US players line up for mid market

US firms such as Blackstone, Carlyle and KKR are driving forces at the upper end of the European buyouts business. Pressure to put capital to work means a US drive into the middle market is a possibility, too.

Crescent Capital, Platinum Equity, Summit Partners, Sun Capital Partners and TA Associates rank among the US groups already active in the European middle market. An abundance of uninvested private equity in the US and favourable deal flow prospects in Europe mean that a series of other firms could soon join them.

According to Close Brothers Corporate Finance, there is an estimated US$118bn of private equity capital uninvested in the US. Once financial leverage is included, buying power is inflated to US$250bn, a capacity that is unmatched by domestic supply of quality assets.

“I am aware of other middle-market funds in the late stages of planning their own European presence,” said Darren Redmayne of Close Brothers Corporate Finance. “As one US private equity GP told me: ‘There just aren’t enough good deals in America for us all’.”

EVCA data support the scenario. It says the amount of money invested in US buyouts in 2003 was four times that of Europe. And, while estimates vary, there are more than 500 middle-market players in the US, compared with around 100 in Europe.

Look at the supply side, however, and the balance shifts in Europe’s favour. Europe has a large number of family-owned companies and a strong corporate divestiture market. “Large, diversified conglomerates have been out of favour longer in the US than Europe, providing fertile ground for non-core corporate orphans to support, grow and exit,” Redmayne added.

US firms tend to be more differentiated than their European counterparts because they are part of a more mature market. This could help the newcomers to corner latent deal flow. But European firms also have a strong advantage through their networks and local contacts.

Conditions in the European debt markets might also encourage US migration. The European market is more fragmented and competitive, leading to lower spreads and equity contributions. The number of senior lenders in the US has undergone consolidation and the top three lenders control about two-thirds of the market.

If the US firms do move, it will lead to competition in fundraising. In addition to US firms looking to raise euro funds, many European funds are due back next year.