A STUDIED APPROACH

The current attractiveness of the European buyout market is no secret. A recent report from information group Dealogic revealed that $88 billion worth of buyout deals have been announced in Europe so far this year, compared with a total of $65 billion in the same period of 2003. And for the first time, the amount of capital awaiting investment on this side of the Atlantic is as large as its equivalent pile in the States.

With this trend in mind, it's no surprise that having a coherent and credible European strategy is of vital importance to American general partner groups. Many of them will no doubt be gathered at Private Equity International's 2004 private equity forum in New York in November, where discussion of successful European fundraising and portfolio strategies will take centre stage.

But while US-based houses are undoubtedly recognising the opportunities presented by Europe, there are still cynics who believe that, when they do head over here, they are reluctant travellers – effectively forced into Europe against their will in acknowledgement of the over-competitive nature of their domestic market.

They should pay attention to the words of a London placement agent who was recently quizzed by a US buyout firm intent on pushing into Europe. He says: “If the story is “we've been successful in the States, it's got too competitive, we want to go to where it's less competitive”, then I would be very sceptical. They might just find it's a bit claustrophobic over here too.”

In fact, at the larger end of the market, the likes of Blackstone Group, Carlyle Group and KKR may now be considered mainstays of the European scene and few would argue – as they once did – that Europe's idiosyncratic cultural traits would seriously undermine their ability to generate deal flow. The European franchise of Hicks, Muse, Tate & Furst is a case in point when it comes to successful assimilation. Though the Texas-based firm denies that a spin-off of its European arm is imminent, the recent decision to ring-fence carry entitlement had the effect of making HMTF Europe seem even more a part of the local fabric.

Far from simply joining some sort of mad scramble for assets, US groups are proving adept at filling gaps – particularly where they can export skills that have had less time to mature on this side of the Atlantic. One of the major advantages of US LBO houses when they started jetting over some years ago was their intimate knowledge of financing techniques that were in their infancy on this side of the pond, and this is a tradition being carried on by, for example, Cerberus Capital Management. Few European investors are yet in a position to compete with the New York outfit's debt restructuring skills, honed in a regulatory framework now being mimicked in European jurisdictions. And if it does, as expected, soon complete the purchase of Bayer's blood plasma unit, it will have gained a vital foothold in the fast-growing German distressed arena.

But it is not just the mega-funds that have been checking in their luggage at JFK: mid-market operators have also been hopping on outbound flights. Their destination is far from certain though. Keen to avoid the highly populated London market, some are boarding flights for Paris and Frankfurt – or even Budapest. That is where Riverside Company headed when it launched its European arm, Riverside Europe, in 1997. With additional offices in Prague and Warsaw, Riverside set out to exploit value opportunities in the relatively under-populated Central and Eastern European region.

Another mid-market US fund with a contrarian strategy is Vestar Capital Partners, which also snubbed London in favour of launching offices in Paris and Milan in 2001. Along with the idea that all Americans can offer is a more aggressive negotiating stance, another myth exploded by Vestar was that its roots in the States should be somehow disowned. Its parentage was actually a competitive advantage when it acquired the French operations of US-based Services Corporation International, a funeral operator. The parent company was delighted to be talking to a buyer that literally talked the same language.

It is easy to misunderstand – and indeed underestimate – the motivations of US financial buyers when they set their sights on expansion. While they are indeed coming from a competitive marketplace, it should not be assumed that they have failed to recognise the equally competitive nature of certain European geographies and sectors. They are instead inclined to demonstrate considerable acuity in identifying niches and playing to their strengths.