The euro zone crisis, now on longstanding high alert, has had such continued levels of pessimism that there is little appetite to invest. However, Europe still offers very attractive, select corporate investment opportunities.
But before considering investment in Europe, let’s consider the dynamics affecting three key factors: sovereigns, banks and private equity.
Sovereigns. Solutions to improve the financial condition of the euro zone are difficult to implement; and virtually all proposed put pressure on GDP or put further strains on balance sheets in the near and medium term. Countries in debt can address through the following: increasing receipts/taxes tied to GDP; austerity measures, sale of assets (privatizations) or by assuming further leverage. Indebted peripheral countries can only push so hard before social unrest precludes their ability to execute these programs. Further, Europe’s ability to resolve the crisis is complicated by having so many parties at the decision making table.
Interestingly, a high level comparison between the European and US economies shows that the European Union is a $17 trillion economy, slightly larger than the US with $15 trillion. Also, while comparability of data is challenging, the Euro area has debt to GDP of 88%, below the US, which is at 103%, and is running at a deficit of 4% of GDP compared to the US at 10%. Additionally, the US is arguably experiencing the slowest economic recovery in over 50 years of recessions based on cumulative GDP growth and job creation. Therefore, dismissing Europe based on the volume of negative sovereign analysis in the media is short sighted.
Banks. We should expect that disposition of assets and tightening of financing standards will continue for the foreseeable future. These will continue to put downward pressure on GDP in Europe making it more difficult to find companies with adequately attractive projected growth for corporate investing.
Private Equity. PE firms’ dry powder (uninvested capital) is only modestly off their all-time highs. This will continue to put upward pressure on pricing in the near term.
While we are all barraged with the European bearish picture, there’s another way to look at Europe as an opportunity.
Investment predicated upon the continuing fall or near term rebound of the euro zone is common but we believe that it is more prudent to invest on opportunities without requiring such risk. There are a range of specific targeted strategies that we are pursuing here at Investcorp. An example is companies domiciled in Europe without dependence on the European economy.
Let me highlight this using a recent acquisition we closed in Spain as an example. In July, our asset-management firm purchased Esmalglass a company in Villereal, Spain, which is a leading producer of ceramic glazes, colors and ink jets used to decorate tile surfaces. The company has decades of expertise and is the leader in the highest growth segment of its industry. They also have a broad base of supporting manufacturing and mixing plants in Spain, Brazil, Portugal, Italy, Russia, Indonesia and China. Over half of the company’s sales come from high growth markets including Brazil, China and India. The business has been growing, sales are now at €270 million, and the profitability has been increasing.
Europe is the largest economy in the world with a strong and reliable framework for investors. And while corporate investing has slowed to a trickle, the timing is right to capitalize on the dislocations in the market place.
We welcome your comments at firstname.lastname@example.org.