US private equity firms scour European portfolios for new deals

It was in the second half of 2013 that US institutional investors seemed to undergo a collective change of heart towards Europe. European funds that successfully reached closes last year, including CVC European Equity Partners VI, Cinven's fifth fund and Apax VIII, show that US institutional investors, once allergic to Europe as fears over the collapse of the eurozone raged, were suddenly desperate to get a piece of the continent's action.

Yes, Europe has struggled since the downturn, but despite a top layer of political and macroeconomic mayhem, the region held onto its fundamental attractiveness. Namely: being the world's largest export market, having discreet national markets perfect for the development of companies, and being home to arguably some of the most inviting legal, tax and regulatory frameworks.

The reappearance of US LPs in European funds hints at America's renewed interest in Europe, but more compelling is the recent rise of US private equity funds hunting for assets in European portfolios. There was of course a wave of US buyout houses heading over to Europe in the immediate aftermath of the downturn, in search of distressed bargains. Notably, Sun European Partners collected a swathe of struggling companies including Bonmarche, Dreams, Jacques Vert, Alexon, SCS and Sharps.

European PE-backed companies attract GP interest from across the Atlantic

While US houses buying European companies is nothing new, in the past this has typically remained the preserve of the mega-houses such as KKR, Carlyle and Blackstone, which have long needed to look further afield for opportunities simply to maintain steady dealflow.

Simply the best
But the view of Europe as solely a hotbed of distressed or large-cap opportunities is quickly falling away; recent transactions show that US firms are pursuing some of the best European companies in the mid-market.

Graphite Capital sold two companies to US private equity firms in the past 18 months. Most recently it offloaded talent acquisition and management services business Alexander Mann Solutions (AMS) to New York-based New Mountain Capital for £260m, generating a healthy 3.5x return on its initial investment.

According to Mike Tilbury, senior partner at Graphite, New Mountain had been identified two years prior to the deal as a potential buyer. The sale process attracted interest from both UK and US private equity, as well as trade. But in the end, New Mountain was the successful bidder because it would be able to expand the company in the US. Says Tilbury: "US buyers are looking further afield to find businesses with a global flavour."

According to Jonathan Bourn, managing director at Robert W. Baird, which advised on the sale of AMS, the company attracted interest from two US-focused funds, two transatlantic-focused funds and two European funds. "The interest it received shows that this wasn't an isolated case; there is genuine interest from US private equity houses for European and UK assets."

And, in October 2012, Graphite sold technical recruitment group NES Global to US buyout house AEA Investments for £234m.

Peering over the fence
Andy Gray, also a senior partner at Graphite, says: "There is a move at the moment for US trade and private equity firms to look at European companies. There is a view in the UK that our open economy and good export market make companies with international offerings very appealing to US buyers." Overall, Graphite has sold five businesses to US trade or private equity since June 2011, including Kurt Geiger to Jones Group; Dominion Gas to Praxair; and Willowbrook Healthcare to Healthcare REIT, as well as NES and AMS.

Other notable deals in 2013 included MCH Private Equity's sale of airgun manufacturer Industrias el Gamo to US private equity firm Bruckmann Rosser Sherrill & Co in August, and Boston-headquartered Abry Partners' acquisition of Thomsons Online Benefits from Pi Capital in February. In March, LDC sold MB Aerospace to Washington-based mid-market investor Arlington Capital Partners. In November, Gresham Private Equity sold Swift Technical Group to New-York mid-market investor Wellspring Capital Management. Furthermore, 3TS Capital Partners exited Romanian software business Avangate to US firm Francisco Partners in October.

Helen Steers, partner and head of European primary investment at Pantheon, has also noticed this trend: "US GPs are now aggressively hunting for deals in Europe. I think this has partly to do with valuations; they're seeing some value in Europe. Plus the debt markets have come back and they are able to finance deals without problems."

Indeed, according to Bourn, US private equity firms are not coming to Europe to buy assets on the cheap. He also points out that another attraction for US buyout houses could be the process itself: "These firms can access vendor due diligence very early on in the process, which is not typically the case on US deals."

The only area of concern for US private equity firms buying assets in Europe, and particularly in the UK, is management incentives. Bourn notes that these differ greatly in the UK compared with the US because of tax legislation. "In the UK, management incentivisation needs to be offered upfront, especially if these managers are well-versed in private equity ownership. US private equity houses won't have experience of dealing with this and they will need to better their understanding and bring in good lawyers to get up to speed."

It is perhaps the severity of the downturn in Europe that has caused this recent surge in mid-market attractiveness. Any company that made it through the onslaught that followed the collapse of Lehman Brothers in relative good health has clearly proven its resilience and strength.

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