Carlyle sees more scope for deals in Europe than US

LONDON Wed Aug 7, 2013 1:29pm EDT

LONDON Aug 7 (Reuters) - Europe is more attractive than the United States for private equity investments because price tags are lower and the region's weak economy has scared off many other players, buyout firm Carlyle said on Wednesday.

Carlyle, which has seven offices and around 130 investment staff across Europe, has invested in three companies in the region in as many months, including British taxi firm Addison Lee and Italian electrical motors and generators company Marelli Motori.

"Our pipeline is stronger in Europe than it is in the United States. A lot of it is fear on the part of some (private equity)investors leading to what I call lack of competition," Carlyle co-founder and co-chief executive Bill Conway told Reuters.

"People sometimes confuse the investment environment with the economic environment; the economic environment in Europe is tough."

The private equity sector has had a difficult time since the financial crisis because cash from banks that helped finance billion dollar deals before the crisis virtually dried up. But activity has begun to pick up.

Private equity-backed deals globally totalled $163 billion in the first half of the year, a 43 percent increase over the same period last year, according to Thomson Reuters data.

The United States accounted for 57 percent of activity, with $96 billion of deals done, more than double Europe's $46 billion.

Private equity firms raise money from investors to buy companies and try to boost their profitability before selling them with the aim of making a return.

Conway did not highlight opportunities in any one European country or sector, but said buying a non-distressed asset from a distressed seller would be particularly attractive.

"I am comfortable with the prices we are paying. The prices in Europe are lower than they are in let's say America. They should be lower because you are taking more risk ... and a lower price is one way of getting compensated," he said.

"So far I'm not seeing the multiples creep up in Europe. It is still an attractive place to invest in terms of multiples."

Private equity firms are paying less now for companies in Europe than before the financial crisis, with deals done at 8.1 times earnings in 2012, compared with 9.8 times in 2007.

A pick up in availability of financing in Europe, where over the last two years Washington, D.C.-based Carlyle has invested 1.2 billion euros ($1.6 billion) across 17 deals in 14 different countries, is also helping deal flow.

"It's hard to underrate the importance of a good banking system to the whole economy of a place and I think it's slowly healing," said Conway, who is also chief investment officer.

BETTER BALANCED

Carlyle ranks as the third largest buyout fund in terms of total funds raised in the last 10 years, according to data research firm Preqin, behind Blackstone Group and TPG.

It has expanded in other alternative asset classes including corporate credit, real estate and even commodities. It now has more than $180 billion of assets under management

Earlier on Wednesday Carlyle, which Conway founded in 1987 with David Rubenstein and Daniel D'Aniello, reported a return to profit in the second quarter.

CoCEO Rubenstein said on a call with analysts Carlyle expected to hold a first close on its next European fund, Carlyle Europe Partners IV, soon. It is seeking around 3 billion euros for the fund, a source familiar with the matter said, less than the 5.3 billion it raised for its third fund in 2006.

It still has around 770 million euros of that third fund left to invest by December, having last year asked investors for an extra 12 months to spend it. The source said the buyout group was not expected to need another extension.

Carlyle declined to comment on the European fundraising.

Its U.S. fund VI recently closed after raising $10.3 billion in commitments, Carlyle said on Wednesday.

Carlyle's third European fund was producing a multiple of 1.4 times invested capital and a net internal rate of return - a common measure of private equity returns - of 7 percent as of June 30, the firms' earnings showed.

That compared to a multiple of 1.9 times invested capital and a net 18 percent internal rate of return across its total private equity portfolio.

In the United States, Conway said the level of "exits" or sales of the firm's investments was good, but new deals to invest in were harder to find.

"I talk about the three jobs my investment professionals have to do: they have to invest the money, then they have to grow its value then they have to exit," Conway said.

"I'd say it's better balanced in Europe than it is in the rest of the world. There are interesting deals to do in Europe and it's harder to find those in other parts of the world."

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