funds rate at least twice this year,and the ECB to restart quantitative easing by the end of the year,we expect demand for these loans to remain strong in light of the fact that over USD13trn of global sovereign bonds now trade at negative yields.Number of public-to-private targets swells:as private market multiples have surged,more public companies are appearing in private equitys public-to-private crosshairs.According to Bain&Co.,these are publicly-listed companies with an enterprise value of USD2-USD10bn,which can be bought at a takeover premium that still leaves the valuation below the average private-market multiple.In the US,Bain notes that more companies fall into this category than at any point since 2005.Of course,given the historic valuation discount of European equities versus the US,this is even more true of European companies,with the non-financial portion of the Euro STOXX 50 index trading at a 8.5x prospective EV/EBITDA,far below the 11.1x for private equity deals.Edmund Shing,Global Head of Equity&Derivative Strategy|BNP Paribas London Branch Fig.4:Strong private equity capital raising over past five years Source:Preqin Fig.6:Europe leveraged loans have returned 5%CAGR since 2010 Sources:BNP Paribas,Bloomberg.Note:S&P Europe leveraged loan index Fig.3:Europe value factor performed strongly in 2006-07(rebased)Sources:BNP Paribas,Bloomberg.Past results are not indicative of future performance,which may be better or worse than prior results.Fig.5:Private equity deal multiples rise (rebased)Source:McKinsey Private equity funds hunting deals 024681012200720092011201320152017Debt/EBITDAEquity/EBITDA11.111.39510010511011590100110120130140150Jan 06Jul 06Jan 07Jul 07BNPP Europe Value index(lhs)BNPP Europe Value/STOXX Europe(rhs)0200400600800100020042006200820102012201420162018Global PE capital raised,$bn0%2%4%6%8%10%20102012201420162018Europe leveraged loan return%5.0%average return|FOCUS 16/05/2019 3 EQUITY&DERIVATIVES Common characteristics of PE targets:There are several characteristics that one can identify in many private equity public-to-private targets,including:1.Target enterprise value ideally in the USD2bn-10bn range,ie mid-cap 2.Steady cash flow generation 3.Potential to improve profitability from a cyclical low eg via restructuring 4.A stable sector/industry.Technology and Healthcare are particularly sought-after sectors.Business services is also been a popular sector 5.Low existing debt leverage to allow for releveraging of capital structure to at least 50%debt,50%equity 6.Relatively cheap valuation to allow for acceptable internal rates of return on investment Many of these characteristics can be seen in the five large private equity buyout deals announced in Europe so far this year(Figure 7),which have an aggregate weighted EV/EBITDA valuation at buyout price of 11.2x.This is almost exactly in line with the average EV/EBITDA multiple for private equity deals over last year.The European stock market looks cheap by comparison:the non-financial members of the Euro STOXX 50 trade at a prospective 2019e EV/EBITDA multiple of just 8.5x,low by comparison with the 11x buyout multiples of recent deals(Figure 8).Value stocks are even cheaper,as expected:the non-financial members of the BNP Paribas Europe Value factor index trade on even lower EV/EBITDA multiples,of 6.8x on a weighted average basis.In our view,the need for private equity buyout funds to invest in new buyout deals at a time when private market valuations have already increased to levels often way above public market equivalents,could prove a key catalyst for the value factor in Europe over the remainder of this year.Geographic split UK still popular:What is perhaps surprising is that,in spite of the uncertainty surrounding the UK on the back of Brexit,the UK is still a popular investment destination for European buyout funds.In 2018,the UK and Ireland came in second at EUR11.8bn invested in 2018,behind only France and Benelux where EUR17.8bn was invested last year(Figure 10).Edmund Shing,Global Head of Equity&Derivative Strategy|BNP Paribas London Branch Fig.8:Europe large-caps,value stocks at big discount to PE deal multiples Sources:BNP Paribas,Bloomberg.Note:2019e EV/EBITDA for non-financial companies only Fig.10:European buyout investment in 2018 by region Source:Invest Europe Fig.7:Exit EV/EBITDA multiples for large European buyouts Sources:BNP Paribas,Bloomberg.Note:private equity public-to-private deals announced in 2019 Fig.9:2018 Europe private equity investments by sector Source:Invest Europe The characteristics sought by private equity firms 6.88.511.111.2024681012BNP ParibasEquity ValueEurope indexEuro STOXX50Private equitydeals(2018)2019 5European PEdealsEV/EBITDA multipleCompanyCountrySector2019e EV/EBITDABCA MarketplaceUKCar auctions12.1InmarsatUKSatellite8.0Merlin Ent.UKAmusement parks12.0Axel SpringerGermanyMedia11.8Osram LichtGermanyLighting13.6Weighted average11.222.2%21.2%19.1%14.2%7.6%15.7%0%5%10%15%20%25%Business products/srvcsICT(communications,tech)Consumer goods/srvcsHealth careFinancialOther11.817.89.910.66.81.90246810 12 14 16 18UK/IrelandFrance/BeneluxDACHSouth.EuropeNordicsCEE2018 Buyout EUR bn|FOCUS 16/05/2019 4 EQUITY&DERIVATIVES Private equity the big winner in alternative assets:With global pension funds desperate to generate returns in a world where sovereign bonds and corporate