On May 3rd, 2022, senior decision makers from private equity, financial institutions, advisory firms and holding companies gathered at the Hotel Principe di Savoia in Milan to discuss industry trends and exchange opinions.

The keynote address was given by Anna Gervasoni, Chief Executive, AIFI (Italian Private Equity, Venture Capital and Private Debt Association). Ms. Gervasoni described the current PE sector in detail, with incoming funds from foreign and domestic LPs, and from newcomers such as pension funds, insurance companies, family offices, wealth management, and retail banks.

The panel was moderated by Paolo Scarduelli CMS Partners and introduced by Duncan Weston, CMS Executive Partner and Poul Pedersen, Executive Chairman of Pedersen & Partners. Contributors included:

• Arabella Caporello – Partner, L Catterton Europe
• Gianpaolo Di Dio – Chief Investment Officer, Senior Partner, Fondo Italiano d’Investimento
• Raffaele Legnani – Managing Director, H.I.G. European Capital Partners
• Guido Lorenzi – Partner, QuattroR
• Marco Samaja – Managing Director, Lazard
• Constantin Terzago – Managing Director, Mutares
• Massimo Trentino – Partner, CMS.

Bruno Pastore, Client Partner & Country Manager for Italy at Pedersen & Partners summarised the key takeaways from the lively debate as follows:

• The M&A market registered record numbers in 2021, although 2022 and beyond could see a slowdown with less IPO and more PE-secondary.
• Small is no longer beautiful. “Buy & Build” is now the way to create value, and to improve the image of PE in the eyes of entrepreneurs – as partners rather than vulture funds.
• A new Private Equity way forward is to invest in companies with financial stress and high debts, as a sort of de-leverage MBO.
• Holding companies are investing in distressed companies and creating value through "ad-hoc" interventions.
• The paramount importance of the human factor and the need for correct management assessment – where possible, this should happen before the investment, not after it.
• New normative requirements will influence due diligence and target company management.
• A more institutional approach is needed for “Buy & Build” value creation and compliance to ESG.

Despite many uncertain external factors such as the war in Ukraine, CV19, supply chain issues, inflation and a recent slowdown in deals, the entire panel had an optimistic outlook for 2022 and beyond.

At the beginning of December 2021, the Pedersen & Partners Private Equity team, together with the Healthcare & Life Sciences, Industrial and Consumer Practice Groups, had the pleasure of welcoming Miranda Tang, Managing Director of Dream Matcher Limited, an advisory firm assisting start-ups and SMEs with growth strategies.

Prior to Dream Matcher, Miranda was the Managing Director of CLSA Capital Partners and Fund Head of ARIA, a series of pan-Asia growth and expansion capital funds. Miranda joined CLSA in 1995 and has over 24 years of private equity, financing and operational expertise in China, India, Vietnam, Indonesia, South Korea, Taiwan, and Singapore. CLSA Capital Partners is the asset management arm of CLSA Securities with AUM of over US$4 billion. The investment focus was on early growth and growth investment strategies in the consumer space, and later funds targeted the Asia Aging theme. For the past two decades, Ms. Tang has reviewed over 8,500+ deals, visited close to 2,000 companies and carried out in-depth due diligence of about 300 companies.

We share our executive summary of the findings below, while expressing our sincere gratitude to Ms. Tang for her valuable contribution.

Overview: Global

Global PE and Venture Capital have endured very well despite the Covid-19 shutdown, particularly since the second half of 2020. Global private equity has been booming, especially in buyouts and exits. Some recent significant M&A deals:

• CVC Capital Partners acquired Unilever's global tea business, Ekaterra, for €4.5 billion (November 2021)

• Clayton, Dubilier & Rice reached an agreement to acquire PwC's Global Mobility Tax and Immigration service business for US$2.2 billion (October 2021)

• Baring Private Equity Asia (BPEA) agreed to buy Tricor Group from Permira for an enterprise value of US$2.76 billion (November 2021).  

Mega funds took centre stage – Oaktree Capital Management announced the successful final close of Oaktree Opportunities Fund XI and its related vehicles, with total capital commitments of US$15.9 billion. This year we saw names such as Silver Lake, TA Associates, Hellman & Friedman Capital Partners. Momentum is very strong and estimated to continue into 2022.

Overview: APAC

There are plenty of M&A activities in the APAC region. For example: Blackstone's US$2.3 billion buyout of multinational Takeda Consumer Healthcare (March 2021).

Coincidentally, on the fundraising side we see larger funds being favoured:

• Lightspeed China Partners, raises US$920 million after closing the largest fundraising rounds in its history.

• KKR raises a record US$15 billion for its Asia fund.

• Carlyle announces a target of US$8-10 billion Asia focus fund.

A notable trend over the last few years is that many LPs are trying to consolidate GP relationships. The public market is doing well, and we see the denominator effect taking place; hence, the allocation is also getting bigger. Due to Covid, the performance of branded GPs is up, which may influence the funds to flourish.

Developed economies such as Japan and Australia are arousing renewed interests coming from investors. Exit via secondary, IPOs, and dual listings are all active in Asia. Covid-induced supply chain disruptions in the region remain a very valid concern, especially in the Southeast Asian market, and emergent inflationary trends need to be considered.

Geographic Snapshots

In China, we have seen the regulatory constraints imposed since April 2021. There is a lot of uncertainty due to the geopolitical issues. There is a temporary slowdown in both investment and divestment in China, with valuation taking a beating.

Softbank announced that they have suffered a US$54 billion loss in Chinese tech companies, and so they have paused their investment in China. Local consumption in China is still very strong. US$1.9 billion sales were reported on Double 11 Day – this is a healthy 8.5% increase from last year. On its own this is very good, although lacklustre compared to the 20%+ year-on-year growth in previous years.

