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US buy-out firms make themselves at home in Europe

US buy-out firms have become much more than just visitors in the European market. They have become permanent fixtures. Chris Davison asks just how that came about and what can be done to stop them going further.

The earliest experiences of US groups seemed only to reinforce this accepted wisdom. There were a string of notable failures – in risky sectors like airlines and technology and safer ones like construction and industrials - that were celebrated by indigenous groups as evidence of their supremacy. And they were willingly supported by local commentators, delighted to uphold the premise that these difficulties were a function of foreignness. A lot, however, has changed in the few short years that followed. And these same critics have been much slower and more circumspect in acknowledging the speed with which US groups have worked through their difficulties and established themselves not just as major players but as a major threat to the future of the local population.

The US investment banks, consulting and accounting firms were all dismissed as threats to the European incumbents over a decade ago. Now they dominate their industries, not just at the top end but often deeply into the local markets. The same appears to be happening within the private equity industry, where the resource, experience, global reach and undimmable ambition of the US buy-out groups all combine to make them a very real danger to the survival of a large chunk of the local population.

US firms plant roots

Back in 2002 Cinven marketed itself as the pre-eminent exponent of large buy-outs in Europe. Its private placement memorandum boasted of its record of being involved in four of the ten largest deals in the 1990s. Just two years later and the claim sounds much balder. The firm has not participated in a single one of the ten largest deals of this decade. US groups, by contrast, have led or participated in six of the ten largest since 2000 and their grip on the top end of the market has been getting progressively tighter. In total, they accounted for 22 per cent of all European buy-out activity in 2003, up from just ten per cent in 1999 when the total volume of activity was about 25 per cent lower.

The five largest deals in the first half of this year were all been done by US firms. Blackstone single-handedly took private German chemicals business Celanese in a deal worth almost E3bn and some way out of the league of any individual European group. Elsewhere, KKR and CSFB paid E2.25bn for Dynamit Nobel, Goldman Sachs and Cerberus bought German property group GSW for nearly E2bn, TPG and CSFB bought Friedrich Grohe for E1.5bn and KKR paid E1.45bn for German auto business ATU. And even where European groups have been successful in winning auctions for large local divestments, as Permira and CVC were with AA, they have been tagged with almost suffocating proximity by US competitors until edging across the finishing line. KKR ran the winning consortium much closer on the car rescue business than any of the interested local participants.

It hasn’t just been the large end of the market where the US groups have made an impact. Vestar and Bain Capital have both made significant inroads into the mid-market, traditionally the preserve of the locals. Vestar bought France’s leading funeral services business OGF for E300m earlier this year. The firm, which has been operating for more than 160 years, looked like the sort of deal tailor-made for a local group until snatched by Vestar. Similarly, Bain had success with the E64m acquisition of German clothes business Jack Wolfskin. The ability of these firms to win deals in this part of the market, albeit still on a fairly limited scale, raises further doubts about the extent to which local networks really do confer a major advantage.

Even more disconcerting for the local groups than the present size of US market share in Europe is the speed with which the relative newcomers have been able to penetrate this allegedly culturally resistant marketplace. They have muscled their way in if not quite overnight then at least within the space of a metaphorical weekend. US groups completed just eight deals in Europe in 1998 but managed 23 in both 2002 and 2003. The same period also saw them dramatically increase their average annual deal size. It was just E520m between 1998 and 2000 but jumped to E1100m between 2001 and 2003. The net result has been more deals and larger deals. The European buy-out market may have been growing rapidly in recent years but even the most optimistic forecaster would not predict growth over the next few years accelerating to the pace required to stabilise the US firms’ share at present levels.

Moreover, simple arithmetic is never adequate in private equity to illuminate emerging trends. Particularly in Europe, the pace of change in the macro and micro environment makes recent historical patterns only partly useful. Just as ominous is the ubiquity with which the names of US groups are mentioned in connection with speculative transactions, a measure of the degree to which they have penetrated the consciousness of vendors, intermediaries and commentators. In the brief moment when UK retailer Marks and Spencers looked fated as prey, the only private equity groups that were considered viable acquirers, albeit fancifully, were all American: Blackstone, KKR and TPG. Not only are they here to stay but it looks ever more likely they will be expanding their European interests.

