Private equity investors sitting on a record amount of cash are poised to leap into southern Europe after shunning the region for years, hoping to benefit from an economic recovery.
U.S. funds especially say they are heading to Spain and Italy as reforms take hold, fears of a crisis relapse fade, and equity prices remain cheap compared to the rest of Europe.
“Spain is now the next private equity paradise”, the co-founder of CVC Capital Partners, Steve Koltes, told private equity managers on Tuesday at a conference in Berlin.
“There are airplanes full of people going down there to pick out the treasures,” he said, adding that such a move is not without risks as many problems remain. CVC, unlike many of its peers, has done three investments there recently.
As of late December 2013, the private equity industry was sitting on a record $1.074 trillion in dry powder or capital committed to private equity funds but still yet to be invested, according to research group Preqin.
While U.S.-based funds avoided southern Europe in the debt crisis, some of them are vowing to come back in force now.
“We are looking at Spain a lot, the country is deleveraging, the situation is improving,” Apollo’s founding partner Leon Black said, adding that as banks clean up their balance sheets many equity, real estate and credit assets are waiting to be mopped up by him and other private equity managers.
Spanish banks are eager sellers of non-performing corporate loans and mortgages as they prepare for a rigorous health check by Europe’s financial regulators.
Investors are in the meanwhile hoping to benefit from an economic rebound.
Spain’s economy, which has been in and out of recession since a property bubble burst six years ago, grew for a second straight quarter in the final three months of 2013, as domestic demand and exports picked up.
Similarly, Italy dragged itself back to growth in the fourth quarter for the first time since mid-2011.
Fears that the two countries may – like Greece and Portugal – require an international bailout have diminished and investors have lauded some structural reforms that have been launched to recoup competitiveness.
“Labour market reforms in Spain have really made a difference, they finally allow some real restructuring,” the head of a large European private equity group said.
Private equity firms buy companies, try to boost their profitability by cutting costs, merging them with rivals or shaking up operations, and then sell them on in the hope of making a return.
While many investors have seen political stability as an issue when thinking about investments in Italy, some private equity managers say that companies with good products are more or less immune to the political environment.
“I think Italy is a great place to invest. I am positive that we will see a pick up in private equity investments in Italy in 2014,” said Carlyle’s co-head of the Europe Buyout, Gregor Boehm.
The abundance of medium-sized companies, especially in the engineering, fashion and food industries and which are in need of capital for international expansion as attractive targets, Boehm said.
“We have made some great returns for our investors there – like recently when selling Moncler – and will definitely stay active in Italy,” he said, referring to the December listing of the Italian luxury ski-wear maker Moncler.
But any investor buying into southern Europe must keep in mind the ill fate of private equity house Oaktree, whose Spanish doughnut maker Panrico filed for insolvency or that of Carlyle which sold tour operator Globalia for a fraction of its original investment.
Careful of doing their homework before launching into insecure territory, not many buyout groups have struck deals of late.
Investment volumes of buyout groups in southern Europe have continued to drop since the start of the debt crisis, contrasting with a strong rebound in northern Europe, especially over the past two years.
In 2013, Spain saw equity investments from buyout groups decline to $867 million from $1.2 billion a year earlier, while total investments reached only $208 million in Italy, one third of what it was in 2012, according to Thomson Reuters data.