The fragmentation of the European financial markets offer “compelling” opportunities for flexible capital providers, according to a new white paper from Davidson Kempner.
The hedge fund manager also pointed towards Europe’s lower valuations and less crowded capital markets as attractive qualities for the market.
Davidson Kempner has predicted that the factors driving private market outperformance –primarily 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 in the future.
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“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,” the report stated.
Davidson Kempner’s research found that Europe’s public equity markets are near their steepest discount relative to the US since 1990; while the cost of capital in Europe has become higher than in the US.
Structurally, the fund manager expects the regulatory-induced de-risking by European banks to continue, which should result in attractive buying and financing opportunities. The white paper predicted that there will be a rise in the number of non-performing credit sales and synthetic risk transfer transactions, and less competition for complex, bespoke financings.
The fund manager also believes that Europe is ripe with potential for driving operational improvements, especially among unlisted small and medium-sized enterprises (SMEs).
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“While Europe has proportionately less private capital than the US, private market returns in Europe have been strong – which we find noteworthy given Europe’s weak public market performance,” the report concluded.
“Moreover, what constrains organic public market growth in Europe can present opportunity for private investors to harness. Many European SMEs are deeply embedded in critical sectors.
“Even though these SMEs may have difficulties accessing traditional capital, they demonstrate resilience and growth potential. Private investors, especially those with global footprints, can help these SMEs grow and expand beyond their local markets.”
Davidson Kempner’s investment activity in Europe is led by Chris Krishanthan, partner and co-head for global credit.
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