The European draw

Only three US buy-out firms had an office in Europe in 1998 and only a handful more had ever done a deal this side of the Atlantic. A little over three years later and there were nearly 20 US buy-out groups with a permanent presence in London or in continental Europe. The late 1990s saw an unprecedented explosion in interest in the region among US firms, the buy-out sector’s own discreet equivalent of a gold rush. And inevitably when people are moved by haste, there are accidents. Not just disappointing or disastrous deals – European buy-out firms’ investment record from the same period is hardly unblemished – but also some opening and closing of offices. Madison Dearborn, for example, changed its mind about the desirability of a European pied a terre and CDR rewound its plans to add to its London office with a German base. European propagandists grabbed each of these episodes as evidence that the US firms were entirely opportunistic and would never become serious players. The reality, however, is that US groups in Europe now outnumber home-grown pan-European firms and that period of apparent clumsiness was ultimately just a moment of adolescent awkwardness.

A proper examination of their motives for moving across the Atlantic would have revealed that their interest was wholly serious. The mid- to late-1990s saw a conflation of drivers for US buy-out firms that made European expansion not just desirable but sometimes even imperative. On the push side, they were feeling a pressure to grow, and the effects of the globalisation of their intermediary networks. On the pull side, they were increasingly attracted to the market opportunity in Europe and the impressive returns that were being enjoyed by local groups in a relatively uncrowded market. Any combination of these factors proved irresistible.

The pressure to grow is an archetypal North American phenomenon. From the genesis of a recognisable buy-out industry in the US in the early 1980s it was taken for granted that with success came larger funds and with larger funds came larger organisations. But eventually the growth in the size of groups, coupled with a dramatic growth in the population of buy-out firms, became a key driver for their foreign adventurism. Their home market was beginning to feel seriously crowded. ‘The decision to go to Europe was made at a time when a lot of firms were being quite introspective. They were thinking about expanding their range of products as well as their geography,’ said Robert Rosner, a founder of US group Vestar Capital. Firms engaged in this sort of introspection had three options: they could remain compact US-centric organisations, they could grow their business by launching new investment products like hedge funds or debt businesses, or they could extend their regional activities. Forstmann Little might exemplify the first category, Blackstone or Carlyle the second, and CDR or Vestar the third. ‘We rejected the product line expansion strategy to maintain quality control and stick to the business we knew well,’ said Rosner. ‘It was consistent with the growth and trends of our portfolio companies.’

The forces of globalisation were also significant in drawing US firms’ attentions to what was happening in Europe. ‘Our network of advisors, bankers and consultants were all beginning to branch out. We were being presented with lots of opportunities out of Europe but we felt it was dangerous to be making investments from long range,’ said Rosner. The large US investment banks had long since established a major presence throughout the continent and were seeing a lot of private equity business. Their compatriot consultancies and accounting groups had also become deeply embedded in the European business community.

But just as important as the internationalisation of the intermediary community was the increasingly international quality of the assets being sourced in the region. European corporates were divesting non-core units in North America, for example. Or they were spinning out businesses that had been frustrated by a singular regional focus. And the prospective private equity buyers in Europe had no experience or capability outside home territory and usually a corresponding lack of ambition. ‘Why are we in Europe?’ says David Blitzer of the Blackstone Group. ‘First and foremost because the vast majority of businesses we invest in are global and you can only credibly invest in these businesses by having a real presence in North America and Europe.’

The global dimension of the deal flow was a significant factor for US groups moving to Europe but the quality of the purely local assets was also very important. By the late 1990s, the market opportunity in Europe was judged to be excellent. The Carlyle Group, one of the first US firms to set up a permanent presence in Europe, offers a characteristically cerebral analysis of what explained the region’s appeal: ‘There were four big themes that underpinned our expectations for Europe back then. Generational transfer of assets was one; the focus has always been on Germany and its Mittelstand but the same phenomenon is true throughout. The coming of the euro was the second. We made the assumption that further economic integration would yield more opportunities. Thirdly, there was real prospect of significant reform in the major economies. There had been changes of government across Europe in 1995-96 and we figured this would herald an improvement in the regulatory environment. And finally we saw ongoing privatisation,’ said Christopher Finn, managing director of the Carlyle Group and one of its European founders.

The upshot of an attractive market opportunity should be strong and sustained returns and by the late 1990s that was exactly the sort of performance profile being displayed by the leading local groups such as BC Partners, Permira, CINVEN or CVC. ‘The data was very good. Private equity in Europe was exhibiting a lot of growth and the returns were really quite good,’ said Rosner. European buy-out returns during the 1990s averaged a net annual 14 per cent, compared with eight per for US buy-outs. Not only did this serve as a lure for the US groups but it had not gone unnoticed by many of their limited partners. With the prospect of a gentle reallocation of capital in favour of Europe, the US firms had the choice of watching the money flow towards the locals or building up a competence in the region that would justify their claim to it. The result was a no brainer.