In India, we are seeing a constant increase in deal size and more attention coming from international investors. There are bigger deals in the energy sector, with larger exits and some very good IPOs. Jio, the telecom platform of the Reliance group is a good example, attracting names like KKR, Silver Lake and Google. Recently there have been some good IPOs attracting names like Zomato and Paytm, and some eye-catching deals in the energy sector, including Hexaware and Mphasis.

In the third quarter of 2021, there were at least 23 PE or VC-backed exits in India, generating US$7.3 billion return – double the size of the return for the same period last year.

In South Korea and Japan, we note decent performance. VC activities are very active but generally below the radar screen because most of the deals are below US$5 million. There have been a few eye-catching exits this year in Korea, including IPOs of Coupang and Kakao Bank, a virtual bank in Korea. It should be noted that most of the tech and VC deals in Korea are already profitable by the time they go for an IPO or M&A.

Australia, after a long period of silence, now has recorded interest from various US funds such as Matrix Partners, which recently invested in Afterpay.

Southeast Asia is the biggest beneficiary as an alternative to China using the “China-plus-One” model, i.e. establishing a hub outside China in case there are any geopolitical concerns in the supply chain. In this region, there is a lag in infrastructure, which also means a lot of potential for investment. In terms of exits, Southeast Asia is also slow, except for Indonesia, which has done well with the Ecommerce platform Bukalapak’s IPO and the merged entity of Gojek and Tokopedia, which secured US$1.3 billion in pre-IPO investments.

Investment Trends

Industries relating to healthcare (biotech, biopharma) are currently attracting the attention of PE funds. Certain tech subsectors such as crypto, blockchain, FinTech, Tech, cybersecurity, robotics and AI are also booming.

Co-investment and/or direct investment have become new norms for LPs. Another phenomenon over the past few years is that the increasing numbers of family offices in Asia are being seen as potential threats to VCs. Mobility is greatly affected by Covid, and we are seeing more club deals in Asia. The other feature we are seeing in Asia is continuation funds, which really prolong the traditional fund lifespan. A good example here is Sequoia Capital, which announced that it is raising a public fund as a continuation fund. They want a longer relationship with startup founders, and they are seeing a lot more potential post-fund life or post IPOs.

Over the last two years, we have seen a lot of topics in terms of private debt and related products. There is an increase in distribution of true wealth and asset management, mobile apps and online.

For 2020 and 2021, there are a few distribution-in-kind types of exits post-IPO, although this is usually uncommon in the region. In Singapore and HK, we see exits and fundraising by way of tokenization (STOs).

The most active ESG investors in Asia of the last two years include: Sequoia Capital, Quona Capital, Matrix Partners China, Omidyar Network, Omnivore Partners, Temasek Holdings, Accel India, andLGT Impact.

Private Equity Mindset to VC Approach

The biggest change is one of mindset. Private Equity used to be very conservative, and focused more on the principal preservation. Compare this to the current situation in VC – where the investment amount is small, but the potential is big!

Guest Speaker:

Miranda Tang

Managing Director of Dream Matcher Limited 

Moderator:

Alvaro Arias

Partner, Global Head of Private Equity Practice Group 

Guest speaker introduction:

Beryl Chu

Client Partner, Private Equity Practice Group

In late March 2021, the Pedersen & Partners Private Equity Practice Team had the pleasure of welcoming Rudy Provoost, Founder and Managing Director of YquitY, an advisory and consultancy practice focused on the PE and VC space as well as executive mentoring and strategic counselling of family-owned and listed companies.

Mr. Provoost has a proven track record and extensive international experience in a variety of executive leadership positions. In his capacity as a CEO, he has led various businesses including Philips Lighting and Philips Consumer Electronics, during his tenure at Royal Philips, and Rexel, when backed by a PE consortium consisting of CD&R, Eurazeo, Bank of America Merrill Lynch and Caisse de Quebec. Mr. Provoost is currently chairman and/or member of the board of multiple companies, among which are Randstad, Elia Group, Jensen-Group, Pollet Group, and Vlerick Business School. Furthermore, he is a Senior Advisor for Cerberus Capital Management and an active investor in 9.5 Ventures, a corporate venturing fund.

The team enjoyed a lively and energising discussion, inspired by Mr. Provoost’s insights into the critical characteristics and key success factors of an effective CEO in a PE portfolio context, highlighting the importance of human capital, true entrepreneurship, and strategic fit.

We share our executive summary of the findings below, while expressing our sincere gratitude to Mr. Provoost for his valuable contribution.

Private Equity – a Human Capital Business

Consider the balance sheet as a metaphor. Once a PE firm has successfully completed the due diligence process, the final phase of underwriting and financing a deal very much focuses on the financial resources side of the target’s balance sheet. Once the acquisition is a fact, the investor’s attention quickly shifts to the assets’ side of the balance sheet in order to find ways and implement actions for maximising the financial return on the assets deployed. A similar logic applies to human capital. While the right side of that balance sheet is literally about the human resources in terms of the capacity, configuration and composition of the sources of manpower, the human assets on the left side are essentially about culture, capability, and organisational context.

The human fixed assets are as much about the culture of the PE firm as a whole as the DNA of the portfolio company that was or will be acquired. Particularly in case of family businesses, owned or targeted by PE firms, understanding the founder’s proverbial source code is also a critical success factor. There are many examples of investment cases in the PE domain, making sense and looking great financially, but when reality kicks in, the cultural mismatch turns them into a burden, if not a nightmare. After all, culture is not only about desired values and virtues, but also, and even more, the concrete consequences and constraints of deep-rooted beliefs and hard-wired behaviours, as well as persistent biases and blind spots.

