The Euros Are Coming, The Euros Are Coming!

The last thing U.S. buyout firms need right now is new competition on their home turf, but it’s coming anyway. Industry headhunters tell me that they’ve been approached by European buyout firms – both large-market and mid-market – about retaining U.S. staffs to make direct investments. The FT reported last month on such a move from BC Partners, and I’ve now heard half a dozen names of similar standing.

Up until now, most European firms have exhibited fright-forced provincialism, with any geographic expansion steering clear of North America. There have been a handful of exceptions, but most of them have been designed either to help portfolio companies handle the North American market, or have been relatively inactive. Permira, for example, has a New York office for direct investing, but has averaged less than one U.S. buyout per year.

A legitimate expansion of European firms into North America, however, could be very problematic for the home team. The most obvious reason is that European firms have access to cheaper capital, thanks to growing currency discrepancy. Imagine a New York and London-based firm both raised the equivalent of $5 billion in 2006, and since have each invested the same amount. Today, the New York-based firm likely has less real capital than does the London firm, since the former’s fund was denominated in dollars, while the latter’s was denominated in pounds or euros. And this is really just piling on, since U.S. buyout firms also are facing a capital currency flip vis-à-vis strategic investors, whose cash reserves require little to no leverage.

The only possible out here is that European firms may not actually be able to recruit too much top U.S. talent. If you’re a senior managing director at Blackstone or KKR, do you leave to run the New York outpost for Terra Firma? Maybe it feels a bit more entrepreneurial, but it’s also a bit disconcerting to be so far away from your partnership’s power base. BC Partners, for example, is initially staffing its shop with a quartet of partners from London and Germany – a non-local strategy which proved disastrous for many U.S.-based VC and LBO firms when done in reverse back in the late 1990s. But if the offers are sweet enough…