European PE firms invade U.S. territory

While many U.S. firms are eyeing opportunities in Asia and elsewhere around the globe, they may also want to guard their home turf as LBO firms from Europe are crossing the Pond in greater numbers to set up shop here.

Within the last month, U.K.-based private equity stalwarts Cinven and BC Partners announced plans to establish New York outposts. They will join CVC Capital Partners, Permira and 3i Group, all of which opened offices in New York within the past few years and are now sourcing deals in North America.

3i Group, which opened a New York office in mid-2006, closed four deals in North America last year, investing about $750 million. It is unlikely those deals would have happened without a U.S. presence, says 3i Partner Ken Hanau.

Brian Korb, a partner at Glocap Search, an executive recruiting firm that specializes in private equity, investment banking and hedge funds, says that he has seen an uptick in his business from European firms looking to staff up their new outposts.

“We’ve always been accustomed to the U.S. going abroad, but this is indicative that Europe has established itself as a stand-alone PE market. And they have their own global agenda that’s not always second to the U.S. agenda,” Korb says.

Indeed, the influx of players from overseas underscores a deal trend that has been growing for at least five years: European firms are hungry for North American targets. In 2003, European firms paid more than $622 million for 23 U.S.-based companies, according to Thomson Financial (publisher of PE Week). Last year, that number grew to $27.7 billion for 63 U.S. targets.

The scenario is not exactly comparable to when U.S. buyout shops began opening their doors on the other side of the Atlantic Ocean several years back, when private equity was still a relatively new industry there. In North America, there’s not much room to grow. “When the U.S. firms went to Europe they grew the market and the capital available for buyouts in Europe proportionately more than could a group of good [European] firms now coming to the U.S., which is already a large buyout market,” says Harold Bogle, managing director at Credit Suisse Group and head of the firm’s global financial sponsors unit.

For the most part, the European shops that can afford to make the move are the mega-firms. BC Partners, CVC Capital Partners and Permira are roughly the equivalents of U.S.-based players Bain Capital, The Carlyle Group and Warburg Pincus. Consequently, U.S. megafirms will feel the pinch the most, at a time when they’re already facing increased competition from strategic buyers and dealing with a credit crunch.

The European firms, on the other hand, stand to benefit from current U.S. economic conditions, namely the weak dollar and the reduced valuations of target companies that will likely result from the credit crunch.

Already, some have paid notice to a few noteworthy deals that stand out as examples of how the Europeans players have outbid the local firms. In 2006, Permira paid $765 million to acquire Indianapolis, Ind.-based Aearo Technologies Inc., a manufacturer of earplugs and eye-protection devices. It beat out a few U.S. buyout shops in the process, including LBO firms Aurora Capital Group and Weston Presidio. The deal was Permira’s largest in the United States so far, and last year the British buyout firm sold the company to technology giant 3M for $1.2 billion.

The European players “recognize the U.S. as being a large, continuously fertile area for buyouts,” Bogle says. “They have the skill set and they want to have a global business.”