The human equivalent of current assets consists of the capability of an organisation in terms of critical skills and core competencies. In that respect, it is an illusion to think there is a one-size-fits-all success formula. While many PE firms tend to streamline and standardise their ways of working and organising, the more successful ones seem to do a better job in tailoring and designing their approach to capability building by taking into account the particular characteristics of the different business archetypes. Eventually, the capabilities required for the turn-around of a distressed company are significantly different from the capabilities needed to implement a buy-and-build strategy in a consolidation context. In turn, it takes very specific capabilities to excel in an expand-and-grow play in order to reap the benefits of being a first mover or emerging leader in a fast-paced and high-potential market environment.

Whereas the company’s culture and capability represent the main tangible human assets, the organisational context forms the intangible human assets. As a company navigates and migrates through its life cycle, the organisational context evolves. In case of a company in the Form stage, skills and competencies for raising to the challenge and scaling up are mission-critical. When in the Perform stage, organisational maturity across key disciplines and functions becomes a condition-sine-qua-non to create a sustainable platform for value creation. In a Transform stage, adaptive leadership and change management make all the difference when confronted with adversity or disruption. In summary, the organisational context is a key variable in the human capital equation. In many ways, life cycle economics and system-psychodynamics go hand in hand, hence the importance in a highly demanding PE environment to anticipate and shape the organisational conditions to be future-proof.

Private Equity – Entrepreneurship at the Heart

Effective leadership in a PE context largely hinges on the driving force of entrepreneurship. Not just in a generic way, but specifically along three distinct dimensions.

First of all, the chief and leaders in charge of the business need to think, feel, and act as owners. There is plenty of evidence of the difference between the archetypal owner’s and the perennial manager’s mentality, especially in terms of skin-in-the-game – the desire to take risk, the determination to stay the course and the depth of personal commitment – hence the importance in a PE setting to hire for character rather than simply recruit for know-how.

Secondly, effectiveness in a PE context highly correlates with pragmatic leadership, which can best be captured in the C.A.S.H. acronym. Entrepreneurship takes indeed a Courageous, Agile, Synergistic, and Hands-on leadership style.

Courage is about audacity powered by accountability; agility is about being ready, willing, and able to adapt and turn opportunity or adversity into a new chance; synergy is about interdisciplinarity and complementarity across teams; and being hands-on is essentially about focusing on what really matters and eliminating unrewarded complexity where possible.

Finally, entrepreneurship also needs to be embedded and expressed in an integral governance model. In recent years, excellence in governance has become a more prominent item on the agenda of many PE firms, and indeed, some of the larger ones have put much more emphasis on it since going public. Eventually, entrepreneurship is not only the prerogative of the CEO and the management team, but also a prerequisite on the side of the chairman of the board and the investment officer underwriting the business case. A powerful concept is the governance triangle that hinges on a triple play between the CEO of the portfolio company, the chairman of the board of that company, who is preferably an operating partner at the firm, and the investment officer, accountable for the deal, who, is most often a financial partner at the firm. In its most adequate form, the governance triangle is an efficient vehicle to ensure strategic alignment, coherent execution and continuous improvement. Essentially, this integral governance concept also matches with McKinsey’s notion of organisational health, defined as the ability of a company to align, to execute and to renew itself.

Private Equity – The Art and Science of Choice

The best performing PE firms stand out by their ability to resolve dilemmas in relation to their operating paradigm, their primary purpose and the principles driving their priority setting. When working with and for PE firms, it is crucial to figure out how they are coping with those dilemmas and making trade-offs in that respect.

In terms of operating paradigm, a lot of small- and mid-cap PE firms are rather opportunistic and apply a buy-to-sell rather than a build-to-last philosophy, with the expected implications: buy as low as possible, restructure or consolidate quickly, and go for exit in three to five years aiming at doubling and even tripling their money. This approach contrasts with the tenure of some of the larger PE funds or niche specialists, who are often ready to pay a higher multiple and rather focus on sustainable long-term value creation by leveraging scale and size in fast growing sectors with the potential for an IPO over time. The contradiction between the two paradigms is not only visible in the difference in strategic ambitions, but also in the approach to talent management. In an opportunistic buy-to-sell scenario, recruiting for expertise in order to quickly turn experience into execution, will probably prevail, rather than the hiring-for-character approach with the aim to build a leadership bench for the long haul. When it comes to financial performance management, the more opportunistic investment officer, who is looking for getting to the projected returns from the investment case as quickly as possible in order to make an exit possible, will presumably behave very different from the more strategic investment officer, who will not necessarily settle for the base case but pursue the highest potential case for the best possible return over a longer period of time.

Even if the primary purpose of a PE firm is generally a variation on the theme of return on equity, it is important to recognise the differences, and especially the hidden competing commitments or potential tension areas. Some PE firms are ready to pay a price premium when acquiring a company and focus on maximising the value side of the business, while other PE firms look for companies trading at a significant discount and bet on quickly and drastically reducing the cost side in order to yield substantial returns. As a consequence of the PE firm’s stance and agenda, it is not uncommon that there are discrepancies between the current and desired quality of management. Furthermore, the task at hand often turns out to be hybrid, leading to gaps and putting pressure on the business system and management team. Choices regarding cash allocation are often a source of tension too. Specifically in the case of PE consortia, one founding member could expect the company to pay a sizeable dividend every year, returning the generated cash, while other members could prefer directly investing the generated cash to make more acquisitions and/or to accelerate organic growth. This kind of tension between shareholders can lead to conflict and have a negative impact on the company’s return on human capital and overall leadership effectiveness.

