Cross-border cultural differences are the greatest barrier to dealflow among UK private equity houses, according to a new report, casting doubt on their ability to compete on an international stage.
According to the research, which was sponsored by insurer Aon and based on a survey of 82 firms involved in the UK industry, buyout firms still have a strong appetite for international deals. However, the difficulties associated with cross-border deals meant many firms were looking closer to home. 36% of respondents said that Western Europe would be the most fruitful source of deals in the next two years. Central Europe was the second most popular choice, with Asia Pacific third. Eastern Europe and Russia were relegated to a distant fourth and fifth.
These cultural differences could take a number of forms. Language and time zones were an obvious barrier, but conflicting tax, legal and regulatory requirements were also cited as a big threat to deals. Others cited different expectations between different countries in terms of processes and information flow. These cultural differences were evident not just within the companies concerned, but also between advisers working on the deals for the buyout firms, the report said.
Other risks identified were perhaps more predictable. Respondents not surprisingly cited some of the financial risks inherent to the current private equity market, including pension liabilities, downward pressure on returns and highly competitive auctions.
However, despite the difficulties general auctions pose for buyers, over half of respondents said this was the preferred exit route for their investments. Secondary and trade sales were next in the list of preferences, leaving initial public offerings as the least popular choice.
The survey also revealed that UK buyout firms see hedge funds not as a threat, but as a potential partner. A third of respondents felt they would play an important role in mezzanine funding, while others felt they would form part of the equity providing consortium.
Healthcare was seen as the most attractive area for new investors, cited by almost a quarter of respondents. Services was the next most popular. As a second choice, the financial sector was cited most frequently.