BlackRock leaning into take-privates and carveouts, says Nathalie von Niederhaeusern

'Large conglomerates are looking at their balance sheet, liquidity, cash situations and focusing in again on their core business, creating opportunity for private equity,' said von Niederhaeusern.

PE Hub Europe spoke to Nathalie von Niederhaeusern, head of EMEA, BlackRock Private Equity Partners (PEP), in the latest in a series of interviews with senior private equity professionals on their H2 dealmaking outlook.

New York-headquartered BlackRock’s alternative strategies include infrastructure, private equity, credit, real estate, hedge funds and multi-alternatives. BlackRock’s PEP team was part of the investment round in ITM Isotope Technologies, led by Temasek.

What is BlackRock’s outlook for H2?

In Europe, the new regime of persistent supply-driven inflation, constrained, tight monetary policy, and higher macro volatility, will continue playing out and this will keep the central bank with elevated rates for a longer time than perhaps people had anticipated. Overall, the outlook for the European economy is rather subdued. If you look at recent economic data, it was underwhelming and we anticipate potentially more disappointing news coming our way.

Global mega-forces are not necessarily favourable for the economic outlook in Europe. Europe’s ageing population, and going hand in hand with that, the constraints on labour forces, as well as the higher wages and low unemployment rates in many European countries, have investors worried because it presages a new regime of elevated inflation and lower productivity.

The other mega-force at play in Europe is geopolitical fragmentation, the rewriting of global supply chains and increased production costs, but within this trend there is also investment opportunities. For example, AI-driven optimisation can keep us busy here in Europe.

Another major trend is the transition to a low-carbon economy, which will require significant capital, and is continuing to accelerate, as well as fundamental changes within the financial services, with the financial architectures of banks under pressure and increasingly non-banks stepping in. This will overall create opportunities, particularly for private markets.

What dealflow do you expect? 

In the first six months of 2023, any data you look at shows that dealflow is down 20 to 25 percent compared to previous years. 2021 and 2022 were two record years fuelled by a buoyant IPO market, cheap leverage and tonnes of new companies and innovations, particularly in the technology sector.

Overall, we anticipate dealflow in H2 to be better. If you look at previous downturns, the outperformance of private equity compared to public equity has increased during times of volatility and crisis. So, the opportunity set is maybe smaller than in previous years, but also more interesting.

In terms of what is driving dealflow, firstly, the financing markets are opening up. Leverage is still expensive, but we are seeing it beginning to open up definitively in the US and a bit in Europe. Second, whenever you have volatility, it can take six to nine months for buyers and sellers to converge on prices and close the valuation gap, which we saw emerge at the tail end of 2022. I think it has dawned on people that increased interest rates and inflation are here to stay. So, the valuation mismatch has started to close. The upside is that more deals are not only being started but also being closed.

LPs have committed a lot of capital to private equity and are expecting significant distributions as we have seen in the past couple of years, but this has really dried up. Now, GPs are under pressure to deliver liquidity to their investors, and either fully exit or partially exit some of their investments. This is also accelerating the flow.

How are these factors informing your dealmaking in H2?

I think public to private transactions, with corrections in valuation given the higher volatility, is something we have leaned into significantly, especially in the US. I think the European framework setup with different jurisdictions makes take-privates more difficult, but potentially even more attractive than in the US.

We are seeing significant activity with corporate carveouts. Large conglomerates are looking at their balance sheet, looking at their liquidity, cash situations and focusing in again on their core business, creating opportunity for private equity.

We have also seen attractive opportunities in consolidation, especially in Europe. If you compare it with the US, Europe has generally much more fragmented industries. GPs are looking to help companies consolidate with synergistic businesses that often are operating in different countries, with different languages and different customer bases. This creates a great opportunity to build national and regional champions. Also, as some of the smaller, sometimes family or founder-owned, companies have been struggling over the past couple of years they are often looking to sell, creating an interesting opportunity.

Lastly, due to the IPO market being mostly closed globally, out of that we have seen some interesting opportunities. We have been able to provide liquidity to those companies, which would otherwise get it from public markets, as well as to young, fast-growth orientated companies, that are still cash burning and need capital. These factors have combined to generate some more attractive valuations and interesting opportunities for structured investments.

What sectors are you looking at?

If you think how we consume, how we inform ourselves, how we buy, how we trade, technology’s touching all these different sectors and will continue to do so. Healthcare has also proven to be resilient over time. Food has been an area of focus for us in Europe and the US. Education is another topic that is essential to society where we’re increasingly looking. Lastly, everything that touches decarbonisation, sustainability and the transition to a low-carbon economy.

What exit opportunities are there?

The IPO market has closed. So, for the large end of the market, finding an exit route has been a challenge. The same goes for some of the growth companies that wanted to go public at a very exciting valuation. This will likely not happen for some time. So, exits have been drying up in the past 12 months.

We’ve seen some more movements and exits happening in the smaller end of the market and in the mid-cap. Strategic investors still have capital, and large funds are still buying smaller assets from smaller funds. Definitely this is a drop-off from the record exit environment in 2021 and 2022, mainly driven by very frothy public markets. So, 2023 from that perspective will most likely be disappointing.

Editor’s notePE Hub Europe’s interviews with private equity professionals will appear throughout August. Read our interview with Main Capital’s Charly Zwemstra.