European Private Equity—Still a Teenager?
If the private equity industry has a life cycle, these are the teenage years for Europe, according to panelists at the conference session on European private equity.
The European market remains very attractive, with strong potential for growth—especially once French and German restructuring gets more underway, according to a panel of private equity group executives.
That panel discussion was part of the 10th Annual 2004 Venture Capital & Private Equity Conference, held February 7 at Harvard Business School. Panelists represented private equity groups that handle funds from $1.5 billion to 5.1 billion euros.
Like its amazing variety of wines, languages, and driving habits, the European private equity business is significantly different from that of the U.S. Buyouts in Europe are more common than early-stage investing; the reverse may be true in the U.S. Phenomena such as multiple buyouts—a buyout of a buyout of a buyout—are not unknown. And exit is difficult throughout the continent, not only in Eastern Europe.
Private equity is a good way to make companies more efficient when public markets are largely flat, they said. According to Nikos Stathopoulos (HBS MBA '95), a partner in Apax Partners, which was founded thirty years ago, "If you look at what drives the sources of deal flow in our business, a lot of it has to do with restructuring opportunities or divestitures or even, more recently, public-to-privates. But I think increasingly what happens in our industry—and in Europe more recently than in the U.S. —is that private equity has become the long-term funder of these businesses."
The public markets take a short-term view because they're driven by mutual funds or hedge funds and are rewarded in the short term. Long-term funders can expect to see more opportunities coming their way, he continued.
According to moderator Josh Lerner, a Harvard Business School professor, this is an exciting time for the European private equity industry in light of its recent history. Compared to the U.S., Europe is a relative newcomer on the private equity stage. Europe saw a few private equity efforts in the 1940s but only really began in the early 1980s. During the last twenty-five years, Lerner said, it made up for that gap with a lot of turbulence: "a very dramatic run off" of activity in the 1980s, followed by a decline in activity that led to a depression for much of the early 1990s, followed by a gradual recovery during the mid-1990s.
"The late '90s clearly saw dramatic growth across the industry but with a particular frenzy on the venture capital side, which then was followed by a pretty dramatic and ugly collapse," Lerner said. "I think today when we look at the European market, it's clear that there is a lot of interest and a lot of energy on the private equity side—the buyout side—while the early stage side is not quite as pretty a picture."
The future of Europe
Asked how the market is likely to evolve in a climate that contains enormous diversity in geography, business practices, and culture, as well as diversity in funds (country-specific funds compete against pan-European funds and global private equity organizations), panelists pointed to corporate carve-outs and restructuring as hope for future payoffs.
When I arrived in 1989, people were saying that there was too much money chasing too few deals. And people are still saying that.
— Allen Haight, Permira
Panelist Oliver Ewald said his firm, Audax Group, has recently made deals on corporate carve-outs that include a digital x-ray manufacturer based in Switzerland and a cryogenic equipment manufacturer in the Czech Republic. As the European economies continue to converge into a single market, companies are jockeying for position, observed Hugh Langmuir, a Paris-based director of Cinven.
Hampered by high labor costs, Western Europe is also feeling the pinch of competition from the Far East, especially China, Langmuir said. It is hard to match the costs and quality of goods that come from China.
The U.K. continues to be most-served market in Europe for private equity, said Allen Haight, a partner in Permira. "When I arrived in 1989, people were saying that there was too much money chasing too few deals. And people are still saying that." Spain and Scandinavia, by contrast, are relatively underserved markets, the panelists said.
Public markets are "anemic" for small and mid caps, so the exit question is more difficult to analyze than in the U.S., said Walid Serge Sarkis (HBS MBA '97), a principal in Bain Capital, a spinoff of Bain and Company. Even when middle market companies show signs of a heartbeat, the ability to get liquidity is much harder, he continued. "It's something we tend to refer to as 'equity jail.'"
Investors also need to adjust their time horizons for Europe, added Stathopoulos. Instead of planning quick flips or expecting a buyout and easy exit in two or three years, they will probably need to hold investments for a longer period of time, he said.
To invest in Europe, you need flexibility above all else, the panelists agreed. For an industry that prides itself on local, personal connections, it is may be wise to seek opportunity wherever it is rather than stick too closely to just one game plan.
"In my group's business judgment, it is extremely difficult in Europe to take the view of the stock picker," said Sarkis. "You can't say, 'I'd love to do the food industry. I think it's a great industry.' It might be a great industry, but ... you need to constantly reinvent yourself. We prefer to look more at situations than industries."