Private equity and venture capital in Europe is in the early stages of a long, deep period of growth—but country-to-country differences in language, culture, and regulations continue to demand a specialized understanding of local markets.
Panelists with experience in the field offered a long-view perspective on the industry while pinpointing its hot spots and challenges at the 2003 European Business Conference on November 22.
"There are fashions in this business," said Rene M. Kern of General Atlantic Partners LLC. He recalled the Europe of 1992, when unification was in the air and a number of U.S. buyout firms rushed into the market only to head home a few years later. Firms with experience in Europe understand that it is just as possible to make money in a down market as an up market, he said.
Government trends over the past fifty years point to an increase of free capitalism inside Europe, said William C. Schmidt (HBS MBA '81) of Advent International PLC. It is easier to do a deal now than it was ten years ago, but borders still pose a challenge. "You have to carry separate suitcases full of methodologies and advisors to each country," he said. "Europe is a fantastic place. But avoiding the competition and getting things done is a real challenge."
Global private equity funding has been on the order of $300 billion since the beginning of 2000, with over 60 percent of that investment occurring in Europe, said Edward J. De Nor, a member of Goldman Sachs' Principal Investments team. "People are waking up," he said. "The number of large deals done in Europe has increased steadily. Capital is going to opportunities that exist uniquely in Europe—not the United States."
| Capital is going to opportunities that exist uniquely in Europe —not the United States. |
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— Edward J. De Nor, Goldman Sachs |
Those opportunities don't come without particular challenges within the firms themselves, panelists agreed. Knowledge management across the organization is no easy feat when an entity encompasses dozens of investment professionals spread across five continents, Kern observed. Internal communication is critical when it comes to developing a common understanding of the "secret sauce" that makes a great investment.
Advent has seen several phases of growth, said Schmidt, and is now making the transition to full partnership—a significant challenge even when an easily identifiable group of core partners exists in a single office. "How do you manage that transition with ninety people across fourteen countries and have everyone feel equal and enabled?" he asked.
De Nor cited the difficulty of striking an internal balance between transactions that are great for the region in which they are located (as in "the best deal that's ever come up in France") and those in the U.S. that still come out ahead after risk and return are measured. "It's a constant battle between being a long-term investor in a market and selfishly doing what's best for our investors," he said.
Biggest growth opportunities
When moderator and HBS associate professor Walter Kuemmerle opened the floor to questions, one participant from Portugal cut to the chase: What did panelists consider to be the two or three biggest growth opportunities in Europe?
| Private equity is a tough business. The average player doesn't make the returns that the institutional investor expects. |
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— William C. Schmidt, Advent International PLC |
Information technology in health care and wireless are two areas that show great promise, said Kern. There will be more consolidation in financial institutions, too, as barriers between European countries continue to fall.
De Nor highlighted the somewhat counterintuitive phenomenon of taking a public company private. Occasionally companies that are spun off from larger conglomerates continue to be managed in the same way, he explained—so there is potential value to be added in "taking it private" and hiring managers who will adopt a new, improved strategy to increase a company's value before it goes public again.
Rather than cite specific growth sectors, Schmidt outlined a few fundamental changes in Western Europe. "It used to be only growth equity," he said. "Now that inflation is down and there are more stable markets, you can do LBOs, and it's a much more stable market for FDI."
What about Eastern Europe? A Russian student wondered if the panelists saw any growth areas in her home country.
"There will be incredible commercial opportunities in Eastern Europe over the next twenty years," said De Nor, but the current lack of liquidity in those markets makes it difficult to develop an exit strategy.
"Private equity is a tough business," said Schmidt. "The average player doesn't make the returns that the institutional investor expects." If there are too many factors that make a deal difficult to do, it is easy enough to look elsewhere—until conditions improve.
"We don't have a bias for or against a particular region or country," agreed Kern. "There are a slew of opportunities out there. The challenge is to make sure that we only invest in the very best prospects."
