After a pause early last year due to the pandemic, corporate operations are accelerating in Europe by most measures. The number of M&A and asset sales is soaring, and each month sees a new lot of IPOs, spinoffs, or SPACs. Signs of greater “animal spirit” are evidenced by rising venture capital flows, more unsolicited acquisitions and leveraged buyouts. Surveys of EU executives and investors are also bullish. Early indicators suggest the trend is not over, considering the stream of extraordinary shareholders meetings – where corporate operations are decided – or the undeployed cash from private equity investors (est. $240bn are sitting in EU buyout vehicles). Buoyant EU corporate activity looks likely in 2021.
Cyclical drivers are supportive. The pipeline of operations that were postponed last year due to uncertainty or as due diligences were interrupted certainly contributed to the recent surge. More importantly, attractive financing rates, support from banks looking to redeploy cash, the backing from public authorities looking to pass on liquidity to the real economy, are all opening opportunities. Valuations remain cheap in Europe, while rising stock prices and improving economic and profit prospects are amplifying the search for yields. More economic policy stability is also helping volatility from trade, Brexit, and US elections, abates. Moreover, potential for change in Corporate Europe is high. ROE and margins weakened due to the trade war and the pandemic, leaving companies with strong operational leverage. CEOs are looking to restructure and/or reorient their business for a post-Covid world. In the short-term, vaccination delays and persisting restrictions are accelerating business transformation and non-core asset sales (especially in travel, hospitality, retail sectors). Potential tax regime changes in the UK in 2021 are also pushing investors to seal post-tax deal returns as fast as they can.
Structural drivers are also at play. Capitalism might be evolving in Europe. Funding means are multiplying (crowd funding, SPACs). Efforts toward greater sustainability is accelerating, with a new ESG regulatory framework that will impact firms and investors across Europe. Moreover, pressure and scrutiny on companies’ management teams are intensifying. It is resulting in increased activism, with a broadening involvement of institutionals (pure-activists only led a third of the recent campaigns). While suggestivist or constructivist approaches dominate, more aggressive approaches are surfacing. EU activist portfolios – lead indicators for other special situations segments – display elevated market beta exposures, a focus on small and mid caps, while most campaigns seek strategic, governance and/or sustainability changes (as opposed to opportunistic positioning). Specifically, they tend to target cheap and cyclical stocks, with poor credit conditions, but with turnaround potential and operational leverage. UK targets still dominate, accounting for about 40% of the recent campaigns.
The outlook of European Event Driven strategies, which outperformed year-to-date, remains promising, supported by a growing number of price movers and catalysts and increased investors’ interest for deep-value opportunities