THE NEW LOOK - L-GAM

realdeals.eu.com
31 OCTOBER 2013 T HE I N D E P E N D E N T VO I C E O F E U R O P E A N P R I VAT E E Q U I T Y
THE
NEW
LOOK
L-GAM’s team
explain how they
can bring a fresh
perspective to
private equity.
FEATURES L-GAM
Felipe Merry
Del Val
L-GAM OF THRONES
Jerome
Bertrand
THERE’S A NEW KID ON THE BLOCK, AND IT HAS
ROYAL APPROVAL. REAL DEALS SPOKE TO FERDINANDO
GRIMALDI, YVES ALEXANDRE AND FELIPE MERRY
DEL VAL ABOUT HOW THEY PLAN TO OPERATE.
Interview James Harris
Photography Richard Gleed
6 } realdeals 31 October 2013
L-GAM FEATURES
Yves Alexandre
You have a strong relationship with the Princely
Family of Liechtenstein – the firm’s name, L-GAM,
stands for Liechtenstein and then your three
surnames. How did that relationship come about?
Grimaldi: We’ve known Max [Prince Maximilian of
Liechtenstein] for many, many years. Personally, I worked
together with him in the early 1990s when I was at Chase
Capital in the US. Max has been a private equity practitioner
for many years – now he’s managing his family’s business.
For the last four or five years we’ve been discussing whether
there was some common ground to do business together.
From their point of view, the majority of their business is
linked to asset management and private banking through
LGT. They have for some time expressed a desire to diversify
away from financial services and the other assets in their
Ferdinando
Grimaldi
portfolio such as art and real estate, agriculture and forestry,
which are part of the family heritage. They want greater
exposure to operating companies.
It’s important to note that this is not a family office, or a
managed account. It is an independent investment vehicle
with a strong anchor investor.
Is it structured as a traditional LP fund?
Alexandre: We wanted to make sure there is a better
alignment of interests than is available in a lot of other funds.
Right from the start, we want it to be clear that we are not
looking to make money on fees and that we will instead be
incentivised on performance.
We wanted a structure that enabled us to act in the long
term. We wanted to avoid situations in which we were obliged
to sell companies because we reached the end of a fund, and
it was no longer possible to provide capital to support growth
projects. I always felt it frustrating that if you found a great
business, you weren’t able to hold on to it because in some
ways, private equity is a business of rotating assets and
returning capital regularly. We want to hold on to winners.
That’s why we have a 15-year life rather than the more
traditional ten-year period.
Grimaldi: We have also insisted that in this environment, we
need to have a completely flexible mandate. For that reason,
we can pursue normal control-oriented leveraged buyouts as
well as growth capital. Throughout our careers, we have always
done control-oriented transactions – we know how to behave
as controlling shareholders. But today there are specific
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FEATURES L-GAM
circumstances where we can be flexible and be a minority
shareholder when the right governance is in place.
Alexandre: We have identified that SMEs are facing trouble
raising capital, and that is exactly what we are trying to
address. And by capital, I mean a broad definition. It could be
a junior debt instrument, equity, a strip with warranties and
equity rights. We can help out management teams undergoing
succession, or help companies realise their growth ambitions.
Grimaldi: We’re also interested in distressed situations,
particularly in continental Europe, where those deals tend
to take the form of a debt restructuring, not necessarily
loan-to-own. We have the flexibility to do those types of
transactions as well.
Are you concerned that other LPs committing
capital at a later date are put off by the
prominence of your anchor investor?
Alexandre: I think some LPs might view it positively.
They will understand that this is a long-term investor with
a history of successful investments. And we will have the
right structure to make sure the governance is appropriate.
We acknowledge that some LPs might not be attracted to
this kind of arrangement.
It’s clearly a difficult time for new firms entering
the market. Why did you decide to go it alone?
Grimaldi: It was always an important aspiration in my career
to raise a fund with like-minded people that I’ve worked with
before. The four of us were at Investcorp. I left in 2002, Felipe
left in 2003 and Yves left in June this year.
In the meantime, I left to join Bain Capital. Felipe joined
a couple of years later, in 2006. Jerome Bertrand, the fourth
partner, also worked at Bain Capital. We all worked in the
industry for 20 years and we wanted to do our own thing at
the same time.