As much as priority setting is about deciding what to do – and especially what not to do – and focusing on the vital few game changers for the most impact, many PE firms tend to get carried away by micro-managing the business, keeping a long list of actions, imposing detailed process and program management routines and controls and adding disproportionate levels of complexity. Paradoxically, this type of intensive care treatment risks to result in lower return on human capital employed, as it often imposes too heavy boundary conditions, limiting the degrees of freedom and room for manoeuvre for the people directly in charge of the business.

Key Takeaways for Selecting a PE Portfolio Company CEO

What works well for a CEO in a PE-owned company?

Thinking, feeling, and acting as a true entrepreneur is a major advantage if not a prerequisite for effective relationship building and cooperation in a PE context as PE people have a deeply ingrained notion of ownership in general, highly valuing a genuine skin-in-the-game mentality, both professionally and privately.

Pragmatic leadership is fundamental in a PE environment: strategy is essential but agility in execution is even more crucial, particularly as it relates to the ability to adequately respond to the market reality, both in terms of challenges and opportunities, and convincingly turn strategic insight and foresight into market leadership.

Versatility is a true asset if not a precondition for a CEO to successfully operate in a PE setting, particularly as it relates to the interaction with the chairman of the board of the portfolio company, and the investment officer of the firm, who signed up for the deal. In that respect, an all-round multi-faceted CEO is often the best equipped to make that governance triangle work. Whereas the versatility of the CEO is a function of the multiplicity of her/his business exposure and experience, its impact is often the highest when the complementarity between the key players in the governance triangle leads to intense cross-fertilisation and synergy of skills and competencies. After all, the PE space is a multiplicity business. A PE firm, consisting of a pool of portfolio companies, is basically designed to turn multiplicity into a source of value creation.

When recruiting a CEO for a PE-owned company, it is key to make sure her/his track record provides evidence of the capabilities required for the task at hand. After all, the profile and personality of a turn-around manager heading a distressed company is very different from the growth champion in charge of a scale-up.

Culturally, it is crucial that there is a strong fit between the CEO’s personal code of conduct and the PE firm’s core values and beliefs system. A cultural mismatch is often a recipe for failure, hence the importance to make this an explicit point of validation when approaching candidates for a CEO position. Cultural discrepancies can also manifest themselves in other ways. Things can go dramatically wrong when someone with a few decades in a single large corporation in a specific industry sector ends up in a PE portfolio company because of her/his unique know-how but finally gets stuck due to a lack of cultural sensitivity in dealing with a brutally entrepreneurial setting. This also illustrates why hiring for character in the case of a CEO is at least as mission-critical as simply recruiting for expertise.

Against that background, it is also mandatory to fully understand and provide CEO candidates with a clear picture of the organisational context and be particularly aware of possible pitfalls and boobytraps in that respect. CEO candidates who have been successful in relatively stable sectors or mature industries could suffer significantly when fully exposed to the harsh reality of distressed operations and market turmoil. Similarly, the system-psychodynamics in a VUCA – Volatile, Uncertain, Complex, Ambiguous – business environment are undoubtedly more challenging than the organisational context of a well-established company in a largely oligopolistic market.

Finally, CEO candidates should be made well aware of the fact that their professional destiny in the future will be heavily determined by the PE firm’s exit strategy, with different possible outcomes, which could even lead to losing the CEO job over time:

• The portfolio company’s shareholder structure could evolve with a change in composition and/or control;
• The portfolio company could be acquired by another firm;
• The portfolio company could become a publicly listed company due to an IPO; In conclusion, selecting the right PE portfolio company CEO requires a truly holistic human capital approach and a deep understanding of all aspects of the PE equation.

At the beginning of March 2021, the Pedersen & Partners Private Equity Practice Team and the Healthcare & Life Sciences Practice Team had the pleasure of jointly welcoming Andrew Thompson, a Silicon Valley entrepreneurial leader who has been a frequent presenter for the World Economic Forum.

Recognised as a thought leader in Healthcare and Technology, Mr. Thompson has raised over $750 million in private, public and corporate capital over the course of his career in his capacity of Founder and Chief Executive.

The team enjoyed a lively and inspiring discussion, and discussed several topics at length, including Mr. Thompson’s insights on bridging the potential of technology with the practice of healthcare.

We share a summary of the findings below, while expressing our sincere gratitude to Mr. Thompson for his valuable insights.

The healthcare challenge

At least half of the world’s population do not have access to basic healthcare. Every year, about 100 million people are pushed into extreme poverty due to out-of-pocket health expenses. Population growth, an increasing number of patients with chronic diseases, and the need to provide new, innovative and affordable treatments are just a few hurdles countries must overcome. Achieving global access to healthcare will require a fundamental shift in the way resources are allocated.

Technology drives a fundamental change

More technologists are working today than they have been over the rest of history combined, so change is happening fast. If you want to know what is going to fundamentally shift the allocation of resources over the next 10 years, it’s a good idea to look back at the last 100 years. The mobile internet and associated digital technologies are a transformative shift; these technologies are remaking all our lives socially, politically, economically, and militarily. They are an opportunity to create a fundamental shift in the way resources are allocated.

The tech industry has created a fundamental shift in the way computing resources are allocated. There are three keys to making this happen:

• Consumerise – a cell phone, not a workstation; more computing power is now owned by consumers than by governments and corporations combined
• Systematise – tech ecosystem that enables a seamless experience; all the complexity is dealt with by producers, not by consumers
• Globalise – sell to everyone, not just rich people in rich countries; most people who own a mobile device make less than $10 a day

Changing the healthcare business model to serve customers Different approaches: US, Europe and Emerging Economies

The key to a fundamental shift in healthcare is what happens in the USA – the most advanced and expensive system, serving as a benchmark for the rest of the world. We don’t have a healthcare system. We have a sick care system. The system was designed in the last century to deal with the major problems of the time: acute disease and trauma. It does the job for which it was designed quite well, and it uses the best technology of the 20th century. It is driven by revenue: producers, payers, providers, and politicians all like healthcare inflation. The only people who would like healthcare to cost less are patients, but they are not part of the healthcare business model in the USA.

