Fallen euro offers discounts in Europe’s private sector [Private Equity Insights]

Eurozone economies face headwinds including soaring inflation, an energy crunch stemming from the war in Ukraine, an expected recession and the plunging euro that in July fell to parity with the U.S. dollar for the first time since 2002.

With the best dollar-to-euro exchange rate in two decades — it remains around 1:1 — it is an ideal time for private equity deal hunting across a landscape of lower valuations.

To identify private companies in the region that could be of interest to private equity firms, S&P Global Market Intelligence first screened the public markets to identify the riskiest sectors. The aim was to find the sector most out of favor, which typically puts downward pressure on both public and private company valuations.

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Using the probability of default, four sectors emerged with the highest potential investment risk, with healthcare at the top.

Lowered corporate guidance supports the sector risk data. Though the numbers are not substantial, the healthcare sector also topped that list, showing the largest increase in lowered guidance among those top four sectors.

Seeking value at a discount

The filter was applied to the 10 private companies in the healthcare that had the highest revenue growth over the last three years and a current ratio of less than 0.50. A current ratio below 1 means the company has more short-term debt than assets.

The idea is to identify companies that continue to show substantial growth through adverse macroeconomic or sector-specific conditions, yet carry high debt. The assumption is that high debt, within limits, is not necessarily bad when looking at high growth companies. Businesses with a high CAGR tend to pour the bulk of revenues back into operations to fuel growth momentum, typically accruing debt.

Many other factors are involved when private equity investment teams do due diligence, according to the strategy and risk appetite of the firm, and investors have to be confident that the company can manage its liabilities.

But the combination of impressive growth momentum, reasonable debt and a euro close to U.S. dollar parity suggests these 10 private companies could pass an initial screen as private equity looks for the right entry point to invest and improve the company’s operational efficiency.

A total 61 whole company acquisitions involving private equity firms were announced in the healthcare sector in the eight months to Sept. 1, according to S&P Global Market Intelligence data.

The largest deal so far is EQT Partners AB and Mubadala Investment Co. PJSC’s June agreement to pay €2.8 billion for Sweden-based Envirotainer AB.

Source: S&P Global