Heard on the streets of Amsterdam

With hundreds of private equity executives descending upon the streets of the Dutch capital last week for an industry conference, Private Equity International put feet on the ground to discover this year’s key trends.

European “maelstrom” threatens LP appetites

A recurring concern for general and limited partners alike was the diminishing appeal of European private equity.

Anselm Adams, director of London-based PECA Family Office, told PEI it will be reducing its exposure to Europe to focus more on Asia. The decision comes amid concerns over the outlook for the eurozone following the European Central Bank’s quantitative easing programme.

Adams pointed to a surplus of buyout commitments from local public development funds as having distorted prices and deal volumes in European markets. Prices paid in the European mid-market hit a record of 9.5x EBITDA in the third quarter of this year, according to data from Argos Soditic and Epsilon Research.

One European general partner who is fundraising also told PEI that “Brexit is stifling our business”. The firm – which has partial exposure to UK assets – said it would seek discussions with the British Business Bank in the hopes of filling a gap left by the European Investment Fund, with the latter reportedly more cautious of investing in the region since last year’s referendum.

The GP is not the first to have struggled to attract continental LPs over the past 18 months. “Some European LPs are still cautious about investing in the UK at the moment unless they’ve already got a prior commitment to a fund,” Gary Tipper, managing partner at Palatine, told PEI in September. “It’s tougher to get a lot of European investors on the hook.”

Debt is in vogue

Such fears did not extend to the debt markets. PEI spoke to one European investment manager who said his firm will reduce its exposure to private equity to free up capital for direct lending.

The looming threat of a cyclical downturn has already resulted in huge sums raised for distressed debt vehicles, with Cerberus, KKR and Bain Capital among those having launched funds with exposure to this strategy.

The heightened interest appears to have spread to other sectors of the asset class. Zug-based Capital Dynamics is seeking $500 million for its debut credit fund as part of its push into the strategy, while Sterling Group is also getting in on the action, having launched its own debt practice this summer.

Times are a changing

With record levels of dry powder contributing to bloated valuations, some GPs are shifting their focus to smaller targets. One London-based placement agent, who did not wish to be named, told PEI he had seen more firms raising small-cap, lower mid-market and niche or sector-specific funds in response to this development.

It is not just fund targets that have shifted. A London-based private equity firm told PEI that 2-and-20 fee terms were no longer a guarantee, as difficulties in deploying capital and a wealth of funds to choose from had afforded some LPs greater flexibility when agreeing fund terms.