Role of Private Equity in M&A

Operating with Momentum – Need to know:

• Corporate restructurings, family business succession planning, distressed company turnaround, and technological change are all major drivers of M&A this year.

• Private equity (PE) firms could be the crucial facilitator of M&A activity as they seek to churn funds and deploy ‘dry powder’ (uncommitted capital).

• Stubborn interest rates make access to diverse forms of finance a potential deal-clincher in many PE situations.

• Softer growth in valuation multiples means finance that supports bottom-line growth post-deal with minimal complexity are increasingly attractive to PE firms.

The prospect of reduced base rates, deal opportunities from corporate reorganisations, and reinvigorating distressed businesses (two-thirds of PE firms currently include turnarounds in their deal search, according to KPMG) could kick-start deal activity. PE funds’ openness to deals designed to consolidate value-chains across borders could be a lifeline for European economies looking for ways to deliver much-needed growth.

Higher interest rates have hampered PE deal-flow in Europe and the UK. But the ECB has now started to cut base rates, and the Bank of England looks ready to follow later in the summer. Tom Gevers, Senior Director Structuring International at ABN AMRO in the Netherlands, welcomes these moves, but adds: “Economic activity is a better driver of PE activity than interest rates. If we can help create growth and optimise business performance, that’s a big driver of deal-flow.”

There are other factors encouraging PE firms too.

Jeremy Harrison, Managing Director, Head of Origination & Sales UK at ABN AMRO Commercial Finance.

In other words, if multiples rise with economic activity and PE houses can access more diverse sources of finance, confidence will return.

Private equity provides rigour in the wider European M&A market, too, anchoring prices and pushing vendors to get their house in order in response to forensic due diligence. That discipline plays to ABN AMRO’s strengths. Having a finance provider that understands assets – whether that’s receivables, inventory, plant, buildings or even vehicles – can be invaluable, especially when they know how to manage them for optimum financial performance. When ABN AMRO talks to PE firms, it knows exactly how rigorous they are at optimising financials – and what they might need from the balance sheet pre- and post-deal.

Diverse deals

With the number of €1bn-plus ‘megadeals’ falling to a ten-year low in 2023 – just 16.5% of PE deal value, according to PitchBook – firms are looking much more broadly for acquisition targets to soak up funds. And while UK private equity has tended to dominate the deal statistics, growing activity in France and Germany, in particular, is adding geographic diversity to the mix. From MBOs carved out of corporates or family ownership, to secondary deals and take-privates, the common theme is value-creation.

“PE firms always look for value, whatever the strategic rationale of the deal,” says Harrison. “Alongside our German team, we helped fund the buyout of a major logistics group, for example, with a leasing and receivables finance deal. It required a pan-European approach to deliver a carve-out that worked for everyone – the family-run vendor disposed of an asset it considered non-core; management got to take control of their business; and the private equity backers were able to buy into a real growth story.”

Matthieu Agten, Head of Sales at ABN AMRO Asset Based Finance in Germany, believes this kind of cross-border deal can boost both specific Mittelstand firms looking to transition around strategic growth – and open doors for PE to revitalise the economy as a whole. Germany has had an uncharacteristically sluggish economy and was technically in recession between 2023 and 2024. That alerted PE firms with a particular interest in turnaround opportunities – but long-term relationships with PE houses benefit both parties whether it’s a distressed situation or not.

Matthieu Agten, Head of Sales at ABN AMRO Asset Based Finance in Germany

That ability to work across scenarios, borders, asset-classes, and types of finance is particularly valuable to PE firms needing to move fast. “We’re getting a lot of calls from PE firms looking to lock down opportunities – especially where we have sector expertise and can evaluate the assets they’re looking at,” says Ricardo Martis, Senior Director ABL Origination at ABN AMRO Asset Based Finance. “One big advantage is we can quickly deliver top-up funding on the acquisition price, which makes them more competitive in an auction situation.”

Although ABN AMRO has strength in particular sectors and asset types, it also maintains diversity in the deals it supports by looking at opportunities through the lens of transitions – in energy, mobility and digital – as well as supporting the move to sustainability. That’s important to private equity backers doing deals: the opportunity for a step-change in digitalisation, for example, can transform an investment post-acquisition and make it vastly more attractive to potential buyers on exit.

Seeking alpha

Most private equity firms place a premium on being transformative owners in this way. Financial engineering is still a factor in many deals. But in a buy-and-build situation, arranging the right financial solutions quickly can make all the difference to generating alpha – growth in the bottom line.

“Plug-and-play ABL solutions give PE firms and their portfolio management teams real clarity into their options when targets are identified – because they’re not going to have to reinvent the structure or re-negotiate the terms as they grow,” says Gevers. That’s ideal when the objective is to deliver growth, not just pay down debt.

“A great example is the €650m deal we organised for a PE-backed European energy business looking to replace its existing borrowing base facility; achieve derecognition of receivables from the balance sheet; generate a high level of financing; minimise operational admin; and minimise funding costs,” Gevers explains. “The conventional base lending structure was ideal to underpin the business structure, but the flexible component was perfect to adapt to seasonal fluctuations and support growth.” (That deal won ABN AMRO the Asset Based Lender of the Year award at the Real Deals 2024 Private Equity Awards.)

The value of discipline

The transformation of asset-based lending into a valued source of financial headroom has been as important for PE houses as it is for medium-sized businesses and corporate entities. Today, it’s a recognised contributor to working capital discipline and efficient use of assets.

There are other technical advantages to deploying ABL structures to support deals and portfolio company performance also. “We can both contribute to, and leverage, the PE firms’ rigorous due diligence,” says Harrison. “We offer pre-deal funding with real confidence, and that makes it ideal as, for example, a bridging facility. Private debt funds will charge a lot more – and ABN AMRO’s facilities can roll into business-as-usual to support growth post-deal. Boosting alpha is the key to driving up returns, and we’re ideally placed to help fund that on an ongoing basis.”

Private equity partners have a reputation for leaving no stone unturned in their hunt for value – a discipline that asset-based finance respects. “We did a deal last year with a PE firm that was looking to optimise asset utilisation in a portfolio business,” says Martis. “Inventory was key to the deal – and ABN AMRO was able to lead a club deal with two other banks to quickly create a facility including receivables, inventory and letters of credit. In that case, the PE firm wants to invest to accelerate growth as a precursor to sale – so long-term financing was really attractive.”

And in an environment when fine-tuning the debt component can be make-or-break for a PE bidder, ABN AMRO’s experience of leading club deals with banks across several European jurisdictions can also make a huge difference.

ABN AMRO knows the PE industry well, and it knows they love to hear from management teams looking to expand. Buy-and-build is often the strategic rationale for a portfolio investment, so being able to fund businesses as they look at cross-border expansion deals, for example, is a real boon to their model.

Asset-based finance can give PE firms and other acquirers invaluable headroom to do deals – and the flexibility to maintain momentum post-deal to invest in the critical transitions that deliver value. In a market where multi-jurisdiction deals are becoming commonplace – especially for buy-and-build strategies – working with ABN AMRO can give any PE an edge.

Want to know more?

Working capital financing offers you, as a private equity company, the extra space and flexibility needed during a business takeover. Our advisors are happy to discuss your financing options, so that you can act quickly when it matters.