Joseph Schull

European Private Equity Specialising to Compete with Rich Asian Rivals


February 23, 2015

There’s been a lot of talk recently about the increased competition in the private equity sector. European firms seem to be faced with the toughest battle, as they have to deal with the increased number of rich Asian and Middle Eastern firms on one side and the large, established American firms on the other side. Many European firms consider specialisation as the best bet to survive the surging competition.


Narrow Focus
So far, the largest private equity firms like KKR and Blackstone Group have continued to focus on a variety of sectors. For the established, large firms the breadth of service is essential for continued success. But many mid-market private equity firms are finding it hard to divide attention against multiple sectors and thus are increasingly in favour of narrowing their focus.


In a Reuters article on the matter, Joseph Schull, a managing director and head of European operations at Warburg Pincus, said, “If you are a mid-market generalist investor in Europe, you will want to develop a specialism quickly, or you may struggle to differentiate”. This has led many firms to look into sectors providing quicker return and helped create a flux of thematic funds. One expert even told CNBC reporters: “There is no market for generalists in Europe. It’s a natural selection”.


Fee Control
But as well as narrowing their focus, the firms also need to compete in a more meticulous investment atmosphere. The private equity sector has seen an influx of firms, as large Asian and Middle Eastern companies are luring in European investors, and this has played a role in changing the fee structure.  On top of this, the financial crisis of 2008 has made investors more wary of paying large sums for fund management without the guarantee of a hefty return. According to the article, private equity firms and general partners have had to deal with declining fees. The global average used to stand at 2.5% of the committed capital, but has declined to 1.5% on average.


The analysts point out that changing fee structure may be helpful for the industry in the end. There is now much more transparency about the way the private equity firms make their money.


Europe Continues to Be Relevant
But the European private equity industry as a whole continues to stay relevant, even as the emerging markets are attracting ever more interest from global firms. In the latest European Private Equity Outlook research by Roland Berger’s strategy consultants, market volatility is still seen as a threat to the industry, but growth is still expected in 2015. In Europe, the changes in energy industry have failed to create a transformative change in how private equity firms invest, with healthcare and pharmaceutical industries controlling nearly 50% of the markets. Many mid-market firms are focusing on the media and technology sector, but once again, competition from Asian firms in the sector has stiffened.


It remains to be seen how well European private equity firms can manage the heightened competition in the coming year. It is becoming more evident that firms need to look into their fee structures and consider narrowing their focus, as fundraising is becoming more competitive and centralised.


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