LPs fear overcrowded buyout market

Both LPs and GPs have expressed concern at the growing competition for large buyouts in the European market, believing the trend will continue due to growing US interest in the region.

Limited partners (LPs) are increasingly concerned at the growing level of competition in the European buyout market, according to a new survey published looking at opportunities in the sector.

The report indicates that LPs and GPs alike are concerned by the increasingly competitive auction process in Europe, with 70 per cent of GPs saying that increased competition, with the resultant knock-on effect of higher prices, was likely to be the defining trend over the coming years. The increase in competition is largely due to the increased presence of US firms in the European market.  Mid-market and small buyout firms were less concerned about the rise in competition than large firms.

The report, “Performing under Pressure: A Survey of European Buyout Firms”, conducted by research firm AltAssets, sought the opinions of 75 European buyout firms and an equal number of LPs. Buyout firms said they expect to produce average annual returns of about 17 per cent over the next five years, partly by building up their focus on operational rather than financial activities. Despite predicting tough exit conditions and more intense competition in the short term, firms are confident of being able to match historical returns over the next five years, primarily due to their belief that they can to bring about operational change.

The survey also reports that the growing trend for secondary acquisitions will continue over the next three years. Financial buyers have provided private equity vendors with some of the year’s largest exits. In March, Cinven and LGV paid over £2bn for the Voyager chain of pubs held by Nomura Principal Finance, one of Europe’s biggest transactions in 2002. Financial sales are expected to increase their share of total exits to 21 per cent over the next three years, filling the void left by the disappearance of the IPO market.

The report also looked at the perception of limited partners towards Europe’s private equity houses. The survey indicated that Europe's most highly regarded buyout firms, as voted for by the region's LPs, are BC Partners, Permira, Apax, CVC and Cinven.