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Daniel Acker | Bloomberg | Getty Images LONDON -- Outgunned by Chinese and Middle Eastern competitors and lacking the breadth of service of their U.S. rivals, European private equity firms

are focusing on specific industries to compete on their home turf. Private equity fund managers, gathering in Berlin on Monday for their largest annual conference, will weigh the potential

threat of deep pocketed buyers from developing economies in Asia and the Middle East. This group, which includes China's property and entertainment giant DALIAN WANDA GROUP Co. and

sovereign wealth funds from Singapore, Qatar, Kuwait and Abu Dhabi, has become a recurrent feature of European auctions where it can beat local investors on price. "This is a new

development," said Hugh Langmuir, a managing partner at European private equity firm CINVEN. "So far the incidents have been limited but it's on a watching brief."

London-based Cinven has turned the trend to its advantage by using its Hong Kong office to grow assets across Asia and negotiate rich exits such as the 900 million pound ($1.4 billion) sale

of British restaurant chain PIZZA EXPRESS to Chinese private equity firm HONY CAPITAL last year. Read More Private Equity Firms in a Frenzied Race to Hire Young Investment Bankers For those

firms seeking an exit from a business, like in Cinven's example, widening the pool of possible buyers has made the process more competitive and secured a higher price. "Having a

global team and expertise in helping companies expand into new markets are strong differentiators," said Luca Bassi, a managing director at Boston-based buyout fund BAIN CAPITAL. NO

ROOM FOR GENERALISTS While some of the major U.S. funds such as Blackstone and KKR have diversified their investments across several asset classes, providing anything from alternative asset

management, real estate and hedge fund solutions, European firms have been reluctant to tackle new business areas. Many of them believe that specialization is the way forward. In Europe

where smaller to middle market deals worth between 500 million and 2 billion euros have become the mainstay of the industry, specialization is even more compelling as blockbuster deals have

been harder to execute. "If you are a mid-market generalist investor in Europe, you will want to develop a specialism quickly, or you may struggle to differentiate," said Joseph

Schull, a managing director and head of European operations at private equity firm WARBURG PINCUS. Some European mid-market firms have started raising "thematic funds" focusing on

areas where they see high returns such as consumer, media and technology. In Britain, consumer-focused private equity firm LION CAPITAL, which backs Britain's high street retailer ALL

SAINTS, is preparing to raise its largest buyout fund to date worth about $2.5 billion, a source familiar with the matter said. "There is no market for generalists in Europe," the

source said. "It's a natural selection." The need for specialization comes after U.S. behemoths such as Leonard Green and PROVIDENCE have spent more than two decades targeting

the retail and media industries, respectively. PRESSURE ON FEES European buyout funds seeking new money to play with are also having to deal with pickier investors, known as limited

partners, who need a strong investment story, wary of paying several hundred millions of dollars in annual management fees. Since the start of the financial crisis, private equity firms and

their managers, also known as general partners, have seen the average amount of these fees dropping globally from 2.5 percent to around 1.5 percent of the committed capital. Read More More

money please! Record amount of PE funds hit market Mid-sized funds have readjusted their fee structure to around 1.75 or 2 percent of the committed capital. Fabio Sattin, chairman and

co-founder of Milan-based PRIVATE EQUITY PARTNERS, said there were clear differences between limited partners and general partners on how to allocate fees. "Investors want fees to be

more performance-related and are reluctant to pay fees when the pace of investments slows down, especially during a downturn." While management fees remain a key source of income from

private equity firms who use them to pay salaries, business trips and rent, other kind of fees, such as transaction fees charged at deal completion, have become less popular. "The

secular shift in the balance of power between limited partners and general partners has begun to make the industry more transparent about how firms make money, which is a good thing in

itself," said Warburg Pincus' Schull. The clampdown on fees has prompted a series of direct investments whereby limited partners have run solo or teamed up with buyout funds to

back the purchase of pricey assets, paying fewer, if no, fees to general partners. _ -- Additional reporting by Freya Berry; Editing by Keith Weir _