[Edaily Marketin YunJi Kim Reporter] As a chill sweeps through the European private equity market in the wake of interest rate hikes, the financial clout of major U.S.-based asset managers is coming to the fore. Although transactions have generally slowed due to higher acquisition financing costs, U.S.-based asset managers—backed by abundant investment capital—have continued to pursue large-scale mergers and acquisitions (M&A). Having long led the large-scale M&A market in Europe, these firms are maintaining their presence by leveraging their ample dry powder (uncommitted capital) and relatively favorable funding conditions.

European PE Transactions Decline, but U.S. Capital Share Nears 46%

According to global market research firm PitchBook on the 12th, the value of European private equity (PE) transactions in the third quarter of this year was estimated at 149.15 billion euros (approximately 223 trillion won), a 10.9% decrease from the previous quarter. The number of deals also fell by 4.4% to 2,253, resulting in a smaller average deal size.

The European Central Bank’s (ECB) successive interest rate hikes are cited as the primary cause of the decline in transactions. Analysts note that as the ECB raised its benchmark interest rate by 0.25 percentage points in both June and September, the cost of acquisition financing increased; the resulting pressure on profitability also made price negotiations between buyers and sellers more difficult.

Although U.S.-based asset managers were not immune to the impact of interest rate hikes, they continued to execute large-scale deals, backed by abundant investment capital and strong fundraising capabilities. According to PitchBook, of the 123.5 billion euros in European private equity deal volume tallied to date, transactions involving U.S. investors totaled 56.5 billion euros, accounting for 45.7%. Notably, U.S.-based asset managers were involved in nine of the top 10 deals by transaction value.

A prime example is the delisting transaction involving DCC Energy, based in Dublin, Ireland, led by global private equity firms KKR and Energy Capital Partners (ECP). In July, the two firms agreed to acquire DCC Energy for approximately 5.75 billion pounds. DCC Energy operates energy distribution businesses in Europe, the U.S., and elsewhere; its stable cash flow generation and potential for business expansion are cited as key investment attractions. In particular, the assessment that the company’s enterprise value was not fully recognized in the stock market served as a strong motivator for the acquisition.

There are also cases where U.S.-based investment firms have prevailed over their European counterparts in acquisition competitions. In September, U.S.-based Veritas Capital agreed to acquire Bodycote, a British heat treatment specialist, for approximately 1.85 billion pounds. Veritas Capital, which pursued the acquisition after recognizing the business competitiveness of Bodycote—which has a customer base in the aerospace, defense, and industrial goods sectors—competed against the European private equity firm CVC Capital Partners and ultimately secured the deal by raising its offer price.

Abundant Capital and Attractive Prices Fuel Continued U.S. PE Investment… 4Q Remains a Variable

Abundant capital is the driving force behind U.S. asset managers’ ability to continue making large-scale deals in the European market. Thanks to raising substantial funds from global institutional investors, major U.S. asset managers have significant amounts of “dry powder” available for new investments. In particular, since large-scale M&A transactions require massive investment resources and the ability to secure acquisition financing, asset managers with strong fundraising capabilities are naturally in a favorable position in acquisition competitions.

The relatively low valuations of European companies are also supporting the inflow of U.S. capital. While it is difficult to find acquisition targets at reasonable prices in the U.S. due to high valuations, the environment in Europe has effectively made it possible to acquire companies at relatively low prices. From the perspective of U.S. private equity firms, even with the same investment amount, they can secure a larger stake in Europe, making it an attractive option in terms of future returns on investment.

U.S.-based fund managers also enjoy relatively favorable conditions when it comes to securing acquisition financing. This is thanks to the U.S. credit market recovering more quickly than Europe’s, making it easier to secure the debt financing needed for large-scale M&A deals. In particular, since fund managers typically finance a significant portion of acquisition costs with debt, the availability of funds in the lending market directly impacts the scale of investments and the success of transactions.

However, some argue that it remains unclear whether the active investment trend seen among U.S.-based asset managers in the third quarter will continue into the fourth quarter. FitchBook stated, “Since the acquisition prices for a significant number of deals completed in the third quarter of this year were determined before the ECB’s September rate hike, it is possible that the recent rise in funding costs was not fully reflected.” It added, “As future deals will need to take this into account, the robust trend of large-scale transactions seen through the third quarter may weaken in the fourth quarter.”