25. GlobalCoverage Deals considered Europe North America Asia Brussels Budapest Luxembourg Madrid Munich Prague Stockholm Warsaw Atlanta Chicago Cleveland Dallas Los Angeles New York San Francisco Hong Kong Seoul Tokyo
Today I wanted to share with you our views on what is happening in the PE worldBecause of our global presence we have privileged view on the global marketsand we see a number of changes happening that will affect you as well. Because private equity firms are your competitor (for corporates) or customers (for M&A firms)
In thisshort session I wanted to talk withyouabout:How has the recession impacted PE and the investment climateWhat structural changes are we likely to see in the industryWhat does these changes meant for the PE firmsthat will emerge as winnersfromtheshakeoutSoletuspeekthroughthewindow on theworldofprivateequity. Thisishow many ofusimaginetheworldofprivateequity[animation]Andthatmighthavebeentrueonceupon a time. But ifyoulookatprivateequityin 2009, youwouldprobablyseesomethingmorealongtheselines:[animation]ThePerfectStorm
2009 was a yearofgloomDeal volume – down (Robert Baird: dealvalueofEuropean M&A 52% down in 2009 vs 2008)Returns– down (Preqin:-24% isthe MEDIAN 1-year rolling horizon IRR for buyoutfunds. NOT 24% decrease!)New funds raised – down (Preqin: # od privateequityfundsraised down 56% in 2009 vs 2008. Same % for globalandEuropeanfunds)Exits – down (Mergermarket: # ofEuropean PE exits down 44% in 2009 vs 2008)
Somethingdid go upthough:Bankruptcies of companies – up (YoYin mid-2009:Denmark +85%, Spain +167%, Switzerland +24%. Thisis for allcompanies, not just PE owned)Management changes at GPs andportfoliocompanies– up (examples: GuyHandsatTerra Firma, PhilipYeaat 3i)GPs out of business – up (Candover)Number of press articles saying “thisisthe end of LBOs” – up But obviouslytheseare not thekindofthingsyouwould want to go up…
ECONOMIC CRISIS GDP (EU 27 in 2009: -4.2% according to Eurostat. Worst hit: LithuaniaandLatvia, -15% and -18%. Turkey: -5.8%)Unemployment (Eurostat January 2010: 10% inthe Euro area. Up to 23% intheBaltics. Turkey: ~13%Industrialproduction (Eurostat as ofDecember 2009: 20% down acrossthe Euro areasince mid-2008)
Keycastis a goodexample Itisexactlythetypeofcompanythatwould be hit in a crisisKeycastis a specialityfoundryAll sectors served by Keycast – from off-road heavy vehicles to paper industry components have simultaneously decreased by 40-70%
Massive drop in order intakeRevenues, and EBITDANeed equity injection, operating resources, negotiations with banks
Ouch. Thathave hurt.Luckily, we didmanage to rescueKeycastandthe company isnowback on track. And we werelucky – out ofourportfolioofmorethan 20 businesses, only 1 company was badly hit by thecrisisBut some other firms are not so luckyWhat if most of your portfolio are companies like Keycast?
Youmightknowsomeofthesestories (bothbankruptciesandtroubledcases)Italian luxury yacht maker Ferretti (Candover)Italian gym equipment maker Technogym (Candover)Swedish bedmakerHilding Anders (Candover)EMI, the music group (Terra Firma)Monier, previouslyLafargeRoofing, Luxembourg-basedbuildingmaterialsmanufacturer (PAI)Italiancoffeemachine company Saeco (PAI)Samsoniteluggage (CVC)Dometic, Swedishcaravanfittingsmaker (BC Partners)FourSeasonsHealthCare, UK nursinghomes (Quatariinvestment firm Three Delta)Incisive Media, ownerofe.gUnquote (Apax)IMO Car Wash (Carlyle)Foxtons, UK realestate agent (BC Partners)
Several investments gone awry can capsize the entire boat – and there are already some sinking ships out thereWe’re now paying the price for the excesses of 2006-2008Massive write-offs for LBO funds will continue, therearemoreskeletonsinthecloset out there
There will be casualties but most experienced PE firmswill survive. If they didn’t do too many reckless acquisitions in the good years and didn’t overextend themselves, they probably will come out of this tough streak alive. Because they have experience, they’ve been through difficult periods before. But their business model will have to change. Youcan’tsail out of a stormlikethisandpretendnothinghappened. Soherearesomeofourthoughts on what will changeinthewaytheprivateequityfirmsworkinthecomingyears
For once, investors will no longer happily write blank checks for tens of billions of dollars without questioning the investment strategyThis has already started. Over the last year, the PE’s best friend, the LP, is not there anymoreRAISING NEW FUNDS HAS BECOME MORE DIFFICULT Poorfundraising environmentEven companies with track record have difficulties raising new funds
CHANGE #1: SMALLER, MORE FOCUSED FUNDSMulti-billion LBO funds will no longer be industry standard”Growth over deleveraging LPs requiring more focused and clear investment strategyEnd of jumbo LBOs?Smaller and More Focused Funds means less competition on mega deals, but in some cases more direct competition on smaller deals from PE firms with sector expertise, etc.
This results in change in investment criteria of major LPs, one that already heavily affects the PE industry: CHANGE #2: FLIGHT TO QUALITYInvestors will be more picky and will demand a good track recordInexperienced players will be outUnfocused players will be outFlight to Quality means less “silly competition”, but an increase in the quality of competition from some PE firms
Thirdly, let’s look at the structure of the industry. In every sector you have new entrants and ones that leave the market. But in the PE space in particular in the last several years there have been a lot of new players, me-too funds, that don’t have the experience but wanted a share of the action. Thereare 4,270 PE firmsworldwide. 10 years ago therewere 1,800GROWTH IN THE NUMBER OF GPsSuddenly this has become a very crowded space. Anyone things they can do private equity investmentsMany new entrants in recent years with significant firepowerNo experience, but how difficult can it be?Just buying left and right, at high multiples These guys are in for a bumpy ride. Private equity is not a hedge fund, it’s not something that a trader from a large investment bank can start. The number of private equity firms is too high, and business owners, banks and investors start to realise that some PE firms are good partners, provide growth and know-how, and some PE firms are the bad guys. As a consequence:
CHANGE #3: FEWER PLAYERSShakeout in the industry will separate the winners from the losersConsolidation between GPsForced exits: portfolio companies under water, GPs unable to raise new fundsFewer players means less competition in general but theonessurviving will be morelikecorporates
Then there are the regulatory issues. Not only are they seen as bad guys (locusts, asset-strippers), but now there’s a whole new EU regulation that will limit what private equity firms can do and increase disclosure INCREASED SCRUTINY“Private equity is not so private anymore”Regulatory push, AIFM directiveDisclosure in public interest
And as a result: CHANGE #4: MORE DISCLOSURE, REGULATION AND TAXATIONMore Disclosure & Regulation means PE is becoming more like the corporate world = leveling of the playing field
THE WINNING PE FIRMExperience track recordIntegrityRelationships: with LPs, banks, brokers, management teams, investee companies, Consistent and focused business model Real value added (EBITDA growth, not multiple arbitrage)Mid market (not jumbo)Be in the right markets Riverside already ticks all of these boxes so we feel very optimistic about the future.