U.S. financial sponsors have jumped into $159.6 billion in syndicated loan activity so far this year, up from $119.6 billion for the full year of 2004, according to data from Dealogic. Europe continues to be a hot area for the loan market, especially in the telecom sector, and buyout firms are looking to put their money to work.
Philippe Costeletos, a partner in Texas Pacific Group's European office, said the growth has been driven by increasing M&A deal volume, private equity firms' dramatic increased share of the M&A market and the substantial increase in larger deals. Furthermore, private equity has broadened the sectors in which it invests to include retail, financial services and technology.
The numbers bear out Costeletos' reasoning. Buyout executives estimate M&A deals are close to $2 trillion, almost double that of 2003. The growth of the private market has also jumped. Private equity represented less than 3% of M&A deals between 1999-2002, but represented about 11.5% of the market between 2002-2005. On average, between 1994-2002, annually there was about $8 billion worth of public to private deals. That number jumped to about $18 billion between 2002-2004 and it is estimated to be about $40 billion in 2005.
Sponsored deals were especially high in the telecom sector, with deal volume standing at about $32.7 billion. "Telecom numbers are pushed by deals like Wind in Italy and are also pushed by the consolidation going on," said Paul Sennett, head of European loan sales at Deutsche Bank in London. "Telecom M&A is a huge boom, between NTL and TeleWest, Wind changing hands, Telefonica buying O2. The whole sector is in an exciting mode that has led to a lot of financing opportunities." The sector grew for the fourth consecutive year, up 64% compared to $20 billion for 2004, according to Dealogic.
Telecom looks to stay hot in 2006. "We expect to see continued M&A activity in the telecom market as well as in the general M&A market," Costeletos said. "There has been tremendous growth in M&A; we expect that to continue and that will drive continued opportunity for the private equity market."
One investor noted that at some point telecom activity would slow down, but maybe not right away. "I think there are some big deals in the rumor mill, so for the first half of next year, I'm not surprised if it is still one of the hottest, if not the hottest and maybe biggest, areas in terms of volume." He said the reason it is so attractive is because it has a fair amount of stability to its cash flow, a "stickiness" to its consumer base and many of the names are well-established. He suggested that the other sector that is starting to heat up is the food and beverage area and referenced the Cadbury Schweppes transaction.
Within Europe, the U.K., with a year-to-date volume of $14.4 billion, is up 47% compared to all of 2004 and surpassed Germany as the most attractive foreign nation for U.S. sponsors. The Blackstone Group was one of the top U.S. sponsors in Europe with a deal value of about $6.9 billion, followed by Apax Partners, Texas Pacific Group and Madison Dearborn Partners, according to Dealogic.