In Europe: Rethinking Europe

In November, Vestar Capital Partners announced plans to close all its European offices – in Paris, Milan and Munich – and focus solely on the US mid-market instead. “More than a decade ago, we saw an opportunity in Europe and successfully pursued it,” Vestar managing director Robert Rosner said in a statement. “However, markets change, so we need to remain flexible and adapt our model.” 

So is this a sensible response to the unfolding economic car-crash in the eurozone? Or a short-sighted over-reaction?

Other firms have adopted a more moderate response. TPG, for example, is rejigging its European team so that it can pursue a distressed investment model, rather than its previous buyout-centric strategy.

Philippe Costeletos, a partner at the firm, is to step down as co-chair within TPG’s European team and focus instead on sourcing distressed deals. Another London-based partner, buyout specialist Matthias Calice, will leave the firm at year end, while operating partner Vincenzo Morelli will move to working on a part-time basis.

This hardly represents a wholesale withdrawal from a market in which the firm has played an active part since 1995. But it does suggest the TPG leadership cadre view Europe as a basket-case-in-waiting – a market that is more likely to throw up a slew of distressed opportunities rather than traditional buyout deals.

UK-listed 3i is another industry heavyweight rebalancing away from Europe in response to macroeconomic shifts. Only a few months after opening a new office in Brazil, 3i recently confirmed it would make 10 percent of its European staff redundant – with most of the cuts likely to be in the UK.

3i chief executive Michael Queen, speaking after the group’s recent results, laid the blame for its losses (£523 million for the six months to September 30) firmly at Europe’s door. “Concern over the Eurozone, political turmoil and deleveraging pressures on the banking system is likely to lead to increased risk and lower growth,” he said. “It’s hard to think of another period that’s been so uncertain or volatile.”

For global firms, you can see why Europe must look like a relatively unattractive proposition at present. GDP growth is likely to be sluggish at best in most countries, with a few honourable exceptions (the Nordic region [see p. 21] and Eastern Europe, for example). Thanks to the ongoing uncertainty over the fate of the Euro and worries about sovereign defaults, agreeing valuations and persuading banks to lend is far from easy – while the volatility of public markets has all but shut down one of private equity’s key exit routes.

One influential European fund of funds manager says the impact of all this will be keenly felt. “There has undoubtedly been a slowdown in European private equity. As a result of the economic situation and the state of the market, GPs will have to invest more widely if they are to put capital to work as Europe is so quiet. More importantly, from an LP perspective, many investors are re-balancing to reduce their European exposure.”

Credit Suisse’s chief global strategist, Jonathan Wilmot, warned in a salutary recent note: “We seem to have entered the last days of the euro as we currently know it.” But he believes a solution will be found to Europe’s economic woes – and that investors will be the driving force. “The pressure for the necessary political breakthroughs will likely come from investors seeking to protect themselves from the utterly catastrophic consequences of a break-up – a scenario that their own fears should ultimately help to prevent.”

In light of all this, should firms be taking a leaf out of Vestar’s book and abandoning Europe altogether? You can certainly see the logic, and it’s perhaps the safest option – particularly for firms with limited resources on the continent. Managers will no longer be able to rely on the rising tide of GDP growth to lift all boats; good opportunities in Europe will clearly be harder to find, which means firms will have to look carefully at how their teams are configured.

However, that doesn’t mean opportunities will dry up altogether. TPG’s reorganisation offers one possible strategy: to focus on distressed companies, of which there will inevitably be many. But there is also plenty of scope for true European specialists to identify under-valued, industry-leading companies who will be able to buck the macroeconomic trends and keep growing – which will offer the potential for multiple expansion in the medium to long term. In other words: don’t write off Europe yet.