European private equity is facing unprecedented challenges in 2024. M&A activity has fallen dramatically as firms struggle to secure traditional debt financing. The DACH region, encompassing Germany, Austria, and Switzerland, witnessed a 23% drop in deal volume from 2022 to 2023, hitting its lowest point in a decade. Activity remains muted in the first half of 2024. In response to tough market conditions, firms are increasingly turning to innovative financing solutions to keep deals moving. Among these, sale and leasebacks (SLBs) have stood out as a powerful tool, offering a viable alternative to traditional debt financing.
The Debt Dilemma
Even with recent movements, interest rates remain at elevated levels, inflation remains persistent, and loans are harder to come by across Europe. These factors have led to a sharp decline in M&A transactions, with the first half of 2024 being particularly weak. One of the key challenges has been a pricing mismatch between buyers and sellers, causing many deals to stall or fall through entirely. This mismatch often arises from differing expectations on valuation, making it difficult to close deals using traditional financing methods.
Impact on M&A Activity
The decrease in available debt capital has had a profound impact on M&A activity. With fewer financing options, companies and their private equity owners are finding it increasingly difficult to pursue growth through acquisitions. The resulting slowdown in deal-making has created a ripple effect throughout the economy, stalling business expansion and innovation. Companies that once relied on readily available debt to fuel their growth are now seeking alternative methods to secure the necessary capital.
There has been a significant decline in transaction volume across Europe. The DACH region saw a 23% year-over-year drop from 2022 to 2023 and is down significantly in the first half of 2024. Other regions, including Spain, Portugal, and the Nordics, have experienced even steeper declines. This downward trend as a result of lack of available financing underscores the urgent need for alternative solutions such as the sale and leaseback strategy.
Sale and Leasebacks as a Potential Solution
Sale and leasebacks (SLBs) are standing out as a powerful tool in this challenging environment. By selling real estate and leasing it back, companies can unlock immediate cash to fund acquisitions without increasing their debt load. More importantly, SLBs can often help bridge the valuation gap between buyers and sellers, offering a way to reach agreements even when traditional financing falls short and buyers and sellers disagree on valuation.
The Mechanics of SLBs
In a sale and leaseback transaction, a company sells its property to an investor and simultaneously enters into a long-term lease to continue operating the property. This arrangement allows the company to convert a fixed asset into liquid capital while retaining operational control of the property. The cash generated from the sale can then be used to finance acquisitions, pay down debt, or invest in other areas of the business.
The Advantages of SLBs
SLBs offer several key advantages in today’s market:
Generate Immediate Liquidity
Companies can convert real estate into cash right when they need it most. This immediate infusion of capital can be crucial for businesses looking to capitalize on opportunistic acquisitions or navigate unforeseen financial challenges.
Avoid Adding Debt
SLBs help maintain financial stability without taking on traditional debt capital. This is particularly important in an environment where borrowing costs are high, and additional debt can strain a company’s balance sheet.
Bridge Valuation Gaps
In a market where pricing mismatches are common, SLBs offer a creative solution to meet both buyers’ and sellers’ expectations, keeping deals from stalling. By providing an alternative source of financing at an accretive multiple, SLBs can help close the gap between what buyers are willing to pay and what sellers are expecting to receive.
Reduce Financing Costs
With the cost of borrowing remaining high, SLBs can offer a more affordable alternative. By tapping into the value of their or a target’s real estate assets, companies can secure the funds they need without incurring the higher costs associated with traditional debt financing.
Europe’s Potential
Across Europe, companies can use the sale and leaseback strategy to keep acquisitions on track. The appetite for single-tenant assets leased on a long-term basis in many European markets remains strong, providing a solid foundation for SLB transactions that can unlock much-needed capital in a challenging financial environment.
Case Studies
Several recent transactions highlight the potential of SLBs across Europe. For example, we recently worked with private-equity backed mushroom producer, OKECHAMP Group, to structure a sale and leaseback of its processing facility in The Netherlands. Through the transaction, our client was able to realize attractive economics and lease terms, while generating significant non-dilutive capital that could be used for future growth.
Future Outlook
As Europe’s debt markets remain tight, sale and leasebacks can offer a critical solution for acquisition financing, keeping M&A activity afloat. By tapping into the value of real estate, companies can bridge valuation gaps, secure the liquidity they need, and continue pursuing growth opportunities despite the economic headwinds. In today’s market, the SLB is not just a creative financing tool—it’s a necessary strategy.
The adoption of SLBs is likely to increase as more companies recognize the benefits of this financing method. With the economic landscape remaining uncertain, businesses will continue to seek innovative solutions to maintain their growth trajectories. Sale and leasebacks, with their ability to unlock capital and provide financial flexibility in shaky markets, will undoubtedly play a crucial role in the future of corporate finance across Europe.
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