Prior to 1995, Warburg Pincus, Bain Capital, KKR and Hicks Muse Tate and Furst were the only US groups to have invested in standalone European buy-outs - rather than occasional add-on acquisitions - and their activities had been very limited. Over the few years that followed they established a permanent presence for themselves and were quickly followed by many of the other household US names. All of them were motivated by the same realisation; that Europe was a large and rapidly growing market well-suited to their deep experience and to their international capabilities.

Same ambitions; different approaches

Despite a similarity of purpose, the US groups all employed distinct approaches to setting up business in Europe. Some, for example, felt London was the only real option as a launch pad into the market. ‘Our theory was that we should start with a centralised business in the UK then we would decide which of the local markets really required local talent,’ said David Blitzer. Blackstone started in London before building a German team and starting work on establishing a permanent presence in France. Similarly, KKR, TPG, and CDR started their European life in London. The decision was both culturally-driven – familiar language – and financially – London’s markets would be the inevitable source of much of the capital required for their large transactions. The resulting geography has proven to be little inhibition to their deal-making, the majority of which both by number and value has been on the continent. Big and increasingly mid-sized deals are auctioned anyway so the need to be entwined within the business establishment is hardly essential.

Other groups reached the opposite conclusion about the most effective entry-point to the local market despite the temptation to take what would in some respects be an easier option. ‘The prevailing view among Americans has always been that Europe starts in London. We got to London and quickly realised that the UK looked at least as competitive as the US. We figured the opportunities really lay on the other side of the channel,’ said Christopher Finn of Carlyle. Bain took a similar view, pursuing continental activity first, and establishing an office in Munich, although like most of its compatriots it has its largest presence in London to ensure it is properly plugged into the financial community. Indeed, in the space of the few years they have been in Europe, the US firms have almost all converged on a similar geographical model – a small number of local offices coordinated through London. Only Vestar has eschewed a presence in the UK, chiefly because its targets are typically much smaller and so the sales process is much less likely to be managed out of London. The group also felt the growth potential was stronger in continental Europe and there was a real opportunity for them to establish a strong foothold.

US groups also adopted fairly divergent approaches to their organisational structure when they first arrived. Some of them, like Blackstone, started out by dropping North Americans into their new offices to do most of the work. Others, like KKR, took the opposite tack by relying mainly on Europeans to build up the business. Each approach brought its own frustrations. ‘Some firms franchised by hiring a local team, which may have lacked the credibility on the investment committee at home,’ said Dwight Poler, a managing director at Bain Capital. ‘Others only sent people from the US to make sure they had the experience and the trust back home, but found they lacked the reach and experience locally.’ The result, however, has been reasoned adaptation and a convergence towards the same organisational model. ‘We pursued a mix of both – bringing a critical mass of people from a deep team in the US as well as extensive recruiting of local nationals. We believe that, as a truly global firm, it has proven to be a very effective approach,’ Poler said.

The effect of this convergence has been a greater sense of stability about the groups. There is certainly no longer persistent speculation about the opening and closing of offices or whispering about the inability of US groups to attract top quality private equity talent. Blackstone’s hiring of Hans Ostmeier from BC Partners serves as a totemic example of the fact that everyone has their price. And it has served to expose the emptiness of another of the original supposed obstacles to US groups making inroads in Europe; they have been able to recruit successfully despite the knots that carried interest ties around the senior employees of buy-out firms.

Despite convergence in many areas, there are still differences among the groups in their fund strategies. TPG, Blackstone, Vestar, and CDR represent the majority in investing in Europe out of a global or predominantly US fund. They argue that it is the best way to align the interests of everyone in the firm and signifies the fact that they are operating internationally and not federalising their activities. But a handful of groups have taken a different route by raising dedicated funds. Hicks Muse, KKR, Bain and Carlyle are all either some way through raising a second European pool or close to launching a new vehicle. They usually argue that a dedicated fund reflects the need for subtly different incentive structures when operating in more than one region. It also respects the LP’s role in making his or her own regional allocations. In most instances these local resources are supplemented with capital from larger funds but some teams are beginning to look more autonomous than others. The incentive structure for Hicks Muse’s second fund, for example, is weighted almost entirely in favour of the local team.

