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Why Europe may not get much cheaper

Sean Gallup | Getty Images

European markets are set for a solid recovery and investors waiting for the continent's banks to sell off cheap assets are likely to be disappointed, said J. Christopher Flowers, CEO of private equity firm J.C. Flowers.

While many investors are looking to take advantage of highly distressed selling by European banks, it's simply not happening, Flowers said at the AVCJ Asian Private Equity and Venture Forum in Hong Kong this week.

"I don't think there's going to be much deep discount distressed selling," he said.

(Read more: Why the euro area remains a good investment bet)

"Financial institutions are trying to deleverage," he noted. "If you sell something at a big loss, you don't decrease your leverage. You increase your leverage. It just basically doesn't work," he said.

"If banks have troubled assets in Europe and they're trying to deleverage, it makes more sense to just roll forward rather than take a big loss."

While that could change if European banks were to recapitalize or if they were to face more pressure to divest underperforming assets, "European banks would have to be better capitalized to absorb those kinds of losses," he said.

In addition, asset investors face another risk from competition for assets, with a large number of funds with "amateur or tourist money" aggressively pursuing deals in the region, he said.

(Read more: Sell US, buy European assets: Strategist)

But Flowers still views Europe as the most interesting region for deals. "ROEs [Return on Equity] will recover; valuations will recover," he said. "In the intermediate run, that makes it a pretty good bet."

He noted his company has found deals in the financial sector, last year closing the purchase of Belgian insurer Fidea from bancassurance player KBC for around 244 million euros.

Others also see opportunities in Europe. The risk-reward is "compelling," said Joseph Cohen, the founding partner of private equity firm Trilantic Capital Partners, which has around $6 billion under management.

(Read more: Private equity needs to act 'maturely': Report)

But he noted his firm is focusing more on Southern Europe as the North appears crowded.

When seeking deals in Southern Europe, "there is the ability to be one of three or one of five as opposed to one of twenty, which is what you see in northern Europe," Cohen said at the AVCJ conference.

But he also noted other risks, estimating around 60-70 percent of the deal-making is shuffling assets from one fund to another, making it necessary to identify an ultimate strategic owner for a company before setting a purchase.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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