Distressed investors turn to Europe

Investors in distressed M&A are shifting their attentions towards Europe to take advantage of historically low valuations, according to Schulte Roth & Zabel (SRZ)-commissioned study released on Thursday.

The study, which was produced by Debtwire and Mergermarket, also found that 60 percent of the private equity professionals, investment bankers and hedge fund managers surveyed believed pricing of distressed US assets would increase in the next 12 months. A majority of respondents believed interest rates and availability of bank debt would have the greatest impact on the pricing of those assets.

“A steadily improving economy, coupled with a favorable financial environment, has resulted in a more limited range of distressed investment opportunities,” said SRZ partner Adam Harris in the report. “Given the amount of money dedicated to this asset class, we expect prices to rise as a function of supply and demand.”

Respondents’ opinions on assets outside the US were mixed. Only 35 percent expected pricing to increase, while 37 percent expected it to decrease. As was the case in the US, those surveyed considered availability of bank debt and interest rates to have the greatest effect on pricing.

Despite that mixed response, 79 percent of the investment professionals interviewed indicated Europe would play a very important or moderately important role in their investment strategies moving forward.

“A majority of respondents claim that Europe will form part of their future distressed M&A investment strategies. An overwhelming number of them still cite troubles in the eurozone as a key consideration in their decision-making process,” according to the study, although “it appears that investors are very carefully treading European distressed waters”.

The latter point is likely due to the fact that some already believe opportunities in Europe have diminished given the amount of risk. Less than a third of respondents indicated that “asset stripping” regulations contained in the European Union’s Alternative Investment Fund Managers Directive would have any effect on their investment strategies.

“The European market is at a standstill and the market does not offer a lot of distressed opportunities as European banks are not selling a lot of distressed assets. We would rather focus on other regions and make good use of those opportunities,” said one US-based investment banker cited in the report.

The study’s findings are based on Mergermarket interviews with investment bankers, private equity practitioners and hedge fund managers based in the US and Europe.