But for these philosophical and economic differences in fund strategy, the model used by US groups in Europe now has more similarities than differences. The key players, of whom there are almost 20, now have a permanent office and often more than one. They employ a significant number of Europeans - even if they tend to have MBAs from North American business schools – so that transplants from back home are generally in the minority. The first wave has gone a long way further than establishing a beachhead. They are comfortably settled in and watching a more gradual second wave.

Intensifying threat to Europeans

It is too early to make a confident judgement about the collective performance of the US groups in Europe. None of them has been investing in the region for long enough, at least in significant volume, to be able to gauge meaningfully the sort of returns they can be expected to produce. There have been some exits – KKR, for example, has sold some of its German investments in secondary deals to European firms such as Montagu. Hicks Muse enjoyed a good return on its flotation of directories business Yell. Carlyle has realised four of the companies in its first fund. And Providence successfully floated Eircom. But most US-led investments are still active. The arrivistes, however, have indisputably made a success of their initial objective in being able to get access to interesting deals and beat local competition at that part of the game. Sceptics attribute some of this success to their willingness to bid more aggressively for assets than local groups. Whether that is true or not, and only long-term analysis of performance data will reliably settle this dispute, the effect is still the same. They are winning a large share of the market and making it increasingly difficult for the large local groups to deploy their capital at the sort of pace required by the size of their funds. The Europeans pace of investment activity, in many instances, has slowed to a trickle in the last few years.

Despite the expectation that the US firms would be laughed out of the local auctions by Europhile vendors, the reality has turned out to be very different. In fact, in many instances they have found vendors more interested in their overtures than those from the European groups. ‘Early on we found some resistance, but since have found many management teams, and vendors, appreciate the experience we bring in actively supporting operational and strategic change, versus mere financial,’ said Dwight Poler of Bain. Other US buy-out professionals say that vendors would often rather do business with Americans than with a buy-out group from a neighbouring country – a German would rather sell to a US group than to a French or British firm. The European Commission may try to perpetuate the idea of Europeanism but the business community, it seems, is unmoved by these ideologies. Witness the success of the Carlyle Group in France – a firm mythically allied to the US political establishment in a country often portrayed as feverishly anti-American. The buy-out industry evidently doesn’t suffer these sensitivities. In many instances, the vendor does not feel him or herself to be dealing with Americans anyway; all of the US firms are now staffed at senior level with high profile Europeans. ‘When we did the Figaro deal in France the vendor only worked with our French team throughout the process,’ said Christopher Finn of Carlyle.

But more important to the success of the American firms to date has been their ability to call on international resource and experience. They can bid for assets that are out of reach of European firms simply because they don’t have people on the ground outside their local market. Blackstone, for example, was able to buy Ondeo Nalco from Suez, a French parent, without banging up against any Europeans. ‘It was a classic example of a predominantly US asset being sold by a European firm. None of the European firms were really interested,’ said David Blitzer. Similarly, local groups were out of the race when Merck came to sell its distribution business VWR in the US to Clayton Dubilier. Or when Vivendi sold its US publishing arm Houghton Mifflin to a consortium that included Bain Capital and Blackstone. In other words, European firms are shut out of a large chunk of their domestically-sourced deal flow. ‘The interesting question is not why the Americans are coming to Europe but why the Europeans aren’t going to New York,’ said Blitzer.

The only European buy-out firms with a presence in the US are Permira and Doughty Hanson. The former insists its outpost concentrates on investor relations, while the latter has been largely inactive in the US for some time. Part of the reluctance of European firms to broaden their investment horizons - they have been successfully fundraising internationally for more at least a decade – stems from their preoccupation with building a European network. That is often more of an organisational challenge than setting up shop on both sides of the Atlantic and the effect, it seems, has been to make them internationally myopic. Permira, BC Partners, and CVC, for example, all have at least five European offices, more than most US groups have globally. Extending that network overseas is difficult and unappealing when the competition overseas is already so intense. The Europeans are also concerned, not unreasonably, that their investors would be unhappy about them straying out of familiar territory. A combination of these two factors is likely to pen all but the most ambitious of the European groups into the region at the cost of denying them a decent shot at some of the assets being picked up by the US groups.

