Expected Flood of Opportunities in Europe Is Still a Trickle

David Rubenstein of the Carlyle Group called Europe "one of the world's greatest investment opportunities." Chris Kleponis/Bloomberg NewsDavid Rubenstein of the Carlyle Group called Europe “one of the world’s greatest investment opportunities.”

LONDON — American private equity firms are playing a waiting game in Europe.

These firms, the Carlyle Group, Apollo Global Management and Oaktree Capital Management among them, have been raising billions of dollars during Europe’s sovereign debt crisis to buy loan portfolios, corporate bonds and other holdings from troubled financial institutions on the Continent. The firms are betting that they can snap up cheap assets for as little as 10 cents on the dollar.

“Europe is one of the world’s greatest investment opportunities right now,” David M. Rubenstein, the co-founder of Carlyle, told a recent private equity conference in Berlin. “There’s no part of the world that will see so much assets sold at a discount as in Europe.”

But private equity has a problem. The great fire sale in Europe has yet to ignite.

Financial firms, particularly those in Southern Europe, have been wary of offloading holdings at major discounts, fearful of taking losses and further depleting their capital cushions. More important, they now no longer have an urgent need to sell assets, thanks to more than a trillion dollars’ worth of cheap loans from the European Central Bank.

“People are talking a big game around distressed investing, but we haven’t seen that many real opportunities yet,” said Fotis Hasiotis, head of European financial sponsors at the advisory firm Lazard in London. “To date, returns on distressed funds in Europe have been disappointing.”

Private equity has been expecting a flood of opportunities. Over the last year, the industry has announced plans to raise $23 billion to buy European assets, roughly half the global total for distressed funds, according to the data provider Preqin. Cerberus Capital Management is currently raising a $3.8 billion fund aimed at distressed debt, including in Europe. The Avenue Capital Group, run by the billionaire Marc Lasry, also has tapped investors for about $2.2 billion for deals resulting from Europe’s debt woes.

European banks had been seen as primed to start a fire sale of assets. With the debt crisis accelerating, European authorities required banks to increase their capital reserves last year to protect against future financial shocks. Many analysts calculated that the new rules would prompt banks to pull back from unprofitable markets and dump riskier assets.

Some private equity firms swooped in early. In 2010, Apollo Global Management bought a portfolio of distressed property loans owned by Credit Suisse for about $1.2 billion, a roughly 50 percent discount to the face value. The private equity firm also bought Bank of America’s Spanish credit card business last August for an undisclosed fee, as the bank looked to pull back from the debt-ridden European country.

But the sell-off stalled after European banks received a financial lifeline. In December, the European Central Bank handed out 489 billion euros ($652 billion) in cheap, three-year loans to financial firms. The banks stepped up for another round in February, borrowing 530 billion euros from the central bank.

“Banks want to retain assets at the highest price possible,” said Michael H. Kalb, senior managing director of Sun European Partners, a buyout firm based in London. “Values for debt are pretty high right now.”

Private equity firms are fighting over a limited number of opportunities. The increased competition is only buoying prices and making it harder to find bargains. The difference between sellers’ valuations and potential offers currently stands at roughly 20 cents on the dollar, according to a leading distressed debt investor at a major private equity firm, who spoke on the condition of anonymity because he was not authorized to speak publicly.

“There’s too much capital chasing too few distressed assets,” said Robin Doumar, managing partner at Park Square Capital, a London-based firm that invests in debt financing. “It’s not a very attractive area because it’s mispriced. It’s a fool’s errand to buy distressed debt at par.”

Despite the inflated prices, some investors still think Europe is the place to be. The structural problems facing many of the Continent’s banks are not likely to go away. Firms hold more than $3 trillion of so-called noncore loans on their balance sheets, according to the PricewaterhouseCoopers consulting firm. Many of these assets must be sold off or run down as firms try to improve their balance sheets to meet new regulatory capital requirements.

In part, banks may be looking to get rid of so-called leveraged loans, used to finance private equity deals during the last boom. A number of highly indebted companies need to refinance in the next year, and struggling banks might choose to sell off the loans rather than extend new credit.

Banks will not be able to rely indefinitely on the central bank for cheap loans, either. The loans are intended to help firms meet short-term financing needs as they bolster their balance sheets. When the government-backed money runs out, financial firms will again have to rely on the markets for their borrowing.

That leaves banks with the dilemma of either offloading unwanted assets soon or waiting in the hopes that prices will recover.

“Banks just have to get smaller, so they’re lending less and getting out of certain asset classes,” said David Abrams, head of European nonperforming loan investments at Apollo Global Management in London. “We continue to see a steady stream of opportunities in the market.”