Brexit, shmexit

Five years ago, raising capital for European-focused funds wasn’t exactly a piece of cake.

Macro concerns at the time – including the eurozone’s sovereign debt crisis, a potential Grexit or dissolution of the Euro – coupled with many large US limited partners’ moves to reduce their GP relationships, made things particularly tough going for funds in market.

“Many US institutional investors avoided the large European funds during the last round of fundraising,” said Josh Lerner, Harvard Business School professor of investment banking and a longtime private equity scholar. Chief factors for the reticence, in his view, included relative return disparities from vintages raised around 2005 or so – many of the era’s US funds substantially outperformed European counterparts – and the aforementioned macroeconomic turmoil.

You might expect the uncertainty and concern around Brexit’s impact to be creating a similar climate today, but industry insiders and observers tell us that’s not necessarily the case. 

“Today, the picture is somewhat different,” Lerner said. “Yes, there are still macroeconomic risks in Europe, but where in the world does not have such risks? So for many investors, the case for underweighting European private equity is much less compelling, and interest in recent funds – as seen most recently in the case of Cinven – is much more robust.” 

Cinven's sixth fund closed on €7 billion at the end of June, after just four months in the market – and was said to be twice oversubscribed. Among its many US pension fund backers was the Tennessee Consolidated Retirement System, which committed $200 million late last year. 

TCRS also committed €200 million to BC European Capital X the day after the Brexit vote. It marked a new relationship for TCRS, whose $1.3 billion private equity portfolio had minimal European exposure at just 9 percent as of the end of March.

The US public pension certainly took Brexit into account when considering the commitment, according to a spokeswoman, but moved forward anyway noting there was a lack of pressure for BC Partners to deploy capital amid uncertainty given the fund’s five- to six-year investment horizon, as well as the potential to deploy capital in a riskier environment offering lower entry prices. TCRS said it was confident the time was right to increase its allocation to Europe. 

The feeling seems to be mutual for a number of fellow investors. The New Mexico State Investment Council and Oregon Investment Council, for example, have signaled a desire to remedy their relative under-exposure to European private equity.

The OIC, which invests on behalf of all the state’s pensions including the Oregon Public Employees Retirement Fund, said in February this year its European private equity exposure had decreased significantly over time. “This development mostly reflects a weaker deal and fundraising environment in Europe versus the US, but 2016 is expected to present opportunities to rebuild the programme’s European exposure,” it said in a programme update. Since then, it committed $250 million to the Sixth Cinven Fund, up from the $75 million it committed to Cinven’s previous vehicle; and $250 million to Permira VI, which launched in February with a €6.5 billion target and €7 billion hard-cap.

Another large European fund enjoying fundraising success Stateside at the moment is Apax Partners, whose Fund IX has surpassed its initial $7.5 billion target and is closing in on a $9 billion hard-cap.

Whether or not fundraising totals ultimately surpass last year’s, when 100 Europe-focused funds raised $83 billion, remains to be seen; 59 funds had raised just over $30 billion the first half of this year, according to PEI data, which puts things on track to beat the $48 billion raised by 119 funds in 2011. 

These recent fundraising triumphs – with strong signals of support from veteran institutional investors – suggest European GPs will find fundraising Stateside amid macro uncertainties a much more palatable prospect this time around.

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