2012 vs. 2013

In 2012, growth in the European PE sector, in contrast to its more vigorous US counterpart, remained pedestrian. The Eurozone sovereign debt crisis continued to concern North American investors, austerity economics dampened economic growth prospects, and disparities in asset valuations between PE buyers and institutional sellers made deployment of capital difficult. Raising new commitments was hampered by the weight of dry powder in existing funds, and divestment levels remained low, limiting the amount of capital that could be returned to investors (total exit value in Europe was 34% down on 2011, compared with 18% globally). Europe held on to its #2 PE position more due to a cooling of the Asia-Pacific region than any renewed vigour across the Old World.

2013, however, seems to have witnessed an improvement. First and final closings have become more frequent, with funds raised also by managers outside of the gilded top 20 firms. Credit markets in Europe are active (the “refinancing cliff” has been managed, leverage multiples have soared), and IPO ($18bn for Q1-Q3 2013, 3x that for the same period in 2012) and PE-backed buy-out ($27bn in Europe in Q2 2013, compared with $29bn in North America) activity has rebounded. Signs of recovery are apparent in various European economies, including the UK, and business sentiment is turning positive. Managers have plugged the holes left by nervous US investors with commitments from Northern European, Asian and Middle Eastern investors, as well as establishing dual-currency (EUR and USD) fund structures. While the dual-currency approach does not fundamentally alter the risks associated with investing in Eurozone-focussed funds—and also creates administrative and hedging headaches for the manager—it can provide succour to foreign investors concerned with the fate of the Euro.

Winners and Losers

The performance of European funds has been chequered. A growing disparity...