Target Europe (weekly)

Not everyone is enthused by the prospect of a wave of North American capital crossing the Atlantic.

“Institutional investors to plough billions into Europe”…“21st century land grab”…“A harbinger of international bidding wars”. If nothing else, a recent press release flagging up a survey from executive search firm Armstrong International wins full marks for grabbing attention.

The survey was broadly about the apparently voracious appetite for European assets from North American institutional investors. Having canvassed the views of more than 300 of them in the first quarter of this year, Armstrong concluded that a “search for yield” has resulted in a “shopping list” of infrastructure and property projects.

Some compelling stats backed up the claims. No fewer than four in five of respondents to the survey said they were actively investing in Europe or planning to increase their allocations to the region. Of the remainder, three-quarters said they were actively considering European investments.

Confronted with these apparently dramatic findings, asset class professionals who shared their views with us came across as, frankly, a little underwhelmed. The first point many were keen to make was that Canadian pension funds – boasting large allocations and keen to invest in relatively stable OECD economies – have long found Europe to be fertile territory.

Hence, when deals have cropped up such as La Caisse’s investment in Eurostar earlier this year or Borealis’s 2014 backing of Caruna, the Finnish electricity utility, long-time observers of the European infrastructure scene will not have been surprised. These were hardly the first Canadian forays onto European soil.

Should a surge of capital now come from the US, however, a few eyebrows would certainly be raised. Up to now, at least in an infrastructure context, US institutions (in contrast to US fund managers, which have been fairly active in Europe) have been generally circumspect. Perhaps the most notable example of a US pension fund investment in European infrastructure was CalPERS’ purchase of an equity stake in Gatwick Airport – but that deal is becoming a memory test, having concluded back in 2010.

There are two concerns expressed about any possible US migration of capital to Europe. One is the obvious point that it will add to an already highly competitive environment. The press release, with the emotive language referred to in the opening paragraph, talks of a possible bidding war between “two trading superpowers” as North America and China face off for the pick of Europe’s infrastructure. In fact, competition would come not just from China but also from domestic groups as well as Australia, Japan, the Middle East and elsewhere. And this free-for-all would take place in a region where deals do not come through the pipeline quickly enough to keep everyone happy.

The second cause for anxiety is that the positive sentiment may be rooted in a misunderstanding regarding the nature of the opportunity. From far away, the well-documented travails of the Eurozone may suggest the region will provide rich pickings for distressed investors. US private equity distress specialists have been busy raising Europe-focused vehicles – and some have had little difficulty raising money. But up close, Europe doesn’t appear to be as much of a distressed opportunity as many assume – and that’s in a private equity context. When it comes to infrastructure – where risks and returns may be somewhat higher in Southern European countries than in the North, but the difference is not substantial – the distressed case may be even harder to make.

Discovering such positive sentiment about Europe, the tone struck by the report’s authors is one of excitement. But the prospect of a wave of fresh capital makes others feel something more akin to discomfort.