The downturn in private equity investment in Europe is sending financial sponsors across the Atlantic in search of backing for new funds. Meanwhile, the need for diversity among U.S. investors is assuring the Europeans a warm reception on this side of the Atlantic.
Leading buyout specialist Cinven solicited interest from U.S. institutions for its latest investment fund, just as it had with its two prior efforts. But the response to Fund III went beyond all expectations and enabled the firm to exceed its E3.5 billion target by 20% within its original timescale.
“Europe is a compelling story, and we put a lot of time and effort, not just with this fund but with funds one and two, into explaining that story to major U.S. investors,” said Cinven’s director, Andrew Joy. “And I think it helps that what we said five years ago has turned out to be true,” he adds, referring to solid performance of the firm’s previous funds. Cinven achieved broad returns in the upper 30s to 40s on the realized deals in Fund I, which closed at the end of 1996.
Its track record has earned Cinven a loyal following – some 75% of investors in its second fund also came for a piece of its third. Joy says that continuity of strategy has a part to play in attracting return business. “They like the fact that we’ve concentrated on market-leading cash positive businesses, and not been seduced by either the telecom or the Internet fashion[s],” he says.
But for many of Fund III’s U.S. participants, this was the first time they had invested in European private equity. “It’s one of the few markets where there’s actually something going on,” says one such investor. Preliminary findings published by research house Initiative Europe show that around E11 billion was invested in 197 private equity-backed deals in the first quarter of 2002.
While this is a dramatic slide from the E16.5 billion invested in 381 deals in the last three months of 2001, activity in the European buyout market still outstrips the U.S. market. And things are expected to pick up over the next year or so. The wave of corporate restructuring that was expected to sweep through the region has so far not made it beyond a ripple, but everyone knows the potential is there.
“For the first time many companies’ shareholder base is predominantly Anglo-Saxon capitalist, at least by method if not by origin, so a lot of boards are being forced to examine what is their core business and how do they maximize value for their own shareholders,” says Cinven’s Joy. “One of the consequences of that is a pretty regular series of corporate spin-offs, which are our main source of deal flow.”
For many investors, this is a chance to put money to work in a generally quiet market. Perhaps more important, it’s a rare opportunity to introduce variety to their portfolios.
“We committed to [Cinven’s] new fund, primarily as a means of diversifying our risk in this area across different geographies,” says a representative of one public fund. Many U.S. sponsors are hemorrhaging from bad investments and struggling to cover mounting costs as their market sinks further into the mire. And while it may not help to stem current losses, investors see diversification as a way to avoid the kind of pain they are suffering now in the future.