While Europe’s public markets will likely remain stagnant for the next decade, the private equity industry will have more than its share of opportunity on the buy side, Terra Firma Capital Partners chief Guy Hands said at Harvard Business School’s recent Venture Capital and Private Equity Conference.
Hands attributed new European opportunities to several factors, including a shift toward a buyers’ market as the size of the industry’s so-called capital overhang declines and banks continue to unload non-core assets. The capital overhang was identified in 2010 as the amount of capital firms had left in their funds after waiting out the frozen credit environment after the collapse of Lehman Brothers. Many GPs declined to transact for months, waiting until the economy came back from the shock of the financial crisis.
If just making money is what motivates you then focus instead on the banking industry or the hedge fund industry and leave private equity and the creation of long-term value to those of us who love making businesses better.
“A year ago there was an overhang of over €300 billion of uninvested private equity capital. More than half of this overhang will be gone by the middle of this year and by the end of 2013 the overhang will be virtually gone. Funds will only be able to invest what they can then raise, rather than relying on the overhang,” Hands said. “Within a few years the dynamics will be firmly in favour of the buyer and Europe will be an extremely attractive place to invest in private equity.”
Furthermore, around €3 trillion in deals done during private equity’s boom years – prior to the recession – will be up for refinancing between 2013 and 2015. Given the tightening of the financing markets, those refinancings will require a substantial amount of equity, which presents further opportunities for buyers, he said.
“This means that there will be, over time, more assets available for investors looking for transformation opportunities,” Hands said.
In addition to providing his views on Europe, Hands emphasised the importance of private equity’s return to its strategic roots, where companies are left stronger, larger and more stable than when they were acquired.
In offering advice to graduate students attending the conference, Hands cautioned: “if you are looking for a career just focusing on making money please don’t come in to the private equity industry. If just making money is what motivates you then focus instead on the banking industry or the hedge fund industry and leave private equity and the creation of long-term value to those of us who love making businesses better.”