Part of the solution, not part of the problem
After her speech, Dörte Höppner, Secretary General of the European Private Equity and Venture Capital Association (EVCA), was joined by two practitioners who argued on behalf Private Equity’s (PE) contribution to the economy. All three panellists agreed that PE is certainly not responsible for the financial market crisis and that it does not pose any systemic risks. The good news is that European policy makers have started to realise that this industry is a source of growth.
“We are part of the solution for companies that want to grow and that need capital to do so. The European Commission created a regime for private equity because policy makers realise that we need more private capital for the funding of small and medium-sized companies and others”. Dörte Höppner added during the event organised by Luxembourg for Finance and Ernst & Young Luxembourg that it was almost easy to convince policy makers once they listen, because it is so obvious that private equity is an important contributor to the economy.
Rory MacMillan is Principal, Director at Carlyle Group, and a global alternative asset manager with 160 billion dollars in assets under management. He has read a lot of books on the financial crisis and in not one of them is private equity held responsible for the crisis we are currently experiencing. In his opinion, the PE industry has evolved tremendously over the past few years. “I think where our industry has stepped up is in its view on debt. We see less leverage than we see in the past. There is more willingness to talk about debt than in the past. Government also has also started to realise that we can be a part of the solution”.
Hans-Jürgen Schmitz is Managing Partner at Mangrove Capital Partners, one of the leading European venture capital firms. He says that considering the fact that private equity and venture capital are financing ideas and helping start-up companies, it is clear that venture capital can be considered a part of the solution for helping struggling Europe. He illustrated his point with the example of a private equity house in Germany, which invested 50 million euros in a company that only had three years under its belt. This is something that would have been unheard of some years ago, he stressed.
Cranking up the volume on the economy
Alain Kinsch, Country Managing Partner at Ernst & Young Luxembourg, was moderator of this high-profile panel. He cited a study saying that 78% of PE performance comes from operational improvement. The Carlyle Group has invested in Europe since the early nineties, Rory MacMillan reminded the audience. “We are investing in companies that want to grow internationally and open new markets. Our philosophy is not to go into the company and basically take over. Our goal is to have a management that takes the company to the next level and the next one and so on. You do that by putting the right people into the right roles: we can help by putting Carlyle experts on the board”.
Hans-Jürgen Schmitz of Mangrove noted that there are a few differences between what firms like Carlyle do and what his firm does. “When we start investing, it is companies with one to ten employees, so growth can be measured through the growth in employees. If I look at the last fund, which was created in 2008, today it has 20 portfolio companies under its belt with a total of 3,000 employees” .
Regarding trends, Rory MacMillan sees the larger buyout companies continuing to raise large funds in Europe. So there is a strong commitment to Europe. In the midmarket niche, however, there are more questions about the future because some firms are deciding to go down the sector specialist route and some down the national route. Nonetheless, he sees a lot of potential for growth for SMEs in Europe.
Hans-Jürgen Schmitz remarked that he does not agree with market specialisation because good ideas are everywhere. Dörte Höppner, Secretary General of the EVCAmentioned a trend of small and mid-size companies that do not want to give up their ownership completely but are willing to take on a minority investment on board. She deduced that the industry shows that it is capable of meeting these new market realities.
Turkey: a private equity hot spot
While Mr Schmitz hopes that this trend will continue, he expressed concern about the shrinking number of players in continental Europe. “When Mangrove started a few years ago, there were more than 200 active funds, and today we are down to 50. The situation is particularly dire in Germany, despite everything you hear about its export performance and its economic strength. France and the UK are much bigger. A fund starts at 100 million euro and not below because you need to have enough capacity and early growth capital available.”
To Mr Schmitz, Russia and South America are interesting destinations. However, his favourite is another country altogether. “Turkey is one of the hottest places right now, not only temperature-wise. Where I invest most are consumer-focused e-commerce businesses, ideas and technologies. Turkey has a very young population that is becoming very affluent in terms of disposable income and that is the perfect market for those types of businesses”.
In an ideal world, investors want something that is liquid and with very high returns. Rory MacMillan of Carlyle Group agrees that his firm responds to clients’ needs. “Our roots are in private equity, but if you look at how business is structured today, you have the funds of funds business. We are in real estate, energy, and we are also now in structured credit funds”.
According to Mrs Höppner, this shift is logical. “The fact that you are offering these kinds of products is also a reaction to market realities. In the USA you have 80% of the debt financing coming from the markets and 20% from banks, whereas in Europe it is the other way round”.
Still number one
The last topic discussed was regulation. Rory MacMillan talked about the challenges linked to this issue. “There are some insurance companies that are holding back from investing in our asset class. The great challenge for us is to see that pension funds don’t fall under the same solvency regime that insurance companies and banks do. What’s more, there are new investors, with high net worth individuals coming through; there is also a growth of sovereign wealth funds and we see greater geographic diversity. It is not all gloom and doom, but the landscape is certainly changing”.
Dörthe Höppner continued by saying that it is not only about regulation, but pension funds that at 40% are the biggest investor group in private equity, but this part will decrease because there is currently a shift from defined benefit to defined contribution schemes. There is another trend that makes fundraising more complicated: “We also see more interest from family offices, especially in venture capital, which makes it more cumbersome for venture capital. They have to knock on many more doors because the commitments of these family offices are much smaller than of a pension fund. If you lose that big investor, you need to make it up with 20 family offices”.
All three private equity experts concluded that Europe, still the largest economy in the world has to make its case and policy makers have to promote Europe as an investment location. They are less worried that investors will avoid private equity, but rather Europe as a whole if the negative news in the press about the future of the continent doesn’t stop. CW