Covid may accelerate the creation of a healthcare system that makes use of the best technologies we have today. The potential of a building where you plug in to electricity can be magnified by the power of a mobile device where you log on to the internet. The capacity and expertise of people with knowledge in their heads is potentially massively extended by software and servers with intelligence in the cloud. Products designed to be safe in everybody and work in somebody could become services – tailored to you, your genes and your lifestyle, delivered where you live, work, and play, in ways that you see, measure and understand, at a price you can afford to pay.

European healthcare is also a sick care system, largely government-funded, where the key economic drivers are cost saving and budget compliance. The challenge is again incumbency and creating a change in purpose (from sick care to healthcare) in scaled human systems that is very hard to achieve.

Then there are emerging markets – will people in China see things differently? Potentially, but only if they don’t use business models that are based on the tools of the last century. The problem with healthcare and how it works in many emerging markets (India for instance) is that they try to replicate the US healthcare system in many ways, and thus create another magnificent dinosaur-style system that no one can afford. The opportunity for India is to leapfrog into a very different healthcare market that is consumer-driven, based on mobile phones, and addresses the basic and most obvious healthcare needs. The opportunity is not so much about China versus America or India, but about a generation of young, smart people who see the discontinuity, and who see new business models that can fundamentally change the way in which large industries work. Alongside that, governments can contribute through smart regulatory policy that makes it possible for these new companies to succeed.

Adding value as a VC

It is important to figure out what questions you are going to ask and in what order: Does this make a difference for a patient? Will this make money? Adding value as a VC is backing technology that makes a difference for patients, and then working to ensure there is a business model that will make money. It is not backing technology that will make money, and then working to ensure it makes a difference for patients.

Raising Money

Raising money for an early-stage company requires a strong narrative – a story. VCs are some of the most patient, open-minded and least opinionated people you will ever meet. With that in mind, I always encourage folks to realise they have 30 seconds to get them engaged. A great healthcare pitch is:

• This is what I’ve got: a unique technology, a great team, a massive market opportunity, and a fast path into the market
• This is why it’s important: it meets a major clinical need and we have figured out how to align economic incentives for patient, provider, and payer
• This is why you should invest now: we are executing rapidly and we will hit these value driving milestones soon.

Guest Speaker:

Andrew Thompson,

Managing Director and Co-Founder, Spring Ridge Ventures

Moderator:

Alvaro Arias,

Partner, Global Head of Private Equity Practice Group

Guest speaker introduction:

Lydia van der Meulen,

Client Partner, Global Head of Life Sciences & Healthcare Practice Group

Guest speaker introduction:

Beryl Chu,

Client Partner, Private Equity Practice Group

In late February 2021, the Pedersen & Partners Private Equity Practice Team had the pleasure of welcoming via video session Stefan H. Gödel, Operating Partner at Fidelium GmbH in Munich.

Mr. Gödel has 20+ years of experience as a Managing Director in consulting, M&A and private equity functions. Moreover, he has broad knowledge and expertise in restructuring corporate clients and value creation for Private Equity investors.

The team enjoyed a lively and inspiring discussion, and discussed several topics at length, including Mr. Gödel’s insights on Private Equity trends, with an emphasis on distressed investing in the DACH region; the role of the Operating Partner within a PE firm; the crucial actions to be undertaken within the first 100 days post-acquisition, and investor expectations.

We share a summary of the findings below, while expressing our sincere gratitude to Mr. Gödel for his valuable insights.

Distressed investing in the DACH region

We do not see a lot of distressed cases right now. The main reason for this is, that governments have put a moratorium on existing insolvency and bankruptcy regulations. Meaning that many companies which would need to file for insolvency or bankruptcy under normal circumstances, do not currently need to file. Once the pandemic has been overcome and the crisis is over, the regulations that are currently on hold will be set in operation again, and the number of defaults can be expected to rise.

Role of an Operating Partner within a Private Equity firm

There are two models of Operating Partners in the industry. In one model, the Operating Partner is employed by the fund to take a top-down perspective on the portfolio companies, but the Operating Partner does not usually take over positions within the portfolio companies. In the other model, Operating Partners can be employed directly by portfolio companies on behalf of the fund, and then take on positions as Managing Director, Supervisory Board Member or Management Board Member within the portfolio company. An Operating Partner can be called a “linking pin” between the fund and the shareholders on one hand, and the local management team on the other. When we look into distressed acquisitions in particular, there can be a lot of insecurity on the part of the local management, so this function also acts as a cultural bridge.

First 100 days post-acquisition

The first thing to do is to create transparency, to understand the company’s actual situation, and even to challenge the plan and the assumptions that the Deal team made when acquiring it. The second priority is to implement a KPI reporting: predominantly P&L, cash position, and cashflow. The third step is to identify the important, success-critical human resources – these are usually about 5 to 10 people (this does not depend that much on the size of the portfolio company), and to either develop a retention plan for them, or hire new staff via networking or with the support of an Executive Search consultant. Last but not least, a strategic plan for the portfolio company must be developed, covering at least 3-5 years ahead.

Expectations of a Distressed Investor

The key metrics are EBITDA, cash position, cashflow, and equity value. The imminent goal, especially in distressed situations, is to very quickly ensure that the company can “stand alone” so there is a need to put external financing in place, make use of all internal sources of cash, and stop the “bleeding” where there are losses, because further capital injections after the transaction should generally be avoided. It is very difficult to do, and sometimes there are misunderstandings in this respect between operational management, the shareholders and the deal team.

