Restructuring Europe

Scotland’s landmark vote on independence from the UK this week has unsurprisingly been a hot topic of conversation in London. However, in meeting with contacts around Mayfair and the City this week, another type of restructuring was clearly on people’s minds: the GP-led type. And, a bit like Scotland it seems, advisors say there’s been a lot of talk but ultimately not so much action.

Fund restructurings are happening in Europe but haven’t quite reached US levels. Credit Suisse, for example, has advised on around 17 GP-led restructurings this year, but only around one-third were in Europe. Market insiders cite a number of reasons as to why – the first being the size and makeup of the European primary market relative to that of the US.

The European market for private equity, in particular, is made up of a handful of mid- to large-sized pan-European GPs and a large number of country-specific, lower mid-market, SME-focused firms that typically raise smaller funds. One advisory source noted that few of the large managers’ funds need to be restructured, but “plenty” of the mid-market vehicles do. The ‘problem’, according to multiple sources, is because these funds are relatively small there typically isn’t enough remaining net asset value to warrant that work that goes into a restructuring deal for various parties involved.

Differing national regulatory regimes affecting various investors were also flagged as to why restructurings can be more complex and difficult to get away in Europe than in the States.

And yet another explanation offered was cultural. European GPs have been prone to viewing restructurings as an admission of error and therefore less inclined to initiate them than US counterparts, several advisors suggested.

For the handful of European GPs who have moved forward with these processes, secondaries capital has been crucial to their success. HarbourVest’s secondaries team kicked off the year by investing $430 million to seal the restructuring of Motion Equity’s €1.25 billion Fund II, for example. In July, Lexington and Newbury backed the restructuring of GMT Communication Partners’ €365 million Fund II. And insiders are now talking about who’s lining up to help Hutton Collins, which is “exploring liquidity options” for its €600 million Fund III.

Globally, more such deals are expected. Pantheon told us earlier this year it had identified some 200 private equity funds that were 2003-vintage or older, with at least $100 million of NAV remaining. It reckons that translates into more than $70 billion-worth of restructuring opportunities, a figure that could grow due to the large number of funds raised in 2006, 2007 and 2008 and the length of time GPs are taking to exit.

It remains to be seen whether or not these opportunities will be pursued aggressively in Europe, or if the aforementioned factors will temper activity.