Europe could hold the key for investors who are hunting for alpha if they are willing to consider private equity opportunities, said Maria Prieto, senior investment director and head of sustainability for private equity at Schroders, a multinational asset management company.

Private equity investments outside the United States offer opportunities that cannot be found in the United States, according to Prieto, who was one of the speakers at Schroders’s Artemis Conference on Thursday. There are a vast number of direct and co-investment-led ventures in Europe that can be capitalized on, Schroders said in an email.

“Over the course of the last five to eight years, we have seen more skepticism about European markets,” Prieto said. The opportunities today are in private equity, where investors can tap into higher returns, she added.

Prieto discussed market opportunities and trends along with Johanna Kyrklund, Schroders’s group chief investment officer and global head of multi-asset investments, and Katherine Davidson, the firm’s lead portfolio manager of global sustainable growth.

One of the reasons private equity offers more opportunities in Europe is that the market there is 10% larger than it is in the U.S. The European market is also more fragmented than the U.S. market, where there are fewer companies in each industry. And Europe is an export-driven economy. These factors combine to make it attractive to investors and put more European companies in need of private equity, Prieto explained.

In addition, consumers have a high opinion of European products. In a rating of consumer opinion about the quality of brands from different countries, European countries took the top five spots. The United States comes in 10th, and China 49th, she said, which adds to the investment potential of European companies.

European companies, like companies elsewhere, are also benefiting from the boost that technology is providing. And Europe is leading the way in ESG investments, Prieto added.

Davidson said the social considerations of ESG took over the top area of concern during the pandemic. Before that, investors and consumers concentrated more on the progress companies were making on environmental issues.

“Investors realize how they invest impacts the world,” she added. Companies that are making ESG a part of the company culture do not have to make a trade-off between shareholders’ concerns and consumers’ concerns.

“I call it ‘corporate karma,’” Davidson said. “Sometimes not rewarding employees can mean more profits for a company in the short term, but for the long term that has risks for the company’s reputation and makes it harder for the company to hire and retain top talent,” which hurts its profitability.

Davidson said Schroders finds the companies with long-term value by doing its own research and does not rely on third-party evaluations.  

Kyrklund said the trends set in motion before the pandemic—a boost in technology, a growing emphasis on ESG, the increasing interest in private equity—were speeded up by Covid-19. For instance, interest rates were low before 2020 and will remain that way for some time. There will also be continued pressure on government finances, and increasingly populist policies have already taken hold.

“The implications for the market are that returns will be more subdued in the next decade than they were in the past decade,” Kyrklund said.