The impact of the low interest rate environment on valuations

Interest rates have been at an historic low for more than 10 years. This has had an indirect but potent impact on valuations. Many investors are looking for investment opportunities as traditional bonds and fixed-income vehicles are less valuable alternatives in a low interest rate environment. This lead to a strong inflow of capital into Private Equity funds. As a consequence, there is a lot of cash on the table when it comes to the acquisition of companies. Strong competition between PE funds and strategic buyers for a limited number of assets can in fact cause valuations to increase.

Characteristics of a CEO for a PE portfolio firm

These firms need someone who is able to drive the company forward, to take it one step further – this is not only a question of industry knowledge, but also of experience and strategic thinking. There are funds that acquire healthy businesses, using them as a platform, and then over the course of time, acquire three to five add-on companies in order to form something different and bigger. Their leverage is more than the EBITDA improvement; what comes out of this buy-and-build strategy is much more valuable in terms of positioning, and might actually attract a larger follow-on audience for a follow-on acquisition than the asset itself, leading to higher multiples. That strategy is also known as “multiple arbitrage”.

January 8, 2021 – Singapore – Pedersen & Partners, a leading international Executive Search firm with 54 wholly owned offices in 50 countries, is pleased to announce that Ruchika Gokarn will be our new Client Partner in the Singapore office.

Ruchika Gokarn is a Client Partner at Pedersen & Partners, based in Singapore. Ms. Gokarn has over 20 years of professional experience in Executive Search and HR Consulting. Throughout the course of her career, Ms. Gokarn has successfully completed numerous senior executive level placements across Private Equity, Technology, Retail, and Industrial industry sectors throughout Asia Pacific. Prior to joining Pedersen & Partners, Ms. Gokarn was based in Jakarta, Indonesia as a Partner and Executive Coach for an Executive Search and HR Consulting firm.

“I am pleased to welcome Ms. Gokarn to our team in Singapore, as an experienced professional, who brings more than two decades in Executive Search and HR Consulting. Ruchika built her career working in Indonesia, but also India and UK and her knowledge of the markets, local and cross-border clients will bring a new wave of closed assignments, placed positions and new professional relationships to our track record in such industries as Private Equity, Technology, Retail, Industrial and others,” announced Reza Ghazali, Client Partner and the Head of ASEAN & Board Services ASEAN.

“Pedersen & Partners’ global team has an impressive track record in maintaining relationships with the existing clients and approaching new ones, especially during this difficult period for companies all over the world. I am thrilled to be joining Pedersen & Partners and work together with my new colleagues on providing high-level support for our clients and help place top-level executives,” added Ruchika Gokarn, Client Partner at Pedersen & Partners.

Highlights:

• The average investment period will be delayed by at least 1-2 years
• A defensive scenario will be followed by a growth scenario. We expect the defensive scenario to last 3 to 8 months
• Some fund managers are taking advantage of the liquidity provided by central banks and governments to switch their private debt to bank debt
• There will be opportunities to identify companies at lower valuations.
• We foresee strong developments in areas related to healthcare and digital space
• The creativity and entrepreneurial capabilities of the management teams are key success factors for exit strategies
• Many leveraged portfolio firms will breach covenant clauses

An analysis performed by the Private Equity Practice Group of Pedersen & Partners following conversations with dozens of mid-sized PE funds in Europe has reached a conclusion that is in line with the opinions of the majority of the macroeconomic analyst firms. The impact on fund managers depends on two main factors: the fund type and the situation of the fund at the start of the crisis. The average investment period will be delayed by at least 1-2 years.

As for portfolio management, we foresee a defensive scenario followed by a growth scenario. However, analysts are failing to take the human factor into account, specifically the influence and capacity of skilful executives to lead their teams and manage their businesses through the complex situation caused by the SARS-CoV-2 pandemic.

Impact on Private Equity fund managers

Some funds are better designed to overcome this situation, and a few have even benefited. These are secondary funds, special situations and hybrids that have greater flexibility to consider alternatives when the crisis recedes.

For the fund managers that have done well, there is a certain luck factor which should not be overlooked. Many fund managers have benefited from a good cash position and the recent closing of a new fund, while others have a relatively broad portfolio of companies. Conversely the fund managers that will encounter the greatest obstacles to recovery are those who have acquired companies which are highly leveraged in vulnerable sectors such as entertainment, tourism and hospitality. Many leveraged portfolio firms will breach covenant clauses as EBITDA declines. Fund managers expect most debt providers to be flexible, but admit that debt providers will have a bigger say.

Some fund managers are taking advantage of the liquidity provided by central banks and governments to switch their private debt to bank debt, benefiting from lower interest rates and obtaining a liquidity security support.

Impact on Portfolio Firms

The members of our Private Equity Practice have had conversations with multiple funds and CEOs, and our conclusion is that a defensive strategy will be initiated first, followed by a growth scenario.

We expect this defensive scenario to last from 3 to 8 months, depending on the leadership skills of the fund managers, their management teams and the particular situation of each investee. During this phase, management teams will address the immediate problems related to liquidity, and will improve cost burdens, while effecting a redesign of business plans and a re-orientation of strategy.

Once this initial defensive stage is overcome, the fund managers will refocus on growth. There will be opportunities to identify companies at lower valuations. Before the crisis, there had been a problem of inflation in company valuations, and this will be eliminated. Furthermore, competition will decrease as some fund managers will take longer than others to recover.

In our opinion, the success factors for portfolio firms will be:

• Management teams with strong leadership capable of maintaining the focus on business, while motivating teams with the creative and entrepreneurial capacity to look for alternatives.
• A timely transition from the defensive phase to the growth phase.
• The ability to align the entire organisation in refocusing from the defensive phase to the growth phase.

