Towards a Global Market for Lbo

TRANSITIONING

TOWARD A GLOBAL LBO MARKET

By Armanno Andrea Pappalardo

The U.S. and European Union LBO markets traditionally have functioned in very

different ways. Because of sophisticated debt and equity markets, American financial

buyers have pursued investment strategies based on financing structures with multiple

layers of securities and arbitrages between private and public markets. The European

LBO market, by contrast, long has been regarded as an area of promise land but too

immature to be really interesting, as demonstrated by the preponderance of small size

deals.

However, according to the results of extensive research into trends, deal flows,

and views of LBO professionals in both geographical areas, several developments have

changed the picture. The U.S. LBO market has evolved from a “deal” business to an

“investment” business with partnerships of business and financial professionals becoming

increasingly critical. In Europe, much larger deals have been taking place as financial

buyers and capital markets have become more experienced and sophisticated.

Changes in the U.S. have been driven by an increased number of competitors,

importance of auctions of subsidiaries and divisions by public companies, and the

competition offered by strategic buyers. Together, they made the American LBO market

more difficult.

In the 1980s, capital and financial skills were the key success factors for private

equity firms, especially in larger deals. But in the 1990s, a number of additional factors

are needed to gain competitive advantage, including the capabilities to:

·escape the “auction trap” and create a flow of proprietary deals

·run the decision-making process at portfolio companies more effectively than

competitors,

·add value through acting as a sounding board for the management of the investee

companies and assisting actively in the definition of growth strategies.

To gain a competitive edge successful PE firms