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PE should not let guard down, warns TPG's Morelli

Greg Gille
@unquotenews
13 June 2014

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Although operating in a much improved fundraising and deal-doing environment, European private equity practitioners still face significant challenges. Greg Gille reports on the industry’s sentiment from the 2014 EVCA Symposium in Vienna

Opening the 2014 EVCA Symposium yesterday, TPG partner emeritus and former EVCA chairman Vincenzo Morelli summed up the tailwind currently enjoyed by European private equity players: "Markets are incredibly stable, IPOs are back in full force, distributions are up and funds are significantly easier to raise compared to two years ago."

Panellists in Vienna were indeed unanimous in describing the momentum garnered in recent months when it comes to attracting international investors. "The growing appetite is mostly coming from US investors – it is not back to pre-2008 levels, but is close to that – mainly because they see performance in their European portfolios, while we also see new interest coming from Asia," said AlpInvest managing director Christophe Nicolas, highlighting that the still low-growth environment is not necessarily a deterrent. "This has been looked into time and time again, and there is just no direct correlation between [macroeconomic] growth and private equity returns. In addition, the European market is simply cheaper: S&P 500 companies are trading at an average 10x EBITDA, while in Europe we see multiples closer to 8x."

But despite the positivity shared by many attendants at the conference, several speakers urged their fellow investors not to be lured into a false sense of security. "Enjoy the improved environment but don't let your guard down," warned Morelli. "In retrospect, these times are always the toughest to make good investments in."

Confidence in Europe might be improving but PE should remain cautious

The sentiment was echoed by Astorg Partners president Xavier Moreno, whose main concern is to see the industry forgetting the lessons learned the hard way back in 2008-2009: "Today debt is coming back, growth is also returning, LPs are keen to pour more capital into the asset class... The same bubble will happen again: prices will rise and holding periods will shorten."

Regulatory pressure
Regulation is another issue that remains very much on the minds of European private equity players. Clessidra executive vice chairman Francesco Trapani did not mince hiswords when asked about his chief concern in the current environment: "What is the real risk for us? Stupid decisions by unprepared authorities."

Stepstone's Marleen Groen meanwhile highlighted the potential damage done to a segment of the industry that should arguably be at the forefront of Europe's recovery efforts: "I wonder what is going to happen to VCs when it comes to regulation. Will LPs extend the same requirements to smaller players? Compliance takes time and requires significant capital, which takes away from finding and managing investments."

Having recognised that regulatory pressure stems in part from the image projected by the industry, several panellists argued for a more transparent approach when it comes to taxation issues – a topic that gained significant exposure in recent months on the back of much publicised court cases in the Nordic region. "This is a very delicate matter but my position is simple: with regards to taxation, don't do things that you would be ashamed of if you ended up reading about it in the newspaper," said Moreno.

The Astorg president went on to explain how an open approach from French players to address tax loopholes several years ago fostered good will with the legislator, which in turn agreed to maintain a reasonable carried interest tax regime in recent months. "If we don't have sensible tax practices in place, it will inevitably come back to haunt us later on," he added.

And GPs shouldn't just think of the tax authorities when it comes to good practices in this area, warned Groen. "Every LP in the room could tell you this: we don't like surprises, and we don't want to be embarrassed," she said. "If you are doing something in order to generate an extra 1% in returns that you'd be embarrassed to tell your LPs, then don't do it."