Private equity firms and hedge funds are looking at battered eurozone periphery countries as investment targets as they seize an opportunity to make potentially big returns.
Dromeus Capital Group, an emerging markets-focused hedge fund manager, has become the latest of a growing group of alternative investment firms seeking to capitalize on depressed pricing of bonds and stocks, or indeed attractive and overlooked companies, in periphery countries.
Last month, the firm, which takes it name from the ancient Greek word for runner, announced the launch of what it believes is the first Greece-specific hedge fund, the Dromeus Greek Advantage Fund, to bet on a recovery in Greek assets.
Other hedge funds – including Adelante Asset Management, Appaloosa Management, Fir Tree Partners, Greylock Capital Management and Third Point – are known to be making similar recovery bets on Greece, and more are sure to follow.
Achilles Risvas, chief executive and managing partner of Dromeus, says: "The huge uncertainty and political instability has caused investors to sell down Greek assets to prices from which the likelihood of further declines is limited. This is the ideal environment for deep-value investors. Prices of stocks and bonds are cheap both versus historical norms and relative to comparable eurozone assets.
"The market is priced for the worst-case scenario of a Greek exit from the euro, and further, even more extreme distress to the Greek economy."
According to Dromeus, market valuations for Greek government bonds price in severe new reductions in their face value, while valuations for Greek equities trade at levels recorded well before 2004. "Simply put, both equities and bonds trade at overly cheap levels compared with historical norms and comparable eurozone assets," Risvas says.
Dromeus’s new fund specifically focuses on Greece, but Risvas says that because the macroeconomic outlook for a number of eurozone periphery countries is unclear, this inevitably creates investment opportunities.
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| Protesters carry flags of Portugal, Greece, Spain and Italy as they march through Athens during an anti-austerity rally in November |
"We do also have a global opportunities fund, which has a much larger universe and means we are actively looking at opportunities in other peripheral eurozone countries, such as Spain, and in particular its banking sector, which clearly needs to de-lever," says Risvas. Asked if he believes there is now a groundswell of interest from alternative investors in eurozone periphery countries, Risvas says: "Yes, absolutely. Hedge funds, particularly, focus on capitalizing from mispricing and so wherever they can find that, they will invest."
Private equity firms are also wanting in on the action, albeit not yet in Greece but in Ireland, Italy, Portugal and Spain. Accelero Capital, Apollo Global Management, Bain Capital, Investindustrial and Kohlberg Kravis Roberts (KKR) have all either bought or are looking to buy companies or loan assets in these countries, where they are unearthing investment opportunities.
Accelero Capital, a private equity investment firm backed by Egyptian billionaire Naguib Sawiris, that targets underperforming telecoms companies in Europe, confirmed in November it was looking to take a stake in Telecom Italia.
Assets or businesses of telecommunications companies are also of interest. Bain Capital paid €1 billion for Spain’s Telefónica’s call-centre business earlier this year.
Sales by banks of distressed assets originated in the eurozone periphery countries are being snapped up too.
Apollo Global Management has just bought a portfolio of £1.47 billion of Irish real estate loans from Lloyds Banking Group at a 90% discount, or £149 million.
Indeed, real estate investment opportunities in the eurozone periphery are one of the most attractive investments, as well as in the financial services sector, according to KKR cofounder Henry Kravis.
Kravis told a press conference in Singapore in October that there was "real opportunity" in Spain and other parts of Europe as the region grapples with the eurozone crisis.
"We’re not in any way writing off Europe," he said. "In fact, we’re putting money into Europe. What we like to do is invest in countries or markets when most people don’t like to be there."
Spain is also a focus for Investindustrial, an Italian private equity group. It agreed last month to take full control of Spain’s PortAventura, Europe’s third-biggest theme park.
Investindustrial bought an initial 50% stake in PortAventura three years ago, and will now acquire the remaining stake from the industrial holding arm of La Caixa, a Spanish lender.
Andrea Bonomi, the chairman of Investindustrial, has said that Spain is a promising target for private equity firms and other investors, despite its deepening recession, high unemployment and the fragility of its banking sector.
One sector that could offer promising opportunities, as the PortAventura deal illustrates, is tourism. According to Jaime Becerril, banks analyst at JPMorgan in London, Spain is the fourth most-visited country in the world, only slightly below the US and China, with the UK, Germany and France representing around 50% of total tourism in Spain.
"This could be a helpful way to revitalize the local industries, especially real estate," says Becerril.