Florida SBA: Investment barriers still exist in Europe

The $164bn pension plan is focused on getting more exposure to smaller managers in Europe, but finds language and regulatory differences within the EU are still tough to navigate.

Florida State Board of Administration, which manages $163.5 billion of assets on behalf of Florida Retirement System Pension Plan, expects to direct more capital and dealflow in “smaller Europe”.

Florida SBA began investing in Europe in 2005 and has backed funds managed by pan-European buyout shops including CVC Capital Partners, BC Partners and PAI Partners. The public pension restructured its global private equity portfolio in 2014, reduced its exposure to large-cap managers and shifted the bulk of its programme to small and mid-market buyout funds. In Europe, it has backed smaller regional funds and country-focused funds including those managed by Metric Capital Partners, Investindustrial and Summa Equity, according to Private Equity International data.

PEI caught up with John Bradley, a senior investment officer at the pension, to find out more about its European private equity programme, its outlook for the region in the near term, and what Brexit and the rise of nationalism across Europe could mean for the growth of the asset class in the region.

What’s the rationale behind backing managers in Europe?

There are a few things that are important for us as we think about investing in Europe.

John Bradley, Florida SBA
Bradley: different laws within EU make it challenging to invest

First, it is attractive from a diversification standpoint. We are believers in market cycles, and the advantage of having exposure outside the US – in Europe and in Asia – is that these markets tend to cycle at different points in time.  We also like in Europe – and in particular smaller Europe – firms’ ability to take companies and grow them across countries. To take that local country champion and turn it into a regional play – that is a fairly good thing to invest in and invest behind. That is attractive.

Second, valuations are a bit more attractive in Europe than they are in the US. We always preface that with the realisation that most countries in Europe have slower growth, so that’s probably some of the reason for lower valuations. We also find Europe’s tech sector interesting. It is something that’s become more attractive, mimicking what we see in the US – all of those are things where, when we look at the portfolio, we like what we have and like where it fits.

Third, we have seen a bit less competition from LPs trying to get into funds in the smaller end of the market. In Europe there are fewer large pools of LP capital chasing deals and chasing GPs. We like this dynamic.

How has Florida SBA’s Europe PE portfolio performed relative to other geographies?

Our European programme has been accretive to our overall portfolio and has outperformed our benchmark, although Europe has lagged a bit behind our US portfolio. Some of that is due to the strength of the US dollar, but we have found success and we are happy with our overall performance and increasingly happy with the performance of our smaller European funds.

We currently have nine small, country/regional-focused European managers in our portfolio. We think anywhere from 8-12 of these types of fund makes sense for our programme. Should we come across funds we think are a good fit for us, we would be happy to add to our manager roster.

What are the disadvantages of investing in Europe and do you see these changing?

For us the distance is a disadvantage. It is a tough place to monitor in terms of staff time, deal sourcing and portfolio management. There are also language barriers as well as barriers within each country and between countries. As an investor, there are different laws and regulations you need to be aware of. France’s tougher employment regulations are one example.

For us, we tend to focus on GPs that have performed well over full market cycles, understand their markets and make those market calls. Is it changing? It does not feel like it, and those barriers still exist.

When we think about the EU, we try and remember that it is a collection of countries with different laws and cultures, so that makes it more challenging than investing in the US, which is more homogeneous across states and regions.

What could impede growth of Europe private equity?

There are a few things that we constantly think of. First is currency volatility. For us, as a US dollar-based investor, currency and how that works for us and against us in these markets is always top of mind. With these investments being so long-term, it can be very costly to try and hedge out that mismatch in currency.

Brexit and the rise of nationalism is also a concern. There is always the worry of whether the eurozone will remain intact. Investors don’t like uncertainty. With Brexit, people waited to see what was going to happen. Now that there is some more certainty to Brexit and what it might look like, investors can form opinions on where the opportunities will be and invest their capital there.