There can be no mega funds without major backers, which is evident right now throughout Europe as private equity firms there close ever-larger funds buttressed by American university endowments and pension funds.
Because private equity is a newer asset class in Europe, compared with North America, it offers much more growth potential, and that, along with a healthy, and open, debt market, has contributed to the surge in deal and fund activity.
“Europe is going through a process [that] perhaps already happened in North America,” said Andrew Joy, director of London-based Cinven, which just closed its third fund 20% oversubscribed for 4.3 billion euros ($3.8 billion). It was the second largest fund raised in Europe, behind only CVC European Equity Partners III, CVC Capital Partners’ third Europe-focused fund that closed with EUR4.65 billion last year. Apax Partners also closed Apax Europe V with EUR4.4 billion in March last year.
“There’s a pretty good stream of disposals of [subsidiaries] going on,” Joy said. “There’s also a modest amount of public-to-private activity. And there are some secondary buyouts as well. So if you add it all up, and then take into account that not many years ago there were practically zero buyout deals being done on the mainland of Europe anyway, there’s definitely been a healthy market, and continues to be.”
Sovereign Capital Ltd., an independent U.K.-focused private equity investor, recently closed its third fund, Sovereign Capital Ltd. Partnership III, for in excess of GBP120 million (about $176 million), exceeding its original target size of GBP100 million, nearly two and a half times the size of its last fund.
Peter Brooks, a managing director of Sovereign Capital, said the allocations from European pension funds, endowments and insurance companies are relatively low, from 1% to 2%, so his fund took advantage of interest from America.
“In the States, the average [allocation] is anywhere between 5% and 10% for a similar type of organization,” he said. “So a lot of the [European] institutions, given the fallout in the public markets, are asking themselves if they should have more money allocated to this asset class, and they’re looking into investing into private equity. Whereas in the States, it’s clearly been very established, and they’ve gone through a period where, having allocated say 5% to 10%, they’ve had some downgrade in the sum of the valuations and are perhaps drawing breath for a while.”
Brooks should know. The majority of his new fund’s LPs are new and U.S.-based, with university endowments and pension funds. He attributes the “quite small” number of returning investors to two factors.
“A lot of our historic [LPs] have either moved upscale, or there were changes here to the team, obviously below [chairman] John Nash, that not everybody was entirely comfortable with at the time we launched the fund,” Brooks said.
What convinced the LPs?
“Our only fully mature fund, which was the first fund, was crackingly successful,” Brooks said. “It made 33% IRR over 11 years, 4.1 times money on investments. And all of it has been fully cashed out with no absolute failures, and the money all returned to the investors.” He added that the firm’s second fund, which was launched in 1997, is still at quite an early stage.
Brooks went on to say it helped that his firm is what he describes as a classic back-to-basics firm that launched its fund after the dotcom bubble burst. Sovereign plans to invest GBP5 million to GBP6 million on average in outsourcing support services, facilities management, waste/environmental, education/training, healthcare services and leisure.
Reports that Doughty Hanson & Co., one of Europe’s largest independent private equity fund managers, has re-entered the market with plans for a EUR3.5B fund is pure rumor, according to Stephen Marquardt, a managing director of Doughty Hanson in London.
“Our goal is to launch a new fund sometime this year, but we have not made any announcements,” he said.
However, he agreed that there’s a lot of room for growth in Europe-based private equity.
“There’s a lot of scope for doing transactions now and, we think, over the next 10 years in Europe,” he said. “With the euro, borders are breaking down more quickly than people thought. National champions’ are no longer divided by borders. And private equity is playing a role in creating real pan-European companies.”
Moreover, U.S. limited partners are focusing more on Europe, he said.
“I think if we were a U.S. fund we would not get the same level of interest,” said Marquardt. “This seems to be the place to be in the eyes of the LPs. And they’re adding more to their alternative assets portfolios, and more specifically to private equity.”
He attributed this trend to the maturity of the U.S. market combined with the deal flow and returns LPs can expect in Europe.
“If you look at the LBO market in the U.S., for every transaction, there are a million firms looking at it. Here, that’s just not the case when you’re looking at the middle market, top half of the middle market or large deals, it’s a much smaller universe.”
Effort Still Needed
Despite the good news, Joy of Cinven said, “That doesn’t mean fund raising was easy. You have to make the case to every investor. And nobody signs up without being convinced.”
Although he described Cinven as an opportunistic fund, he cited business services, publishing and health care as areas that look promising. The fund will focus on Western Europe, and management will avoid highly cyclical industries, “such as heavy manufacturing, commodity-based chemicals, or telecom, which we have never done,” Joy said. “One of the reasons we were successful is that we’ve stuck to the same strategy that’s worked for us over the last 10 or 15 years, which is larger buyouts. We didn’t go into telecom or the Internet… so there’s a feeling of continuity there. And it’s a very stable team, and I think in these times that appeals to people.”
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