By Sierra Jackson

Law360 (January 26, 2021, 8:10 PM EST) -- European private equity firms secured a combined €92 billion (nearly $112 billion) in 2020 — the second-highest amount of capital raised after 2019's €102.3 billion — even with a major drop in the number of funds closed amid the coronavirus pandemic, according to a new report.

Just 90 funds, the lowest count in a decade, secured the money, according to private capital markets data provider PitchBook's "2020 Annual European PE Breakdown Report," which was published Jan. 19.

The report found that this combination of highs and lows pervaded the private equity industry last year, resulting in minor dips in overall investment and exit values and volumes, even as individual deals and specific industries climbed to new heights.

Those fluctuations are further proof of the private equity industry's resilience, according to Ropes & Gray LLP private equity partner Kiran Sharma, who is also co-head of the firm's international practice group.

"What last year showed everybody, yet again, is the ability for private equity to adapt and to diversify and to compete," Sharma said. "Ultimately, private equity wants to do deals and will find a way to do deals, and I only expect to see that continue."

Fewer Funds Landed More Capital in Record Time

On the fundraising side, although just 90 funds were closed compared to 154 in 2019, the median and average size of these investment vehicles peaked in 2020 at €377 million and €1.1 billion, respectively — the highest they've ever been, the report said.

The pattern of a decreasing number of funds landing more capital has been visible within the private equity industry as a whole, as well as in other kinds of platforms, like venture capital.

Dominick Mondesir — a PitchBook private capital analyst for Europe, the Middle East and Africa and the report's author — told Law360 that established fund managers nabbed more capital than newer sponsors because the pandemic made it harder for investors to do thorough reviews of a new manager.

"It was increasingly difficult to do things such as on-site due diligence, and increasingly difficult to meet managers face to face and build a rapport due to the pandemic, and obviously due to the lockdowns and travel restrictions," Mondesir said.

And some of the year's largest funds, specifically those with more than €1 billion in commitments, were sealed off in less time than in 2019 despite the challenges posed by the pandemic, according to the report. The median time these larger funds took to close in 2020 was just 10.8 months, the report said, compared to the median of 13.7 months the previous year.

PitchBook noted that private equity firm CVC clinched €21.3 billion for CVC Capital Partners Fund VIII — the year's largest fund overall and the largest European buyout fund — in just seven months.

Deal Size, Q4 Volume Boomed as Overall Activity Took a Hit

Investment activity in the European private equity industry also set records in 2020, despite a brief pause in deal-making in the first half of the year. With €449.1 billion committed across 4,179 deals, last year saw a less than 3% year-over-year decrease in both the total number of deals completed and their collective value.

In spite of these dips, PitchBook found that the fourth quarter raised the bar for quarterly deal volume with more than 1,200 transactions occurring during the period. Average deal size also logged a new annual high of €248.9 million, a more than 22% increase from 2019's €202.7 million.

The report credited deals like the €17.2 billion carveout of elevator business ThyssenKrupp in the third quarter with further ballooning that statistic. The Germany-based company's transaction was the largest European leveraged buyout in more than a decade, according to the report.

Paul Weiss Rifkind Wharton & Garrison LLP partner Alvaro Membrillera, who also heads the firm's London office, said in an email that his practice witnessed this increase in multibillion-euro transactions after the start of COVID-19's first wave.

"Some large transactions we worked on over the summer signaled that sophisticated private equity firms were ready and willing to support large transactions and dispelled the concern that the pandemic was going to put a stop to deal-making in the second half of 2020," Membrillera said.

Kem Ihenacho, a Latham & Watkins LLP partner and the global vice chair of the firm's private equity practice, also told Law360 that there was a "real bounce back" in the year's final quarter and a higher degree of certainty as investors better understood the health crisis' impact on different business sectors.

