Saturday, July 23, 2005

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Private equity groups go to Europe

Peter Gumbel has a fascinating story in Time on the growth of U.S. based private equity firms engaging in leveraged buyouts of European firms.

Germans in particular have taken pride in their "humane" form of capitalism, characterized by relatively short working hours and high pay, in contrast to what they see as a more cutthroat, competitive American way. But as global competition grows, European firms are under pressure to trim costs. Private-equity transactions--in which investors buy up a company using substantial amounts of debt, overhaul operations, then sell out after a few years--have been common for years in the U.S. and Britain. They used to be the rare exception in continental Europe, where financial leverage has long been frowned on and relationships with investors were based on tradition. No longer.

Starting in the late 1990s, all the big U.S. players, including Blackstone, Kohlberg Kravis Roberts (KKR), Carlyle Group and Texas Pacific Group, set up small-scale European operations. They're now bustling, growing rapidly and accounting for ever more of the U.S. groups' business. In four years, Blackstone's investments in Europe have jumped from about 10% to 30% to 40% of its total business, and the firm has opened offices in London, Hamburg and Paris. "It has become quite a significant part of our business," says Stephen Schwarzman, Blackstone's CEO and one of its co-founders. "It's a moment of structural change in Europe." The American moneymen last year were involved in about one-third of all European buyouts, doing deals worth more than $25 billion. That's triple the amount in 2001 (see chart). And there's no end in sight: several of the groups, including Blackstone and KKR, are in the process of setting up new investment funds aimed in part or entirely at Europe.

As the American money pours in, the deals are larger, more frequent and more highly leveraged. Five years ago, the largest European buyout transactions had a value of about $1 billion. Today's biggest deals are three times as large, and several private-equity groups are poring over at least one transaction involving a telecommunications firm in Spain that is worth more than $12 billion. One reason Europe is attractive: such huge firms as electronics giant Siemens, automakers DaimlerChrysler and Fiat and the French media company Vivendi Universal have shed operations they deem no longer core to their fundamental business. Also, investors have been buying medium-size companies whose family owners are looking to sell. Once the Americans take over, they move fast, prodding the firms to make their operations leaner and frequently reshuffling management. The worse off an operation is, the more money the investors stand to make from selling after turning it around. "We like the complexity of Europe," says Jim Coulter, a San Francisco--based founding partner of Texas Pacific. "It often means there is more inefficiency."

Read the whole thing. The restructurings are causing a bit of a ruckus. That fact that these groups are headquarted in the U.S. probably doesn't help matters right now. More importantly, European unions allege that the private equity groups come with mass layoffs. I have no doubt that's true in some cases, though the funny thing is that if you read the entire article, you will fail to find a single example of a U.S. firm actually recommending mass layoffs.

posted by Dan on 07.23.05 at 12:56 AM


This has been a long time coming, but beware the hype in the US business press. BusinesWeek comes out with a story every other month on the coming wave of US-style restructurings that will (insert cliche) shake up / reform / turn around Old Europe. It's been hyped for over a decade and I've yet to see it happen (otherwise, Paul Achleitner of Allianz, who's been doing this long before Bonderman and the others discovered Germany, would be as rich as Kravis by now).

Also, a large part of this is simply liquidity-driven: there's been an astronomical increase in the amount of capital devoted to private equity during the past decade and a half. There simply aren't enough investment opportunities in the US market to absorb the gazillions, and the vast increase in investment funds, pouring into the market.

Which means two things: returns in the core US market for private equity investments will significantly underperform returns from past years, and the smartest private equity investors, like Kravis, David Bonderman et al, will probably reap above-average returns by being the first to figure out how to penetrate the opaque and convoluted ownership structure of so many continental European firms.

I think it's likely that this wave will crest fairly quickly as European family-owned businesses develop the equivalent of poison pills and as the number of easy targets/quick wins shrinks to zero over the next few years.

At which time KKR, TPG and the rest will probably turn their sights to India and Brazil.

posted by: thibaud on 07.23.05 at 12:56 AM [permalink]

The simple use of this phrase:

They used to be the rare exception in continental Europe, where financial leverage has long been frowned on

suggests someone who doesn't know what he's talking about. European companies have always had much more debt in their capital structures than American ones.

posted by: dsquared on 07.23.05 at 12:56 AM [permalink]

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