Comment: Eurozone fears deter non-European LPs

According to recent conversations with both LPs and GPs, unsurprisingly, those investors in the UK and northern Europe were more sanguine and largely accepting of the current issues affecting the eurozone, with the majority agreeing that while the ongoing uncertainty in Greece will cause severe consequences to the Greek Economic system, the impact on their own, respective investment portfolios is likely to be negligible given the moderate overall exposure to the region.

For most of the LPs we spoke to, the size of Greece relative to the rest of the region is a significant factor that has helped to mitigate concerns. One LP commented: "Our clients were worried about the impact of the issues in Greece nine months ago, including a potential exit from the EU, but they seem less concerned now, having looked at the situation in the context of European GDP."

Furthermore, potential contagion throughout Europe now poses far less concern to those LPs we spoke to than it did in 2012/13 – further evidence to suggest that confidence in the region is continuing to improve.

One London-based investor who represents high-net-worth individuals and family offices concurred that investors in Europe have been through some turbulent times but the impact upon business has been small.

While uncertainty around the eurozone is problematic, it is performance and the potential for good returns that continues to drive LPs to invest in Europe. One of those interviewed concurred: "Europe is Europe. There is always something going on but returns are higher than in other geographies" – a sentiment shared by a number of those we spoke to, both LPs and GPs.

Another commented that they do not believe the continued uncertainty will have much impact on their business as they invest globally and the companies themselves are not in crisis, concluding that the portfolio is diversified and they are slow-growth investments.

However, this pragmatic approach to the situation is certainly not shared by investors outside Europe.

Referendum reverence
When asked what impact the current situation in the eurozone was having on the firm's investment strategy, an investor in the Middle East cited not just the continued uncertainty in Greece and previous concerns about contagion, but also the forthcoming referendum in the UK. He confirmed that the current state of Europe was cause for genuine concern and, as a result, he and his firm would not be committing capital to European managers until there is "more clarity on the future of the region."

When asked what level of clarity they were looking for, the individual confirmed that the firm was waiting for the outcome of the UK referendum even though this is not currently expected to occur until 2017. He confirmed that, until then, they would continue to seek opportunities in domestic markets as well as the markets in Asia and the US rather than Europe.

A pension fund investor from North America shares this concern and confirmed that the organisation he represents is certainly not as aggressive in backing European GPs as it was, and that while it would not be backing out of Europe completely, the organisation would not be returning to previous levels of investment in the region until there is more clarity.

One fund-of-funds investor confirmed that these were not isolated cases and that they have noticed significant caution from investors outside Europe, making specific reference to those in "Asia, the Middle East and the US." The individual commented: "Investors in Europe know what is going on but the uncertainty, not just of the ongoing issues in Greece but of the UK potentially leaving the European Union, could lead investors to retreat from the European market altogether."

Creating comfort
Having received such feedback from sizable investors in the asset class who have, until relatively recently, committed significant levels of capital to European GPs, we were keen to understand whether the GPs, particularly those in Europe, were aware of such concerns and, if so, how they were responding to them?

One European GP confirmed that while raising capital for the firm's latest fund, the issues in Europe had posed considerable concerns to investors, particularly those in the US. As a result, the firm had to work hard to ensure the investors could get comfortable enough to commit.

Another GP confirmed that the firm had to provide substantial detail to their investors on the exposure of both the fund and the underlying portfolio companies to Greece. He continued: "We appreciate that investors are cautious about investing in Europe and will continue to provide the information necessary to allay any ongoing concerns."

However, a GP based in London talked about their frustrations that certain LPs can't separate their evident concerns about the situation in Greece from the rest of Europe. This sentiment was shared by other firms we spoke to and while most of the GPs involved in this project are not proactively communicating updates on the current situation, preferring instead to respond directly to questions from their respective LPs, a number of the LPs we spoke to have been surprised to discover that there are firms in the market who do not necessarily regard the concerns of investors around these issues as a long-term risk to their respective businesses. Furthermore, there are GPs in the market who have yet to address any potential concerns with their own LPs.

Whatever the eventual outcome of the current situation in Greece, the concerns of LPs, particularly those outside Europe, are not going to go away. With some talking about being prepared to wait for the outcome of the British referendum before committing further capital to the region, it is clear that cautious sentiment towards Europe will remain for some time to come.

However, a number of the European LPs and GPs we spoke to agreed that it is possible that those investors in the US, Asia and the Middle East who remain cautious about committing capital to Europe do so because they are geographically detached from the region, as evidenced by a similar pattern of behaviour in 2012 as the crisis emerged, in addition to the general debate and ongoing commentary that European investors are exposed to, which provides valuable context.

While those LPs we spoke to largely agree that GPs should not be commenting proactively on political developments, there is clear evidence to suggest that LPs, particularly those outside Europe, remain sceptical about the private equity market in Europe and, in order to improve perception and restore confidence, GPs must work closely with their LPs to address their respective concerns and, in some extreme cases, rebuild the investment case for the region.

As those European GPs who have successfully closed funds with commitments from LPs in the US, Asia and the Middle East will attest, this takes time, effort and patience but for those willing to do so and to apply the necessary resource, LPs can be convinced that Europe remains a key market for investment and continues to present quality opportunities that will result in strong returns.

Stevenson James is a specialist executive search and advisory firm focused on the alternative assets market.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Fundraising
• LPs
• Comment
• Top story