Impressions from PE on the Road – Europe

One of the great things about INSEAD is its global set up and global reach. Therefore we envisage one stream of this blog to deal with topics on Global Private Equity. By this we don’t mean another aggregation of how big the industry is or how much money was invested but rather local market developments that together shape the worldwide private equity industry. 

Let’s start with a look at Europe - having just spent the last three months on the continent alternating between (too) short spells of holiday and working on a variety of PE related topics. In the latter capacity my colleagues & I met with a large number of senior PE professionals on trips to London, Paris and Munich plus at two conferences on our campus in Fontainebleau and a family office gathering in the South of France (well, not all work).

These meetings, while somewhat biased by the people we approached, chance encounters and an oversampling from our senior alumni in the industry, nevertheless provided a fairly representative sample of GPs at the larger end of the buy-out space. The one observation that stands out is a clear bifurcation of the industry across the PE life cycle – let me share a few comments that were frequently raised:

Fundraising was either easy or extremely difficult, with little in between. A mix of decent track record in the last two funds, a distinct strategy for which LPs had room to allocate and momentum (sometimes helped along by early commitment incentives for LPs) seems to have allowed some players to reach their anticipated fund targets quickly. Others with more losses in their portfolio and a less differentiated strategy struggled more thereby pushing out fundraising periods and eventually having to settle for smaller funds. This then often means scaling back the team and office network.

With returns from European buy-out funds of the 2006/7 vintage not looking pretty on an IRR basis (but might still turn out ok in terms of money multiple) many firms were eager to leave this period behind emphasising a return to “normal” i.e. the period of 2002-2005 (interesting how this resembles rationalisation patterns by VC firms earlier in the decade). 

The question of whether we will re-enter a less volatile environment or not aside, one of the more immediate impacts from the crisis will be on carried interest and the alignment of interest at the heart of the PE industry. Many of the more recent joiners in the industry have not seen much of carried interest and with larger pre-crisis funds still going through the motions this is not going to change anytime soon. So the senior partners we spoke to were very aware of the need to restructure their remuneration practices to motivate their (now in many cases fewer) key staff.

On the investing side we were surprised to see how widely differing firms with broadly similar investment strategies would perceive the market opportunities in Europe. Some firms have stepped up their activity markedly over the last two years while others prefer to invest outside Europe or mainly at the distressed end of the market. Somewhat consistently with their perception of deal flow people addressed the question of globalisation. Proponents of a global investing strategy were as numerous as proponents of a geographical “stick to your knitting” approach.

Another area of strongly differing views was that of value-add and the use of operating partners. Philosophical differences emerged around a PE firm’s involvement with management (hands-on or light touch) and the PE firm’s internal dynamics on allocating economics and responsibilities between deal and operating partners. 

That’s it for a snapshot on the state of European buy-out market. With trips to Malaysia, China and Korea lined in the coming months we expect different topics to dominate the discussion which I look forward to sharing with you.