And there are good opportunities. A lot of private equity
players have disappeared, particularly in Southern Europe.
Yes, the market has been difficult, but investors are now more
willing to put money to work and valuations are recovering.
A lot of LPs have received distributions, and they are feeling
better about putting money back into the asset class. And
investors are hungry for yield – government bonds are offering
just one or two per cent, high-yield bonds just five or six per
cent. Although the public markets are much stronger this
year, there is still a lot of volatility.
You’re looking to invest in SMEs – that’s very
different from what Bain Capital typically
does, isn’t it?
Grimaldi: I’m not sure that’s true. At Investcorp, we were
making investments with an enterprise value from $100m
(€72.7m) businesses to $1bn at the most, and that was during
the good years.
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“”
THE MARKET HAS BEEN
DIFFICULT, BUT INVESTORS
ARE NOW WILLING
TO PUT MONEY TO
WORK AND VALUATIONS
ARE RECOVERING
Alexandre: In the past few years Investcorp has been focused
on a maximum enterprise value of $200m to $300m, so very
much in the mid-market.
Grimaldi: Meanwhile at Bain, when I arrived in 2002 our first
European fund was $500m, so it was very different from what
the firm was doing at the end of 2006 or in 2007. The market
changed a lot while I was there. If you look at our combined
experience, in the last couple of years 80 per cent of the
investments were in SMEs, and by that I mean companies
with an enterprise value between $100m and $300m.
You mentioned that SMEs are finding it difficult
to access finance. Which geographies will you
be focusing on?
Grimaldi: Right now I think there is a market dislocation
in Southern Europe. On the supply side, a lot of firms
L-GAM FEATURES
“”
WE DON’T WANT TO BE VIEWED AS
INVESTORS THAT FOCUS ON FINANCIAL
ENGINEERING. WE WANT TO STICK TO
WHAT DROVE RETURNS HISTORICALLY
have disappeared or are very cautious, and that represents
a clear opportunity.
I can’t give a breakdown of what the portfolio will look
like, but we have a good track record in Italy, Spain and France,
and we’re also interested in the German market. It also helps
that I’m Italian, Yves is French, Felipe is Italian and Spanish
and Jerome is French and German.
Today there are a lot of global businesses that generate
the majority of their turnover outside the country in which
they are based. If a company is headquartered in Spain or
Italy, let alone Portugal or Greece, they get penalised. Their
valuation will be lower and their access to finance will be
much more difficult. There really is no reason for these
companies to be penalised.
Alexandre: We don’t want to be pigeonholed. There is a big
opportunity in Southern Europe at the moment, but clearly
there are SMEs in other markets and we intend to expand
our team to include the German market as well.
It doesn’t help that SMEs in Spain and Italy
have a much higher cost of financing than their
counterparts in France or Germany…
Grimaldi: That’s true but the real problem is access. At the
height of the eurozone crisis in 2011 and the beginning of
2012, you could see it everywhere – there was a huge difference
between Italian and German government bond yields. It’s
much less now, but the spread for SMEs is much less
transparent. We’ve done a lot of work on this and it’s clear
that access to credit is one of the biggest issues hindering
SME growth plans, particularly in Southern Europe.
Of course, it’s very different for companies that can access
the bond market, but none of the companies we’re looking at
are in that range.
You mentioned that you’d consider co-investing
with other private equity funds. Do you think
that will be a significant part of your business?
Grimaldi: I think it will be the exception rather than the
rule. I don’t think there will be traditional private equity
funds looking at the same opportunities as us, so I can’t see
it being more than 20 per cent.
Merry del Val: It’s more likely, given our structure, that we’d
co-invest with management teams and other entrepreneur-led
companies that want to open up their capital for us. It’s also
more likely that banks will team up with us.
Banks hate loan-to-own, because it means investors buy
debt at ten cents on the dollar. Banks will occasionally do
it when they have to get rid of the paper. But they hate
crystallising the losses. So what tends to happen is banks
amend and pretend, they kick the can down the road, and
they know they’re doing it, but it buys time.
There’s an opportunity to work in a collaborative way
with banks if you can come in with a capital increase,
strengthen the management team, make sure you get some
protection on the new money, but still work with banks to
return a big part of their exposure. That is something that
banks are more receptive to.