Investment opportunities

In terms of areas of opportunity, we foresee strong developments in areas related to healthcare and digital space.

For a long time, Private Equity has seen Tech and BioTech/MedTech/Health Technologies as highly attractive industry segments for investment, and we have heard this stated repeatedly at the Pedersen & Partners PE Breakfasts that we have hosted across the world. The Covid-19 pandemic is creating disruption and uncertainty for the medical technology industry in ways that were unimaginable a few short weeks ago. Potential risks and opportunities lie ahead in this precarious business environment; whilst clinical studies are suffering from the priority given to battling the pandemic crisis, pre-clinical Biotech is seeing ‘business as usual’. Moreover, MedTech and Health Technologies could gain traction, with new ways of working more rapidly embraced by hospitals and other healthcare institutions during and following this crisis.

The Covid-19 crisis has already sparked a review of legislation and policies on broadband connectivity, e-learning, e-government, e-health, sustainable mobility and data sharing. Regulatory initiatives will accelerate the adaptation of these technologies. Foundational technologies such as IoT (Internet of Things), machine learning and AI will get a further boost as they enable further automation and the release of human capacity. Finally, IT developments will further dissolve borders between classic industry verticals, and disintermediate related value chains.

If you would like to conduct an interview with a representative of Pedersen & Partners, or have other media-related requests, please contact: Diana Danu, Marketing and Communications Manager at: diana.danu@pedersenandpartners.com

January 10, 2020 – Madrid,  Spain – Pedersen & Partners, a leading international Executive Search firm with 54 wholly owned offices in 50 countries, is pleased to announce that Partner Alvaro Arias Echeverria has been appointed Global Head of the Private Equity Practice Group.

Alvaro Arias Echeverria has been in charge of Iberia and Latin America at Pedersen & Partners for almost a decade, and has co-headed the Global Private Equity Practice at Pedersen & Partners for over two years. With over 15 years of Executive Search experience, Mr. Arias Echeverria has successfully completed Private Equity assignments across Europe and Latin America, with mandates ranging from succession planning and high-opportunity sectors to value creation and portfolio management strategies. Mr. Arias Echeverria focuses on organisational and leadership effectiveness and advising clients on business and intrinsic talent-related aspects, informed by his lasting relationships with leading investment management firms, institutional investors, asset management, advisory, development, and pension fund companies. In addition to his Private Equity focus, Mr. Arias Echeverria has a substantial track record of successful assignments in Retail, Industry and Energy, Financial Services, Healthcare, Telecoms, and IT, with a particular focus on due diligence processes and talent gap analysis. Prior to joining the firm, Mr. Arias Echeverria held senior positions as a Partner and member of the International Executive Committee of Neumann International and Principal at Egon Zehnder International. Before launching his Executive Search career, he was a Senior Manager at AT Kearney, and a Professor at IESE Business School. While at IESE, Mr. Arias Echeverria collaborated with other IESE professors to found the financial services boutique Global Business and Finance, and the IESE International Finance Research Centres (CIF) in Barcelona and Madrid.

“The global Private Equity industry has registered record-high results over the last few years, and our clients have consistently turned to our expert industry consultants for help in aligning their strategic investor plans with their leadership capabilities. Alvaro has led our global team into partnerships that help our clients to plan investment strategies which include a built-in C-level talent component to ensure the best match at every stage of the deal, from appointments and assessments to succession strategies and value creation plans. Alvaro applies his core values-driven advisory and search expertise across the lifecycle of an investment, and his thorough understanding of the industry processes and talent requirements transcends geographical boundaries while factoring in local sensitivities. I am certain that Alvaro’s appointment will be a stepping stone for the entire Practice Group’s accelerated growth,” stated Gary Williams, Chief Executive Officer at Pedersen & Partners.

“As with many other industries, Private Equity has been greatly impacted by the abundance of opportunities brought on by the era of digitalisation, among other global factors affecting its course. At Pedersen & Partners we are uniquely positioned to help clients achieve their transformative goals in unpredictable and rapidly changing operating environments. Our team of consultants encompasses a wide array of critical credentials that are essential to guiding and advising them on vital leadership aspects necessary to accomplish their business aspirations. I’m excited to take on full responsibility for the Private Equity Practice Group, and to continue strengthening our position in this complex market in the years to come,” added Alvaro Arias Echeverria, Partner and the Global Head of the Private Equity Practice Group at Pedersen & Partners.

If you would like to conduct an interview with a representative of Pedersen & Partners, or have other media-related requests, please contact: Diana Danu, Marketing and Communications Manager at: diana.danu@pedersenandpartners.com

• What are the recent developments and trends in the German M&A market – including deal flow, valuations, funding, availability of credit for leverage financing, exit routes and co-investments?

• What are the high opportunity sectors and market segments?

• What are the strategies for value creation and portfolio management?

• How does the geopolitical arena impact deal sourcing and management of the investments and exits – and what external factors are significant?

• Finally, what are the main sources of capital during fundraising, and how is this evolving?

These were the main questions discussed at the 2019 German Private Equity Breakfast, co-hosted by Pedersen & Partners and leading law firm CMS. Nearly 100 professionals from the industry gathered in the ballroom of Villa Kennedy, Frankfurt to discuss trends and exchange opinions.

The panel was moderated by CMS Partner and PE practice lead Tobias Schneider and Poul Pedersen, Executive Chairman of Pedersen & Partners. The panel was carefully assembled with leading heads of industry, and represented a good mix of investment and PE professionals, including Benjamin Buerstedde from Advent International, Hauke Hansen from Triton Partners, Joakim Lundvall from Nordic Capital, Jan Henrik Reichenbach from Muzinich & Co, Michala Rudorfer from Permira, Ervin Schellenberg, investment banker and founder of Capitalmind, and Bernhard Mohr, managing director of Evonik's corporate venture arm.

