Few private equity pros can go anywhere today without being questioned about a “China strategy.” However, an inquiry often left unasked-but which is proving to be just as pivotal in today’s global economy- is, “What’s your Europe strategy?”
The fact is, a number of U.S. firms have been deploying their European strategy for years now
A recent study issued in the spring indicates that private equity groups last year raised $58.5 billion in funds dedicated to Europe, an upwardly alpine trajectory compared to previous years.
The report, issued by the European Venture Capital Association (EVCA), Thomson Financial (publisher of PE Week) and PricewaterhouseCoopers, showed that there were five funds raised last year that each came in above the $3.8 billion mark. But even excluding those, the growth in fund-raising was still 20% over the prior year.
With funding comes more investment, and Western Europe also set records in dealmaking in 2005. A study by Incisive Media and Bridgepoint Capital showed that private equity deal volume topped $128 billion for the first time.
The growth in markets outside of the United Kingdom helped to account for the impressive totals. Activity in France nearly doubled, as the country logged $26.4 billion in private equity deal volume, while Spain made an even more impressive leap to $15 billion, up from just $2.5 billion the year before.
In the same study compiled by the EVCA and Thomson, investment in private equity is clearly shown as having paid off. Over a 20-year investment horizon, buyout funds tracked in the study generated an average net IRR of 12.4 percent.
Over a 3-year horizon, buyout funds generated a 7.9% net IRR, while in a 1-year window, buyout funds displayed a robust 20.9% average return.
A Bridge Into Europe
Meanwhile, there are a number of recent developments that continue to blur the lines between North America and Europe. For instance, Kohlberg Kravis Roberts & Co. and Ripplewood Holdings have each tapped into the European public markets to raise capital for new funds. Following KKR’s $5 billion IPO last month in Amsterdam, there will likely be more U.S. firms eyeing similar floatations in Europe. Already Apollo Management is reported to preparing such a move.
Warburg Pincus saw fit when it raised its most recent fund to do away with the idea that it required separate vehicles for the United States and Europe. The firm instead raised a lone $8 billion global fund.
In another homogenizing development, the European Union is on the verge of implementing a takeover directive, which will help to standardize M&A law across many countries.
This will mostly affect publicly traded companies. But, in general, it is a sign of a cultural shift – a new receptivity to Americanized corporate ownership practices. This is particularly notable when one considers that just 13 months ago Germany’s then head of the ruling Social Democratic Party likened private equity to a plague of locusts.
Despite all the good cheer, potholes do remain. Simon Wildig, with London-based Close Brothers Private Equity, says that he has seen a few sizeable U.S. firms set up European outposts in the last several years that have still not made much traction in the market.
“Western Europe might operate under a single currency, but it is still quite a distinct group of markets,” he says. “I think there has been a view that an investment in the U.K. or France would be an entry into the European market in general. It’s not that easy.”
Part of it is the culture of Europe. Common complaints regarding U.S. firms is that they aren’t making enough local contacts, their language skills are lacking and they don’t keep up with local politics.
Also, many U.S. firms come off as less than delicate when dealing with Europe’s labor unions, which can quickly mess up deals if they are ignored or undermined. Employee protections, particularly strong in countries like Germany, Holland and France, can cool a company’s ability to hire and fire employees – an indispensable practice for many LBO shops.
There are other differences as well. Conni Jonsson, managing partner at Stockholm’s private equity giant EQT, says that in deal sourcing and portfolio management there are major differences between the United States and Europe.
As it relates to finding deals, Jonsson says that success relies heavily on reputation given Europe’s less transparent marketplace. And once the deal is made, U.S. firms may run into a wall when it comes to motivating management.
“U.S. firms think the only thing that counts is money. Lots of gold at the end of the trail isn’t good enough,” Jonsson says.
Despite these reservations, Europe is becoming friendlier to U.S. investors and in many ways resembles the opportunity found on the North American soil. Ian Leaman, a director and founder of M&A advisor Buckingham Corporate Finance says, “I think U.S. investors should be seeing Europe as a reflection of their own market: a very large, continuous, active and growing economy.”
This story previously appeared in Buyouts, a related publication.