Private equity can unlock hidden investment opportunities, says Capital Dynamics

Concern about investing in Europe has obscured numerous investment opportunities, says Mark Drugan, managing director of European investment management at Capital Dynamics, an international asset manager based in Switzerland focusing on private assets, including private equity, clean energy, infrastructure and real estate.

“There is ample opportunity for those who are willing to take a closer look at Europe’s private equity markets,” says Drugan. The changes to the investment markets arising from the debt crisis engulfing the Eurozone “provide opportunity for the well-capitalized and astute private equity investor. Precisely because of the changes taking place, we believe that mid-market private equity provides a compelling investment case.”

Two significant groups of business owners are increasingly motivated to consider selling their businesses in the near term, says Katharina Lichtner, managing director and head of research at Capital Dynamics. The first is the impending retirement of the baby-boomer generation of entrepreneurs, who will be looking to either sell their businesses or pass them on to the next generation. An EU report last year estimated about six million business owners will retire in the next ten years.

Put another way, says Lichtner, “about 600,000 firms per year will face succession issues. While not all of these often family-owned firms are suitable for private equity ownership, many are and the current owners are increasingly seeing the benefits of a sale to private equity firms, especially in situations where the next generation has pursued a different career path.”

The other group potentially looking to sell is the large corporates adapting to the increased regulatory load. She says: “these groups are more likely to focus on their core business and spin off non-core units over the coming years. These types of assets are ideal investment candidates for private equity value creation as they have frequently been under-managed or ignored by their previous owners.”

Both groups may be incentivised to sell by increasingly favourable terms from lenders looking to boost their book. Lenders are under pressure from Solvency II and Basel III to clean up their balance sheets in time to meet new capital requirements. Credit Suisse data suggests an estimated €119bn in Western European leveraged loans is due to mature during 2012-15, peaking at €51bn in 2015. Lichtner says: “This development could potentially increase the number of businesses looking for new owners, or new financing, in the near term.”


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