U.S. buyout money heads abroad amid financing drought

By Megan Davies

NEW YORK (Reuters) - As the credit crunch continues to dog their financing markets, U.S. buyout firms are investing an increasing proportion of their capital overseas.

That trend is only going to continue thanks to an increasingly global economy and growth rates overseas looking higher relative to the United States.

So far this year, more than half the takeovers announced by U.S. private equity firms involved foreign targets, up from 35 percent in all of 2007, according to Thomson Reuters data.

"There are more opportunities for attractive deals outside the U.S. than there were before," said Michael Holland, chairman of private investment firm Holland & Co and a former partner at buyout firm Blackstone Group (BX.N). "It's spawned in part by the emerging market successes."

U.S.-funded deals in the past year include J.C. Flowers & Co boosting its stake in Japan's Shinsei Bank Ltd (8303.T), Washington D.C.-based Carlyle Group CYL.UL investing in Australian equipment hire firm Coates Hire Ltd; and Hellman & Friedman buying a stake in France's Gaztransport & Technigaz.

This is not the first time U.S. private equity investment has been weighted in favor of foreign deals. Five years ago, buyout firms' investment overseas was 52 percent of the total.

But from 2005 through 2007, easy financing fueled big U.S. deals such as the $31.8 billion takeover of energy giant TXU, skewing the deal flow to the United States.

Stephen Moseley, president of private equity advisory business StepStone Group LLC, sees increased U.S. investment abroad, partly because growth rates overseas are higher, and as a weak dollar encourages diversifying outside the home base.

About half this year's investments from U.S. firms were in foreign countries, but Whitney Bower, partner at London-based private equity firm 3i Group Plc's (III.L) US Growth Capital unit in New York, said he wouldn't be surprised to see that move to a 60/40 or 65/35 split in favor of investments abroad.

He said until the late 1990s, there was a lack of private equity capital outside the United States, excluding the UK which he says is probably the next-most-mature buyout market.

But he noted a "substantial increase" in the past decade in activity in Germany, Spain, Italy and France, and more importantly in Asia -- in India, China, Australia and Japan.

In the first half of 2008, the top foreign countries for U.S.-funded buyouts by value were Germany, the UK, Canada and Italy, according to Thomson Reuters figures. Russia saw significantly more private equity inflow than in recent years, at fifth highest, while Japan was sixth and India seventh.

RISKY BETS?

For some investors in private equity funds, whether or not the capital goes into the United States or outside is less important than the return.

One major institutional investor said it was crucial for the private equity manager of any fund to have established solid relationships in the particular market to be successful.