But a lot of banks in Europe are still reluctant
to work with private equity firms in such a way…
Alexandre: There are other factors at play. European banks
simply couldn’t take the losses – they didn’t have the capital.
That’s why they have been much slower to act than US
banks. European banks cannot afford to do that because
they are unwilling to do a rights issue and wash out existing
shareholders. Certainly in Southern Europe, banks are cautious
about diluting existing shareholders. So banks have been slow
to clean up portfolios.
This is why there have been so few distressed
deals in Europe. Do you think that will change?
Grimaldi: I think banks in Europe are getting closer to the
point where they are ready and able to take writedowns. In
the last four years they have been able to rebuild their capital
bases, and they’re more profitable.
A lot of banks have big exposure to government bonds.
When government bonds went underwater because of the
eurozone crisis, banks were making losses. Now with the
help of the ECB, the situation is normalising. Central banks
are pushing for solutions that are more definitive. In Spain
they have formed the bad bank; something similar is being
discussed in Italy. We are getting there. I’m not saying there
will be a flood of opportunities in the next couple of months
but we are getting there.
Returns for European private equity have been
pretty disappointing in recent years, especially
compared with public equities. Do you think the
returns that the market became accustomed to
will recover or were they the result of one-off
conditions, namely a wave of privatisations and
a nascent private equity industry?
Grimaldi: I don’t think you can judge private equity on the
basis of a couple of years. Public markets are very volatile, so
returns in the last year have been positive, but will they last?
Undoubtedly there are cycles in private equity. The one
from 2002 to 2008 was very positive. There was strong global
economic growth, inflation was low, plenty of leverage was
available, as well as multiple accretion. The stars were aligned.
I think we’re in a period where we’re going back to a more
normal private equity environment.
We have to ensure that we do well every step of the way –
buying well, adding value during the ownership period and
selling well. It is no longer reasonable for us to assume, as
we could in 2006, that someone is going to bail us out in the
end just because leverage is going to be higher and the market
will be exuberant.
Alexandre: We don’t want to be viewed as investors that
focus on financial engineering. We want to stick to what drove
returns historically, spotting the opportunities where capital
is needed and buying well.
Leverage is creeping up to pre-crisis levels. Is
there a risk we’re heading back into a boom?
Grimaldi: Monetary conditions are exceptionally favourable,
but I think that will change. Interest rates are very low
and there is a lot of liquidity in the system because of
quantitative easing.
Alexandre: A lot of companies have been refinanced, so the
problem has been moved by a couple of years. It may not be
easy to raise the same amount of debt two years from now.
Merry del Val: At one point there was a clear flight to quality
for larger deals. There were safe, defensible transactions
between 2008 and 2009. The real high-quality assets, on the
whole, went for high multiples, and they still found pretty
interesting levels of financing. Pets at Home is a good example.
That part of the market hasn’t come down as much. For SMEs,
they definitely have come down.
Debt for me is an amplifier of performance – for good or
bad. Debt is a way of lowering your cost of capital, but it’s also
a tool to be used with care. It is good up to a level, and beyond
that it generally just benefits sellers. It means they can get a
higher multiple. During a good period, the money that was
spent buying the asset could have been used in other ways
and therefore stifles the company’s growth. In a bad period,
the ability to withstand crisis is hampered. Either way,
excessive debt is not good.
Family offices have been more active in recent
years. Are you seeing greater competition from
these investors?
Alexandre: We’re definitely seeing a trend now. Initially,
family offices had a lot of capital to deploy and they wanted
to do that more cheaply, so they increased the number of
co-investments. Now they are starting to do direct investments
and they’re building their own teams. There will be some
successes, and some failures. It’s not easy to create the right
team – it takes a lot of time. If you look at the LPs that have
done direct investments for a long time, a lot of them have
had ups and downs.
If family offices aren’t paying fees then they
can afford to pay a higher price and still get
the same return. Are you concerned that pricing
will increase?
Alexandre: I don’t think so. Family offices tend to be pretty
prudent and use less leverage. Besides, they don’t have the
resources of endowments and pension funds, which have
millions of dollars to deploy. Family offices may become
more active, but they won’t drive the boom.
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