London: still Europe's gateway for private equity firms

Three years on from the fall of Lehman Brothers, Elliot Wilson finds plenty of green shoots in the industry

Is private equity back? That’s what you might infer from the events of early August.

From nowhere, a bidding war for a US wound care company, Kinetic Concepts, appeared to break out. It pitted leading London-based private equity firm Apax Partners against a bid from Kinetic rival ConvaTec – a firm in turn owned by private equity giants: Avista Capital Partners, based in New York, and Stockholm-headquartered Nordic Capital.

For sure, just as one swallow does not make a summer, a rare bidding war pitching several industry leaders (Apax, with £12bn in assets, is by far the biggest of the three) into direct conflict does not mean that private equity’s heady pre-financial crisis days have returned for good.

But two aspects of this potential bidding war are noteworthy.

First, it suggests that, even as the US and Europe drown in debt, the leveraged buyout, based on borrowing at high rates of return, is not dead.

Second – and more pertinently – it showcases the quiet strength of London’s private equity industry. Rumours of the buyout industry’s demise, all too easy to believe as the economy shrank and then stagnated between 2008-2010, have clearly been greatly exaggerated.

Apax Partners’ £3.9bn Kinetic bid, funded with £3bn in borrowing from Bank of America, Credit Suisse and Morgan Stanley, is just the tip of the iceberg.

When it comes to private equity (as well as so many other facets of the financial world) London remains the gateway to Europe – the centre of the buyout world across the continent

In July, BC Partners bought Swedish cable company for £1.6bn, outbidding British rival Cinven.

In July, BC Partners, headquartered in London and with branches and partners across Europe and the US, said it had secured £4.7bn in commitments for its new buyout found, raised in stages since September 2010.

Apax Partners is also on the fundraising trail, while Phoenix Equity Partners is looking to deploy some of the £450m raised from 31 institutional investors in 2010. To the surprise of many, that ten-year fund was larger than a £375m fund raised in 2006, at the height of the market. 

“The private equity industry in London is alive and kicking,” says Mick McDonagh, partner and head of private equity Europe at KPMG. “The scaremongers three years ago described it as a dead asset class. Things were clearly overdone back then, and today the sector in general terms is in reasonable health, with a number of funds raised and a number of funds yet to be deployed.”

When it comes to private equity (as well as so many other facets of the financial world) London remains the gateway to Europe – the centre of the buyout world across the continent.

A number of reasons explain why this should be. McDonagh points to the “huge pool” of talented people that London has retained throughout the worst of the financial crisis.

“People want to work in London because of the vibrancy of the city,” he adds. “And the city remains a high-quality financial centre, and a great place to do business.”

The country, and the City, also remain open to business, shunning any prospect of protectionism. That openness and accessibility was highlighted in August 2010 when troubled banking giant RBS sold its credit card-processing division, WorldPay, to two Boston-based buyout giants, Bain Capital and Advent International, for just over £2bn.

The presence of most of the world’s leading US and European investment houses, from Goldman Sachs to Credit Suisse, also makes London the obvious place to source debt capital to finance a major buyout

Stuart Alexander, managing director at London-based Gemini Investment Management, points to another factor in the city’s favour. Few people start their careers in private equity: rather, they get drawn to its more laidback lifestyle, which offers a more satisfying, client-facing career where hours are shorter and deals, while larger (and potentially more profitable) take longer to complete.

Private equity partners and associates are drawn from across the board, but buyout firms usually hire professionals with a solid contacts book (leading to expertise at deal origination) as well as a sound technical ability to structure a debt-heavy deal (likewise with deal execution) – built up, in many cases, by spending time working at a bank. And where better to build that capability than in London, still the financial and banking centre of the world.

“Your labour capital in London is always within two square miles,” notes Alexander. “All the big banks and big investment banks are here, both of which provide huge numbers of employees to private equity firms.”

The presence of most of the world’s leading US and European investment houses, from Goldman Sachs to Credit Suisse, also makes London the obvious place to source debt capital to finance a major buyout.

In many ways London is still like a gigantic financial supermarket. If you can’t finance a major leveraged buyout here, it’s most probably not doable. 

This in turn is attracting talent into the mix. Private equity is hiring again, say leading executive search professionals, after several very slow years. And even old hands are coming back in search of action as the market heats up. It’s notable that BC Partners’ co-chairman Francesco Loredan, the firm’s most senior European partner, recently relocated to London from Geneva after reversing an earlier decision to quit the business altogether.

In time, other parts of the world outside the US may come to rival London, whose buyout industry has survived intact the worst of the financial crisis. Asia is rising – though the industry there is probably still 30 years behind. Germany should gain in importance too, as leading family-owned corporates – the famous Mittelstand – turn to new sources of funding as local banks find their ability to lend constrained.

But for the time being London will remain the private equity capital of Europe, and one of the two global hubs of the buyout world, along with a slowly fading US. The UK capital’s private equity future – for years and, perhaps, for decades to come – remains very much intact.

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