US specialists target Europe as competition grows

Domestic competition in the US is driving specialist funds without a physical European presence to look for opportunities across the Atlantic.

Strictly US-based firms have so far invested €1.3 billion into European companies in 2017, exceeding the €1.1 billion total for last year, according to data from S&P Global Market Intelligence. The 63 deals completed this year may also be on track to outnumber the 102 recorded in 2016.

The growing demand for European assets has been particularly noticeable among healthcare and technology funds, Stewart Licudi, head of European financial sponsors coverage at investment bank William Blair, told Private Equity International. Funds with deep knowledge of a sector are less likely to be concerned by a lack of familiarity with new markets.

“The US is a massively competitive market,” Licudi said. “I think if you are a specialist healthcare fund, even if you sit in the US, clearly you understand that your exciting markets are global and therefore you’re not necessarily going to find everything you need within the borders of the US. There’s a scarcity value to the asset.”

New York-based growth investor Bregal Sagemount is one US firm that has made a foray into the European market. The firm, which closed its second fund on a $960 million hard-cap in February, invested nearly $100 million in UK-based technology services provider Options in August. The transaction marked the only non-US-based investment in the Bregal Sagemount portfolio. Bregal Sagemount declined to comment on its geographical focus beyond confirming that Options was its first UK investment.

Operating in a different continent without permanent feet on the ground has its challenges. In addition to time differences and language barriers, an anonymous European investor told PEI they would be cautious of traditionally US funds targeting Europe without a significant track record of successful investment in their domestic market.

Such wariness is not limited to fund investors. Management teams can also be wary about remote financial sponsors. Licudi recalled one UK team that would only deal with potential US buyers from the east coast to avoid “being dragged to board meetings in California once a month”.

However, with niche targets remaining just that, the growing trend of US to Europe dealflow is unlikely to spark an influx of new offices in the continent. “If it’s for a healthcare fund that targeted a very specific asset in Europe because it was part of their overall strategy, are they going to open an office? Maybe not,” Licudi said.

“You can go the halfway house route that some people have done … where they have somebody who's based in the States that commits to spending a week or month in Europe. [Specialist funds are] usually saying, ‘Here are some very specific criteria of things I’m interested in,’ so it’s a very thoughtful approach.”