Europe is undergoing dramatic change: Even the most conservative European institutions are awakening to U.S. private equity. The fastest growing group of new institutional private equity investors is in the Netherlands and Scandinavia, while Germany is moving the most slowly. In examining Europe it is necessary to recognize that each country has a separate stage of development as an investor in U.S. private equity.
Institutional investors in the United Kingdom are longstanding investors in public and private equities in the United States. In fact, our markets are more co-mingled than one might suspect. Such investors are so important in the U.K. public equity market that there is common reference to the “institutionalization” of the public equity market. Corporate institutions in the United Kingdom are as mature in private equity investments as their U.S. counterparts and represent more than $6.4 trillion under management. Groups such as BT, Barclays, Lloyds, BP, Shell, British Airways, HSBC, National Westminster and ICI by themselves represent more than $184 billion in pension assets. They have participated in public equities since the 1950s and many have significant exposure to private equity.
The change underway in the United Kingdom, as a result of Paul Myner’s landmark report, is the entry of public pension funds and insurance companies in private equity investing. Public institutions represent another large pool of pension assets, and life insurance assets an even larger pool. While the report did not specifically recommend such changes, it provided them with a blueprint to use in making private equity investments.
Henry Robin, a partner at NIB Private Equity, says that there are no statutory or regulatory changes pushing Benelux investments into U.S. private equity. On the contrary, investors from the Benelux countries have always been active in the United States and they have been important investors in U.S. private equity funds for the last decade. The Netherlands is home to two global banking groups well known in U.S. private equity: ING and ABN Amro. The largest institutional investors in the Netherlands are represented by NIB Capital, a corporation funded by two of the world’s largest pension funds: ABP and PGGM, which have combined assets of more than $230 billion. NIB Capital, for its part, has two subsidiaries: NIB Capital Bank and NIB Private Equity. NIB Private Equity manages more than $17.2 billion in private equity assets, about half of which is committed to the United States. This translates into an annual investment of $600 million to $800 million, making NIB one of the largest private equity investors in the United States. NIB opened its New York office in 2000. It prefers venture capital (life sciences and IT), mid-market investments and leveraged buyouts.
Considered as a whole, this market (Denmark, Sweden and Norway) of institutional investors represents about $1.7 trillion of assets. It is awakening to private equity with pension reform taking place across the region, and the U.S. is the principle beneficiary of changes underway. Sweden, for example, has a totally reformed pension industry with at least $7 billion allocated to private equity, according to Bjorn Haugaard, CEO of Danske Private Equity (owned by Danske Bank Group). That’s an important indication of what’s coming. Danske Bank, the second largest bank in Northern Europe, with almost $14 billion in assets, is one of the region’s most advanced private equity investors. It started working in alternative investments in 1999 and today has $1.4 billion under management in private equity in all geographies across all asset classes. Haugaard says the region is like the United States 20 years ago, as U.S. investors sought growth in private equity after years of “horrendous” returns from public equity.
German banking, insurance and corporate investors are well known in the U.S. private equity market. The country’s biggest banking groups, Deutsche Bank and Allianz, have been in the market for decades. Allianz, for example, has about $3 billion invested globally in private equity through 41 fund managers, with the majority of it in North American investments. The big story in Germany relating to pension funds investing in private equity was the creation of private pension funds in October 2002. It is the first potentially revolutionary change in a system created by German Chancellor Bismarck in 1889 (the world’s first old-age social insurance program). Enrollment in private pension funds has been slow, and private funds investment in private equity has been unremarkable. As a result any near-term expectations of increased investment due to pension funds liberalization in Germany are unrealistic.