European private equity is undergoing consolidation and globalisation

Nicolas Renauld, Head of Private Equity Investment at CA Indosuez, believes the European private equity market is now nearly as mature as its North American counterpart. Let’s take a look at this rapidly changing sector.

How would you characterise today’s European private equity market?

Nicolas Renauld: In Europe, or at least in Western Europe, private equity has reached a level of maturity more or less equivalent with that of North America. The market enjoys very high liquidity and is sufficiently deep. Nevertheless, it is still quite fragmented and multi-local, requiring in-depth knowledge of local specificities and the resources necessary to address opportunities in each region.

Is Europe’s newly-found international attractiveness rekindling the appetite of foreign LPs or GPs?

N.R.: It is indeed providing a boost to the European private equity market. But the micro-economic reality often goes beyond market rumours and changing perceptions coming from across the Atlantic. Europe’s macro-economic growth alone does not explain the attractiveness of European companies, in particular their potential for transformation through international development.

Do you think Europe has a big enough reservoir of companies for private equity firms to invest in?

N.R.: Definitely. There is a significant reservoir of mid-sized private companies that are future targets for buyout firms, providing opportunities for cross-border and intra-European transformation. The challenge is to find enough opportunities among high-growth companies with a strong technology component. This segment is still relatively deeper in United States.

In France, for example, there is a lack of late-stage capital for technology start-ups once they reach a certain critical size. Although both early-stage and buyout capital are available, US firms still have a greater funding capacity at this intermediate level. Buyout firms have not fully transformed technologically and many venture capital investors are still locked in their early-stage models. In our view, the convergence of these two worlds is more advanced in the United States.

In France, are new players making inroads to the detriment of traditional domestic funds?

N.R.: New market participants with a lower cost of capital and a longer investment horizon are moving into the market, at a time when liquidity is abundant and interest rates are low. This is broadening the competitive environment. It remains to be seen, however, if this advantage will last should interest rates rise in the medium term. In any event, their emergence is forcing domestic funds to react and take them into account.

That said, it’s not necessarily bad news for “traditional” players, for whom this new source of capital might provide additional liquidity or a source of co-investment. In addition, well-established teams have an advantage in organisation and asset transformation.

As an investor, what is your investment strategy vis-à-vis GPs?

N.R.: In contrast to some of our peers, our investment strategy is not based on reducing the number of GPs with whom we collaborate. Rather, we want to maintain a high level of granularity even if such diversification creates real resource and infrastructure challenges. Selectivity remains fundamental and is a key success factor in optimising our returns. The market is sufficiently deep – in Europe anyway, less so in Asia – to work with a broad, but specialised base of GPs. Expanding the reach of our investments is one of the best ways to optimise the cash we employ and by extension our liquidity. Lastly, we believe that working with a GP is not only a question of commitment amount, but also of relationship.

There is nevertheless a fundamental question with regard to GPs: do they have the critical size necessary to meet their operating needs, ensure the long-term stability of their human capital, deal with regulatory issues and manage the relationship with their investors? Below €500 million in assets under management, the model shows signs of stress. GPs must first seek to achieve critical size in their existing segment. Fund size must be adjusted, while strengthening and broadening investment capacity by improving sector, digital and operational expertise. All this with a cross-border and pan-European approach.

What changes do you see happening in private equity in the next few years?

N.R.: We are confident that private equity will mature even further and is here to stay as a mainstream asset class for investors. The pace of consolidation and globalisation among market participants is set to accelerate.

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