credit yield less and less,they are being increasingly forced to allocate to alternative asset classes.Since 2008,US pension fund investments in alternative assets have ballooned from 7%to 20%of total assets(worth USD7.6 trillion in 2017).While historically,hedge funds have benefited from a large slice of this allocation to alternatives,the latters poor performance(4.1%CAGR since 2010)compared to private equity(17.4%CAGR)or infrastructure(10.7%)since the financial crisis is driving reallocation away from hedge funds and towards the latter two asset classes instead(Figure 11).Pension funds struggle to get enough PE exposure:According to Bain&Co.,at the end of last year 60%of private equity limited partners(including pension funds,sovereign wealth funds and other institutional investors)remained below their target allocation to private equity(Figure 12).Thus the USD2.44trn of dry powder in private equity funds reported by Preqin at end-Q1 2019 could swell even further as this year progresses.This in turn is likely to pressure private equity firms to put this money to work in order to justify their management fees,with the focus on buyouts as it is in buyout funds where the bulk of this potential investment resides.As buyout valuations expand,returns suffer:Private equity funds could become a victim of their own success.A strong run of capital raising has swelled the investment coffers of private equity funds off the back of the strong trailing performance of private equity.However,since the start of 2018,US private equity funds have struggled to match the performance of public equities(Figure 13),gaining only 5%net of fees over the last 18 months and trailing the S&P 500 by 6%.Perhaps we are at a point where the weight of money into the asset class is swamping available profitable opportunities.Private equity could be a catalyst for value stocks.From late-2004 to mid-2007,note how the outperformance of US private equity buyout funds over the S&P 500 was correlated with a similar outperformance trend by US value stocks(Figure 14).Given the value inherent in the value factor today,after persistent underperformance versus other smart beta factors,we believe a similar situation could play out in this late stage of the post-crisis economic cycle,with public-to-private transactions acting as a value catalyst.Edmund Shing,Global Head of Equity&Derivative Strategy|BNP Paribas London Branch Fig.12:Pension funds struggle to maintain PE allocations Source:Bain&Co.Fig.14:Pre-crisis,US value outperformance followed private equity Sources:BNP Paribas,Bloomberg.Note:Thomson Reuters US private equity buyout index Fig.11:2010-Private equity beats public equity,hedge funds(rebased)Sources:BNP Paribas,Bloomberg.Note:Thomson Reuters Private Equity Buyout,MSCI World equity,HFR Hedge Fund composite and Dow Jones Global Infrastructure indices Fig.13:2018-Private equity returns have lagged the S&P 500(rebased)Sources:Bloomberg.Note:Thomson Reuters US private equity buyout index Private equity looks set to take even more money 10020030040050020102012201420162018Private EquityHedge FundsGlobal EquitiesInfrastructure3537253842405055506050435740335030273418152018222510201816220%20%40%60%80%100%Below TargetAt targetAbove target8090100110Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Jul-19US private equityS&P 500901001101202004200520062007Index rebaed 2004=100US value v S&P 500US PE buyout index v S&P 500|FOCUS Based on the characteristics of private equity target companies,we have created a equally-weighted custom basket of 30 European companies that meet common criteria for past public-to-private transactions.Custom basket construction 1.Universe:the STOXX Europe 600 Index,excluding Financials,Real Estates,Airlines,Auto,Oil&Gas and Mining companies as(a)these companies are very cyclical,and(b)do not provide stable cash-flows.We then excluded companies that are highly unlikely to be sold given heir history and holding structure.Even when there is high potential for a buyout,some companies are simply not viable targets,namely family-owned companies and strategically important companies for national governments.2.Valuation:We narrowed down to stocks with EV/EBIT 17x and EV/EBITDA 10 x to account for cheap valuation.3.Debt:We narrowed down to stocks with net debt/EBITDA 2x,as private equity firms tend to prefer companies with low leverage.4.Theoretical LBO returns.Finally,we ranked the remaining companies using the possible rate of return of a 3-year LBO,and picked the top 30.The scenario for our theoretical LBO was as follows:We set the debt/equity financing at 60/40 and the LBO equity premium at 30%;we assumed the cost of debt at 4%to match the average buyout debt financing cost for PE in 2018;and a fixed EBIT increase rate at 2%per annum.Higher exposure to cyclical sectors and to the UK The resulting equal-weight basket of 30 European stocks is skewed towards the industrial sector(Figure 18)and to the UK geographically(Figure 19).It has outperformed the Euro STOXX 50 ex-financials index since 2016.16/05/2019 5 EQUITY&DERIVATIVES Edmund Shing,Global Head of Equity&Derivative Strategy|BNP Paribas London Branch Fig.18:Sector breakdown Fig.19:Country breakdown Fig.16:European LBO basket performance 2016-2017(rebased)Fig.15:LBO basket profitability and valuation vs benchmark Custom basket European LBO basket Fig.17