Alongside the advantage presented to them by their global reach, the US firms also benefit in Europe from the enormous experience they have developed investing in their home market. They all have a pedigree at least as long and usually much longer than their European counterparts and are comfortable and familiar with the sorts of opportunities they are presented within their new market. CDR, for example, drew strength in its contest for UK food distributor Brake Brothers from its previous involvement in the sector in the US. ‘We invested in a big food distribution firm in the states and sold it for about six times. This was a nice deal and it fitted right in our strike zone,’ said Roberto Quarta of CDR. The firm called on professionals from its European team and from its US office and was able to demonstrate operating strengths to a vendor who remained emotionally attached to the business.

Two of Vestar’s deals in Europe have been in sectors with which they have experience in the US; the acquisition of Swedish rail brakes manufacturer SAB WABCO and Italian firm FL Selenia. The Carlyle Group exploits similar strengths when competing for European defence or industrial assets, having built up a wealth of experience in these sectors back home. And Blackstone credits its success in winning the limited auction for German waste business SULO on its experience in the sector in the US. ‘We had real credibility in that sector and I think they (the vendor) hoped we would take the asset seriously. Our experience played well with the owner. He’d spent his entire career building the business and that mattered,’ said David Blitzer.

While the European groups are sometimes still cutting their teeth on deals in particular sectors, the US groups have usually been there before. Analysis of their deal activity in the US between 1993 and 1997 and the deals they have been doing in Europe since 2000 shows clear similarities. In both instances, the largest sectors were services, manufacturing, technology, media and industry. European buy-out activity in the earlier period, by contrast, was heavily concentrated on manufacturing and industrial assets. The pattern has not eluded investors when weighing up their capabilities. ‘There has been a big increase in the availability of US-style transactions in Europe. These are basically divestments from big corporates, the sort of things they were doing years ago,’ said one European LP. It is hard to compete on experience with the likes of Bain Capital, which has completed more than 200 investments in its long history.

The final major competitive advantage enjoyed by the US groups, although admittedly just a handful of them, is their scale; scale in terms of their financial and human resources, and scale in terms of their ambitions. Blackstone and KKR, in particular, are fearless investors at the large end of the market and confidently outgun their local competitors. Blackstone, for example, was able to underwrite the entirety of its E3bn public-to-private acquisition of German chemicals firm Celanese, a feat unimaginable among the Europeans. KKR was able to stretch to make up the shortfall left by Change Capital’s withdrawal in the Vendex deal. And even Bain Capital, whose European deals have been a mix of mid-market and large, was able to buy Brenntag, a global distributor of industrial and specialty chemicals, single-handedly from Deutsche Bahn for around E1.5bn. The Europeans, with the possible exception of BC Partners, have either been shy of transactions of this size or felt compelled to bid jointly. Unsurprisingly, when speculation builds about who might try for the very large trophy assets, like Marks and Spencers or Sainsbury, it is the US groups that spring to mind increasingly. They are driving the top end of the market by virtue of their resource and, just as importantly, their ambition.

What the investors say

European vendors were never quite as unwelcoming to the American groups as the propaganda would have us believe. Similarly, it seems, the limited partner community was never quite as concerned as the local GPs would have liked. ‘Some years back when KKR first started making noises about opening up in Europe, they created a bit of a stir. The reaction among the Europeans (GPs) was prickly. They asked us whether we would invest in KKR for European exposure and almost asked us for reassurances that we would remain stalwart investors with them. Their attitude seemed to be to keep the buggers out for as long as they could. I always felt that was bit blinkered, like trying to hold back the tide,’ said one influential European fund of funds manager.

There might have been some initial scepticism in the same way there would be when any general partner announces an intention to move into a new market – a scepticism usually labelled during the due diligence process as the absence of a tangible track record. But the attempts to discredit US groups by insinuating irresponsible bidding – the so-called ‘cowboy approach’ to investing – were at best short-lived and ultimately ineffective. ‘A couple of years ago, a lot of the UK-based large and upper mid-market groups complained that the US groups were chucking in bids in auctions without during any due diligence just to knock out the local players and then cutting the price. I don’t know if that ever happened but it became a perceived Americanism. The local firms felt the US guys weren’t playing by the rules,’ said another LP. Either the perception has been corrected, the behaviour has been changed, or the perpetrators of these complaints have recognised the futility of their propaganda. European GPs are now much more likely to be found using conference platforms to talk about the benefits of the US arrival and the sense of cooperation that exists throughout the market.