"When you look at some of the other factors — the dry powder, availability of debt — I think that confidence returned, and there was a pent-up demand that really resulted in a real uptick in Q4," Ihenacho said. "And that's flowed through into the first quarter of this year as well."

Ihenacho said that the information technology sector especially benefited from a ramp up in deal-making, a trend that also made headway in venture capital activity.

And technology deals accounted for a historic percentage of overall activity in 2020. The sector comprised 21.7% of the European private equity industry's total deal value and 25.9% of the total number of deals.

In terms of deal structures, the report found that bolt-on or add-on transactions — where private equity firms beef up the value of portfolio companies through the acquisition of smaller businesses — constituted 56.8% of all IT deals that wrapped up last year.

Sharma said that bolt-on deals seemed to occur more frequently for all kinds of sectors as her clients saw an opportunity to focus on more proprietary deals in their existing markets to lessen deal-making risks and costs.

"In the environment that we had last year, ease of execution was key, to the extent that new deals were capable of being done," Sharma said. "I think some funds saw an opportunity to be accretive to the portfolio company by doing add-ons and bolt-ons with a view to perhaps selling this year or maybe the next, rather than just waiting for a window to open up."

She added that private equity firms opted to build out existing portfolio companies with an eye to maximizing their value in the long term.

PitchBook also noted that bolt-ons made up a record-breaking 61.4% of all buyouts in 2020.

Exit Activity Plummeted, But IPOs Stayed Afloat

PitchBook's report showed that overall exit volume and value suffered the worst hits in 2020. With just under 900 exits worth a combined €233.6 billion closing in 2020, the overall number of exits and their aggregate value plummeted by 18.3% and 10.9%, respectively. In 2019, Nearly 1,100 exits carried a total €262.1 billion value.

Deals between private equity firms, or sponsor-to-sponsor deals, and corporate acquisitions were especially dampened with each accounting for just 333 exits — making 2020 the first recorded year the exit types have ever mirrored each other, according to PitchBook. Sponsor-to-sponsor exits fell 34.5% while corporate exits saw a 38.9% drop.

Baker McKenzie LLP partner and private equity global chair Karen Guch told Law360 that corporate acquisitions might have fallen as companies looked to focus on their core business units. Guch added that likely explained the prevalence of carveouts among her clients, with private equity firms quickly picking up the divested assets.

Guch said that corporations have been "really looking at stabilizing their own businesses and focusing on what they do best to get through this pandemic and through this difficult period before they go on acquisition trails."

It's worth noting, however, that median exit size jumped to €114.2 million in 2020, or up 10.1% from 2019, according to PitchBook. The report said that's largely because the majority of actively trading private equity assets hail from sectors whose valuations have stayed constant or increased amid the pandemic. For example, roughly 20% of all of 2020's exits occurred in the IT sector, which the report said was an all-time high.

The real survivor among the exit types last year was the initial public offering, PitchBook's research showed. With a 10% drop, IPOs fell the least of all exit types in Europe, but going-public bids represented less than 5% of all exit transactions.

The IPO blitz that hit the U.S. made smaller waves across the pond, Guch noted. She said that although the European market generally tends to lag behind its U.S. counterpart, the "dramatic" discrepancy in exit activity was surprising. Guch added that geopolitical issues like Brexit and Europe's response to the pandemic may be to blame for the difference.

"It always has to do with confidence in the market when you talk about an IPO, so I suspect it's more around those sorts of issues," Guch said. "I think the fact that it's been quite strong in Europe is probably quite a positive sign, and we expect that Europe will follow the U.S. in the year and pick up on that front as well. "

Mondesir said that despite the exit market's "lethargic year," which he said followed 10 years of strong deal-making, exit activity will change for the better in 2021.

"As mass inoculations ramp up and as the public equity markets continue to heat up, we do expect exits will bounce precipitously in 2021," he added.

--Additional reporting by Benjamin Horney. Editing by Breda Lund.

For a reprint of this article, please contact reprints@law360.com.