European assets remain attractive despite euro crisis

The European market is a harsh place at the moment. With worries about the Greek economy being transformed into worries about the specific costs of a Greek exit from the monetary union, the euro has seen a significant loss in value. While this has reduced the price of European assets, it also makes for an incredibly volatile investment environment.

Despite this, US investors appear to have refocused their attention on the crisis-ridden continent. While economic conditions have worsened, causing headline valuations to decline, corporate profit margins have continuously risen over the past 30 years, according to research by Goldman Sachs Asset Management. This could be an indicator that even though volatility skyrocketed, the general quality of the European assets on the market did not deteriorate.

"In a sense there is an appetite, but it is for the contrarians who can take a 5-10-year view," says Graeme Gunn of SL Capital in an interview with unquote".

Many large North American LPs, such as CalPERS, are experienced private equity investors and follow a long-term strategy. For these investors, taking a position that is currently considered contrarian should be attractive and probably still less risky than diverting to emerging markets.

US firm Vista Equity Partners just closed its fourth fund on $3.5bn and recently invested more than half of it in the £1.27bn buyout of UK capital markets and banking services company Misys, which was taken private in March.

Christopher Flowers, chief executive of US private equity firm JC Flowers, recently made headlines with his relocation to the UK. His firm owns ex-KBC insurance unit Fidea in Belgium and has a particular focus on distressed financial institutions. Considering the recent surge of spinouts from financial institutions, this sector is likely to see increased activity in the near future.

While the eurozone crisis has had a severe impact on Western European economies, it has also driven prices down, which creates opportunities for investors. Europe's private equity market is likely to survive on the coattails of low valuations and a lack of liquidity.

Moreover, American LPs have historical ties to the European markets – ties which are now more important than ever. New regulation, such as Solvency II and Basel III, is restricting commitments of insurers and banks. With local players also exposed to the eurozone crisis, foreign capital is becoming vital for European firms.

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• Topics
• Performance
• Vista Equity Partners
• Interview
• Goldman Sachs Asset Management
• JC Flowers