The main conclusion of the participants is that the race for the best deals is set to continue, as Private Equity continues to consolidate its position as an attractive asset class. Several investors have treated 2019 as a year of fundraising and divestment such as Permira’s IPO of Teamviewer. 

In the words of one panellist: “You need to be somehow creative to find good deals.” Such sectors as consumer, e-commerce and software were mentioned as interesting, while automotive and traditional retail are challenging.

Debt

Debt investing continues to be one of the fast-growing pillars in PE, but players like Muzinich and other large debt investors have calmed down a little, and are now looking for quality rather than quantity. There was also a lively debate about the best way to leverage and invest in a mid-market deal: raise funds from banks or from debt funds? The inclusion of hybrid debt structures in a financial model has been regarded as useful, especially for smaller transactions.

Portfolio management

Value creation is high on the agenda and most PE funds spend more resources on value creation and/ or operating partner teams. Approaches to portfolio management have been very diverse due to the range and size of recent investments, but it pays off to adopt a bolder approach and engage in deals which require a careful handling of the portfolio, as seen in the KKR/Springer deal.

Economic Cycle

There is consensus that the economic cycle has now peaked and we are seeing a period of slower growth. This is not necessarily bad, as many opportunities arise during economic downturns – for example, we see a continuing scheme of corporate disposals. There is a current trend away from classic deal structures to more modern ones.

Fundraising and exits

Fundraising is becoming more transparent than ever. The Limited Partners market is going through a disintermediate process, with funds facing increasing difficulties in justifying their added value. Meanwhile, Private Equity fund managers are going directly to institutional investors. For Permira and Advent the past year has been marked by successful fundraisings.

Meet the Team

If you would like to conduct an interview with a representative of Pedersen & Partners, or have other media-related requests, please contact: Diana Danu, Marketing and Communications Manager at: diana.danu@pedersenandpartners.com

What are the recent developments and trends in the Spanish M&A market – including deal flow, valuations, funding, availability of credit for leverage financing, exit routes and co-investments? What are the high opportunity sectors and market segments? What are the value creation and portfolio management strategies? How can CEOs be more creative and add value? How does the geopolitical arena impact deal sourcing, management of the investments and exits, and what external factors are significant? What are the main sources of capital during fundraising, and how is this evolving?

These were just a few of the questions raised at the 2019 Spanish Private Equity Breakfast in Madrid, co-hosted by international Executive Search firm Pedersen & Partners together with international law firm CMS, in which representatives from well-known Spanish and international private equity funds held discussions in a lively and agile atmosphere.

The high calibre event gathered more than 70 professionals to ensure a range of perspectives, including: Carmen Alonso, Head of Iberia of Tikehau Capital, Carlos Carbó, Founding Partner and CEO of Nazca Capital, Eduardo González, CEO of Eugin Clinic, José María de León, Director of H.I.G Capital, Álvaro Olivares, Partner of Corpfin Capital and Alberto Yanci, Partner of Proa Capital. The panel discussion was co-chaired by Carlos Peña, Partner of CMS and Álvaro Arias, co-head of the global Private Equity Practice at Pedersen & Partners, and the talking points included sources of debt: bank versus debt funds, managing and relating to CEOs of portfolio companies, fundraising strategies, investment opportunities during down cycles, and Spain itself as an investment destination.

Debt

There was a lively debate about the best way to get leverage to invest in a mid-market deal: from banks or from debt funds? Those who favoured using bank debt pointed out the lower interest costs, while those who favoured debt funds highlighted the greater flexibility. Some of the contributors considered that the approaches are complementary, and suggested the possibility of using hybrid debt structures.

Portfolio management

Each fund manager has their own strategy for managing investments and relating to the CEOs. Some strategies are common to all, such as getting close to the CEOs and partnering with them. Trust is critical, especially when CEOs propose new strategies or ideas to generate further value. CEOs manage expectations by aligning budgets with reality. An awareness of the economic cycle, and the importance of adapting growth or efficiency strategies to fit it, was mentioned as a critical success factor.

Economic Cycle

There is a consensus that Private Equity is undergoing a good period in terms of deal generation, exits and fundraising in an environment of high liquidity. Nevertheless, there is also consensus that the economic cycle has already peaked, and a period of slower growth has arrived. This is not necessarily bad, as many opportunities arise during economic downturns.

Fundraising and exits

Fundraising is becoming more transparent than ever. The Limited Partners market is going through a disintermediate process, with funds facing increasing difficulties in justifying their added value. Meanwhile, Private Equity fund managers are going directly to institutional investors.

Sectors of interest

Last year the main investment sectors in Iberia were energy, telecoms and services, although the consumer sector was also attractive. However, manufacturing saw only 8% of the total investment. During 2019, the distribution shifted with energy at the top, but investment in services and consumer sectors dropping. Next year’s most attractive opportunities may be in niche defensive sectors such as natural ingredients for all industries, and activities related to the ageing of the population.

The race for the best deals is set to continue, as Private Equity continues to consolidate its position as an active investment asset class. Spain is a good destination for mid-market investment (10 to 100 equity tickets) with good opportunities and still some discounts in valuations compared to other European countries. The total Private Equity investment in Spain has already passed 0.5% of GDP – above the European average – and continues to grow.

If you would like to conduct an interview with a representative of Pedersen & Partners, or have other media-related requests, please contact: Diana Danu, Marketing and Communications Manager at: diana.danu@pedersenandpartners.com