LPs: Crisis overstated – mid-market offers best prospects

Kimberly Romaine
19 October 2011

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LPs hold out high hopes for Europeтs mid-market. However GPs must strategize carefully. Kimberly Romaine reports from Budapest.

"The myriad negative headlines are overstating the scope of the mess in Europe. There are still a lot of very healthy exporting countries in Northern Europe. Economic growth does not necessarily translate to equity returns," said Rune Jepsen of QIC Global Private Equity, indicating that low growth does not necessarily mean poor returns.

"People equate the headlines with lots of distressed opportunities in Europe. But we think this is overblown," said Helen Steers of Pantheon. "It is actually very hard to put a lot of money to work in European distressed situations; there are more opportunities in the US for this." The LPs were speaking at the EVCA Mid-Market Forum this morning in Budapest.

The experience of GPs backs this up, with some recording record returns in the last few years. Yesterday, it was announced that DN Capital sold Endeca to Oracle - its second sale to the blue-chip this year (Datanomic was the first) and the seventh exit in 18 months for DN. Advent Venture Partners has had three stellar homeruns in the last 12 months, at least one of which generated a double-digit multiple. Preferred equity captive Investec GAF has also celebrated a hat-trick of exits in the last 12 months, all generating 28-37% IRRs - extremely impressive given the fact the investor is taking on mezzanine-like positions. And in CEE, Mid Europa Partners has enjoyed three exits in the last year, two of which were very lucrative.

"The last three and a half years have been our best ever," says A. Michael Hoffman, chairman of Palamon Capital Partners. "We have seen really interesting opportunities in the recession." Palamon has recorded nine exits in the last 18 months, with Dress for Less in Germany arguably its most impressive.

This success may be down to its pan-European approach, as well as its place in the mid-market. "We struggle to find fund managers that provide us with the scope we seek," said Julie Gray of Canada Pension Plan Investment Board. "There are not a lot of pan-European mid-market players. We found ourselves overly exposed to large players in the last cycle. Plus, a lot of upper mid-market fund managers became much larger during their last fund raise, so it left us with a gap in the mid-market. We are now looking at true mid-market players - many of which ‘grew up' during the last crisis - and emerging markets funds. When GPs are good at something and stick to it, LPs will really seek them out."

But might too many LPs be looking in the same direction now? "There is a huge tsunami of capital being directed at some mid-market funds, because large investors have to put large sums of capital to work. But this may crowd out other LPs," points out Steers, warning that it may also have a negative impact on the GPs in question.

Jepsen thus offers the following advice to fundraising GPs: "Ensure any LPs coming into your fund really understand what they are getting into. A lot of investors entered private equity in the early 2000s and are no longer in the industry."