Eurozoned out

The struggle to keep a contagious sovereign debt crisis at bay in Southern Europe caused the Euro to fall to a four-year low against the dollar in late May.

While this might have been from a high base at the start of the year of around $1.50 and it has strengthened somewhat since the low point at the end of May, it is predicted to keep falling. “We forecast it to weaken further and be close to parity [with the dollar] by the end of the year and to stay like this for some time,” Marie Diron, a senior economist at Ernst and Young, tells PEI.

 Greece: the country has been the focus of Southern Europe’s
sovereign debt crisis and its fi scal tightening has sparked
civil unrest

For those general partners operating within the eurozone, the short- to medium-term effects of a weakened Euro can be beneficial “if you are invested in one of the strong economies and if your portfolio companies are export-intensive”, says Helmut Vorndran, managing partner of German private equity firm Ventizz Captial Partners. The converse is of course true of import-intensive businesses.

For limited partners, short-term currency swings are somewhat hedged by the long-term time horizon of a private equity fund. “I think most LPs take the view that over the 10-year life of a fund, heaven knows what will happen to a currency,” says a senior source at one of Europe’s largest LPs. “It can swing immensely; sometimes it flatters and sometimes it does the opposite.”

A weakened Euro could potentially make Euro-denominated funds more attractive to dollar-denominated investors. But while investing in European funds may have become marginally cheaper, the story behind the weakening currency – macroeconomic uncertainty – is deterring LPs from investing in the region.

“I think the point behind the weak currency you are seeing now is the macro view,” says Klaus Bjørn Rühne, partner at ATP Private Equity Partners, a Danish LP. “You should be concerned as an LP if it is a sign of relative weakness of the European economies, meaning you would be less interested in investing as an LP in European private equity going forward”.  Rühne continues that while the UK and Scandinavia both look “okay” from a private equity investment perspective, “we would probably put more money in the US, Asia and South America”.

He adds: “There is a dramatic change in wealth and fortunes from Europe to other continents.”

Rühne’s sentiments are echoed by the unnamed senior LP source, who describes his organisation as having a “pretty negative” view on Europe. “There are opportunities around – from corporate disposals, restructurings et cetera – but there’s not a huge amount of Beta.”

Diron adds that in Ernst & Young’s upcoming Eurozone Economic Outlook, due to be published at the end of June, the forecast for the region in terms of GDP growth is bleak, with zero growth in the Southern states expected for “several years” and only between 1 percent and 2 percent in Northern Europe over the same period.

Senior politicians in France and Germany are currently considering the implementation of a “two-tier” Euro currency, according to a report in UK newspaper The Daily Telegraph, citing a European official as a source. France, Germany, Holland, Austria, Denmark and Finland would form part of a “super-Euro” group, said the report.

Should this happen, says Vorndran, it would have a “definite impact” on the attractiveness of Europe for private equity funds, as the “strong” Euro states would be left with a much stronger single currency. Vorndran also warns against the establishment of a “transfer union” in which money flows in simple terms from the north to the south as having an “enormous impact on the financial stability of the northern economies and thus on the attractiveness of private equity funds investing in these areas”.