White Paper
Europe: Opportunity in Fragmentation

Despite its weaker historical growth relative to the U.S., Europe offers compelling investment opportunities for flexible capital providers because of its market fragmentation, lower valuations and less crowded capital markets. Even amidst the elevated uncertainty around tariffs and the prospect of a global trade war, we believe the underlying factors that make Europe an attractive market remain.

Europe’s public equity markets are near their steepest discount relative to the U.S. since 1990 in terms of both regular and sector-weighted P/E and PEG multiples.1 Moreover, the cost of capital in Europe has become higher than in the U.S.

Structurally, we expect the regulatory-induced de-risking by European banks to continue, which we believe will result in attractive buying and financing opportunities. Relative to U.S. banks, European banks retain a larger portion of loans but are increasingly looking to improve balance sheet returns through capital optimization. As a result, we expect to see more non-performing credit sales and synthetic risk transfer (SRT) transactions, and less competition for complex, bespoke financings.

We also believe Europe is ripe with potential for driving operational improvements, especially among unlisted small and medium-sized enterprises (SMEs). Moreover, there is significantly less private capital in Europe chasing these opportunities, which leaves a void that minority equity and structured credit providers can fill.

Despite weaker public equity market returns and GDP growth since 2000, European private equity returns have outperformed U.S. PE returns during the same period. We believe this is a function of Europe’s relative private capital scarcity.

We believe the factors driving private market outperformance—less capital chasing deals and more potential for “operational alpha”—will persist for the foreseeable future, making Europe an attractive market for opportunistic, flexible capital.