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 Private equity fund managers, gathering in Berlin on Monday for
their largest annual conference, will weigh the potential threat of
deep pocketed buyers from developing economies in Asia and the
Middle East.
This group, which includes China's property and entertainment giant
Dalian Wanda Group Co and sovereign wealth funds from Singapore,
Qatar, Kuwait and Abu Dhabi, has become a recurrent feature of
European auctions where it can beat local investors on price.
"This is a new development," said Hugh Langmuir, a managing partner
at European private equity firm Cinven. "So far the incidents have
been limited but it's on a watching brief."
London-based Cinven has turned the trend to its advantage by using
its Hong Kong office to grow assets across Asia and negotiate rich
exits such as the 900 million pound ($1.4 billion) sale of British
restaurant chain Pizza Express to Chinese private equity firm Hony
Capital last year.
For those firms seeking an exit from a business, like in Cinven's
example, widening the pool of possible buyers has made the process
more competitive and secured a higher price.
"Having a global team and expertise in helping companies expand into
new markets are strong differentiators," said Luca Bassi, a managing
director at Boston-based buyout fund Bain Capital.
NO ROOM FOR GENERALISTS
While some of the major U.S. funds such as Blackstone and KKR have
diversified their investments across several asset classes,
providing anything from alternative asset management, real estate
and hedge fund solutions, European firms have been reluctant to
tackle new business areas.
Many of them believe that specialization is the way forward.
In Europe where smaller to middle market deals worth between 500
million and 2 billion euros have become the mainstay of the
industry, specialization is even more compelling as blockbuster
deals have been harder to execute.
"If you are a mid-market generalist investor in Europe, you will
want to develop a specialism quickly, or you may struggle to
differentiate," said Joseph Schull, a managing director and head of
European operations at private equity firm Warburg Pincus.
Some European mid-market firms have started raising "thematic funds"
focusing on areas where they see high returns such as consumer,
media and technology.
In Britain, consumer-focused private equity firm Lion Capital, which
backs Britain's high street retailer All Saints, is preparing to
raise its largest buyout fund to date worth about $2.5 billion, a
source familiar with the matter said.
"There is no market for generalists in Europe," the source said.
"It's a natural selection."
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The need for specialization comes after U.S. behemoths such as
Leonard Green and Providence have spent more than two decades
targeting the retail and media industries, respectively.
PRESSURE ON FEES
European buyout funds seeking new money to play with are also having
to deal with pickier investors, known as limited partners, who need
a strong investment story, wary of paying several hundred millions
of dollars in annual management fees.
Since the start of the financial crisis, private equity firms and
their managers, also known as general partners, have seen the
average amount of these fees dropping globally from 2.5 percent to
around 1.5 percent of the committed capital.
Mid-sized funds have readjusted their fee structure to around 1.75
or 2 percent of the committed capital.
Fabio Sattin, chairman and co-founder of Milan-based Private Equity
Partners, said there were clear differences between limited partners
and general partners on how to allocate fees.
"Investors want fees to be more performance-related and are
reluctant to pay fees when the pace of investments slows down,
especially during a downturn."
While management fees remain a key source of income from private
equity firms who use them to pay salaries, business trips and rent,
other kind of fees, such as transaction fees charged at deal
completion, have become less popular.
"The secular shift in the balance of power between limited partners
and general partners has begun to make the industry more transparent
about how firms make money, which is a good thing in itself," said
Warburg Pincus' Schull.
The clampdown on fees has prompted a series of direct investments
whereby limited partners have run solo or teamed up with buyout
funds to back the purchase of pricey assets, paying fewer, if no,
fees to general partners.
(Additional reporting by Freya Berry; Editing by Keith Weir)
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