Beyond Sponsor-to-Sponsor: The Rise of the Strategic Buyer in European Private Equity

The sponsor-to-sponsor deal has been a dependable way out for private equity for most of the last decade. At the top of the market, that reliance is fading. I was pleased to be quoted on this shift in Bloomberg's recent piece, Private Equity Finds Corporate Crutch for Exits, and I set out my further thoughts here. Corporate buyers are becoming a central part of the exit picture, and they look set to stay. Sponsors who recognise this early, and plan for it, will be better placed for the next cycle.

Who Buys Next?

The change is clearest when you split the market by size. For mid- and small-cap funds, selling to a larger sponsor is still a natural exit and often the easiest one. There are plenty of larger buyers able to take an asset to its next stage.

At the large-cap end, the picture is very different. Every buyer is already thinking about its own exit. If a buyer acquires a large asset from another sponsor, who will buy it in four or five years? At that size, few sponsors can write the cheque. Many of these assets have also been through several rounds of private equity ownership. Realistically, that leaves two exits: a strategic buyer or an IPO.

Continuation vehicles and "private IPOs" have their place. However, they rarely give LPs the liquidity they expect. In Europe, the IPO route is still unattractive. Valuations and investor demand are uncertain, and a listing is seldom a full exit. Sponsors usually sell down over time, so they stay exposed to the market and receive their returns later. 

Without a reliable IPO exit, large-cap buyers either cut their bids or stay out altogether. That widens the gap between what sellers expect and what buyers will pay. Until European ECM recovers, the strategic buyer is the most credible counterparty for large assets.

Where corporates have the edge

That does not mean corporates win every auction. Sponsors are still often the better owners of businesses that need reshaping, whether in strategy, capital structure or operations. For mature assets, though, corporates can offer synergies, access to new markets and strategic fit that a financial buyer finds hard to match.

Financing adds to that advantage. Investment-grade corporates can usually borrow more cheaply in the bond and bank markets than in the leveraged loan and high-yield markets that sponsors rely on. They can also combine cash on hand, existing facilities and, where needed, equity. While rates stay high, that flexibility is a real competitive edge.

Structural, not cyclical

The obvious concern is that corporate demand could fade as fast as it appeared. We think that is unlikely. European corporates increasingly see scale as essential to competing with US and Chinese rivals. The political case for building European champions is strong, and it points to sustained interest rather than opportunism.

What sponsors should be asking now

If the strategic buyer is becoming the main exit for large assets, it should shape decisions from the day a sponsor invests, not only when it sells. Sponsors should be asking:

• Which corporates are the likely buyers?
• How will those buyers view the asset's integration potential?
• What regulatory, merger-control or foreign-investment issues could a strategic sale raise?
• How should a process be run when corporate and sponsor bidders assess value and certainty so differently?

There is no standard answer to any of these. The sponsors that work through them early will capture the most value from Europe's new exit landscape.

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