The LP community is now not just convinced by the seriousness of the US firms in Europe but sometimes describes their arrival as a positive. ‘They have really raised standards, both in terms of competence at a management level and their due diligence standards. They have opened up the market in terms of being able to do bigger deals. They have brought their wherewithal and capability from the US and they really know what they are doing,’ said the fund of funds manager. ‘It was sort of like a cartel until the Americans arrived and they could get away without the same standards.’ And while there is inevitably concern about the intensity of competition being unhelpfully inflationary, very often the US groups are judged to be less pressured than their European counterparts to invest their funds and so less likely to overpay for an asset.

Ultimately, the best measure of a group’s respect among LPs is their fundraising success. And so far the European fundraising efforts of the US groups have not matched the performance of the outstanding local groups. Carlyle and Hicks Muse, for example, are both currently trying to raise European funds and their success to date falls a long way short of Permira’s bionic marketing last year. But there are tentative signs that this might change with time. One leading indicator is the extent to which LPs rank the different groups in Europe. The annual AltAssets survey of LPs, which canvases the views of over 100 active investors in private equity, has for the last three years invited respondents to say who they think are the best groups operating in different markets. They have, for example, consistently ranked BC Partners and Permira as the two outstanding European buy-out firms. Preliminary data from this year’s survey has included for the first time a number of votes for Bain Capital Europe, the first time LPs have included a US group as one of the best in Europe.

The expectation among LPs is that US firms will become ever more important in the European marketplace. ‘The line is definitely blurring between the US and the European groups now,’ said one large LP. ‘If they make a success they could be really quite formidable. They are certainly learning very fast and are prepared to throw a lot of money around to hire the best people. They should be taken very seriously.’ And the logical conclusion of any further encroachment by US groups would be to question the survival of all the local groups. After all, there is a finite source of capital, even allowing for an increase in allocations to Europe from the massive US institutions. ‘Some of the European groups are going to suffer. And it won’t just be the large groups. The US firms are already starting to look a bit further down at the mid-market,’ said a Nordic investor.

The outlook

The US groups have clearly defied the self-interested forecasts of the late 1990s that they would be forced to turn tail and go home again. The question now is not whether they can dig in but how much more territory they can take from local groups. Any self-respecting exercise in scenario analysis would rule out the prospect of withdrawal as a waste of time. Instead, the focus would be on determining whether there is greater probability of their market share stabilising at present levels and an end to the influx of new players, or whether they will continue to eat away at market share and leave only the slimmest parts of the market for a husk of local groups.

There are factors in favour of the former outcome. It is significant, for example, that many of the US groups have been as active and sometimes more active in Europe in the last few years than they were in their home market. Blackstone, for one, invested more in Europe between 2002 and 2004 than they did in the US. Part of the explanation for this behaviour lies not in a deliberate intention to shift their investment emphasis to the old world but in the fact that the market opportunity in the US in the post-bubble period was not judged to be as attractive. There wasn’t so much happening in the US. So when their home market picks up, as it appears to have been in the first half of this year, they may be expected to retrain their resources on the US. But disappointingly for the Europeans, there is little evidence of that happening so far. They have been as busy in Europe this year as in the years before.

What appears to be near certain is that the US groups will continue to be the dominant force at the large end of the market, with significant implications for the cadre of large European groups. They have all the necessary ingredients: access to capital, access to international deal flow, experience, and ambition. They may also increase their influence in the mid-market. Vestar, Carlyle, and to some extent Bain Capital and Hicks Muse have already made a success of establishing quality deal flow in parts of the market traditionally judged a stronghold of the local firms. It seems unlikely there would be much incentive for US groups to stoop much lower down the market, given the economics of running a smaller firm and the weaker strategic logic. But some sector and strategy specialists have already moved into Europe, opening up another front in their influx. Cerberus, Gores and Platinum, distressed and turnaround specialists, have been active in Europe in the last 12 months and still face very little competition from local firms. The relative advancement of the US market means there is a strong supply of more sophisticated groups to take advantage of certain niches. Europe hasn’t yet evolved to the point that it has begun to produce many dedicated strategy specialists. And it may not get the chance if the US groups can get established quickly.

The scale of the threat to European firms is immense and their ability to respond remains, in most instances, uncertain. For the moment they seem more inclined to denial than reaction. Meanwhile, the US bulls make intimidating noises. ‘There are definitely similarities between the way US private equity groups have moved into Europe and the likes of Bain, Goldman Sachs, and McKinsey,’ said the managing partner of one US group in Europe. Apocalyptic forecasts may be over the top but there is clearly now a need for the Europeans to admit at least to the seriousness of the threat and articulate a convincing strategy in response.