Not so long ago, US institutional investors had their backs turned firmly against Europe. The repercussions of the financial crisis had hit Europe hard as the bank debt crisis morphed into sovereign debt crises. An EVCA trip last week to meet US investors shows that this perception has shifted. Europe is back on the map for many US LPs, who are bullish about European private equity. Here’s why.
The 2008 collapse of Lehman Brothers and the crisis that followed were an extreme test of Europe’s resolve - both of keeping the Union together and of the Euro itself. Yet European government (the EU Commission and the European Parliament) has proved it will do everything in its power to keep the EU together. Eurozone countries and the European Central Bank have shown they will not allow the Euro to be undermined - by anyone. The EU and the Euro are here to stay. The stability and certainty this offers investors has not gone unnoticed in the US.
Some EU countries may remain in recession and need further structural reform, yet many others are now performing relatively well, offering investors a promising and stable place to deploy capital. This is reflected in many US investors’ portfolios, many of whom are investing “in the better economies that are doing well,” as one US pension fund manager puts it.
Nevertheless, many US investors understand that private equity investments in European companies also provide exposure to markets far beyond the EU. A private equity-backed company may be based in Europe, but its business is often global (for proof of this, see our case studies, many of which demonstrate high growth outside Europe). High global demand for European products and services allows investors in European companies to benefit from growth across the world.
In addition, Europe’s private equity firms are well versed in identifying the value champions among the region’s millions of companies. Unlike emerging markets, European private equity is predicated on value, rather than growth - and this is reflected in the high and stable returns it has generated over decades.
This brings us to the subject of emerging markets. The rush of capital flowing towards the world’s fledgling economies, particularly following the crisis, has left many investors disappointed with the result: returns have not compensated them for the higher risk of investing in markets where legal and political systems lack stability. Developments in Russia in particular are a timely reminder of how important stability is for investors, who are currently struggling to see a premium from investing in emerging market over developed economies.
And finally, regulation. While US investors may see much of the EU’s financial market reforms as unnecessary, they generally concede that this is far preferable to insufficient regulation and a lack of security. Nevertheless, all the US investors we met agreed that Invest Europe should remain engaged with policymakers: they want us to improve the regulatory environment to ensure that US capital can continue to flow to Europe.
Europe’s relative stability, its commitment to remaining a union, its deep pool of companies that compete on a global stage and its emergence from recession led by a number of well performing countries make it an attractive investment destination. It should come as no surprise, therefore, that most US investors now have around 30% of their private equity allocation directed at Europe, with 60% at the US and just 10% allocated towards other markets - most notably Asia. This is a strong endorsement of European private equity and is good news for Europe.