In a recent webinar hosted by Palico in association with Real Deals and IPEM, a panel of industry experts sat down to discuss mid-market private equity’s response to lockdown disruption and lay out the challenges and opportunities the pandemic presents for Europe's mid-market managers. • 6 min. Read •
On the Panel were Claire Commons, our Head of Strategy at Palico, who moderated the session, Ilona Brom, Managing Director at Wilshire Private Markets Group, Juan Luis Ramírez, Founding Partner of Portobello Capital, Laura Dillon, Principal and Irish Team Head at Waterland Private Equity, and Carl Nauckhoff, Senior Principal and Head of IR at Investindustrial.
At the start of 2020, it was business as usual for private equity managers, who began the year eager to deploy record cash piles and exit prized assets. Covid-19 changed all that.
Buyout figures for the first six months of the year released by the Centre for Management Buyout Research (CMBOR) revealed the lowest number of new deals and exits since the dark days of the global financial crisis in 2009. The Argos Index, which tracks the multiples paid by private European mid-market companies, saw pricing fall by a turn in Q1. Figures for Q2 are expected to show even deeper dips in valuations, and more than half of respondents to a GP survey conducted by Investec are bracing for lower returns.
For all the disruption, however, opportunities have emerged too. Mid-market portfolio companies have proven the efficacy of remote working, the power of technology, and the importance of good ESG has come to the fore.
Either way, Covid-19 has changed private equity for the long-term. In a webinar hosted by Palico in association with IPEM and Real Deals, Palico brought together a group of GPs and LPs to reflect on how firms have navigated lockdowns and what this means for the asset class in the long-term.
Here are some of the highlights from the discussion:
The European mid-market Zeitgeist:
Palico’s Claire Commons said Europe’s mid-market “was a critical area” for investors building exposure to Europe.
“Europe is run on small and mid-market companies and the performance of European mid-market investments has been really good, especially when compared to some of the larger funds. If you look at Europe’s top quartile of funds, there is a really good ability to pick top managers,” Commons said, adding that the performance in the European mid-market had been driven by genuine “roll your sleeves up operational improvements” rather than “catching the wave of capital markets”.
Investing in a low-growth environment:
It is no secret that Covid-19 has caused steep declines in GDP across all European economies, many of which were already experiencing anemic growth prior to the coronavirus outbreak. How are European dealmakers finding growth against this backdrop?
Ilona Brom from Wilshire Private Markets Group said GDP fluctuations were not a predictor of uncovering value in Europe’s mid-market.
“Yes, growing GDP is helpful, but at the end of the day it is all about creating operational value that is not dependent on the economy or leverage. Transforming that company into a business that is better is the priority – whether through internationalization, or a buy-and-build strategy,” Brom said.
Europe continues to deliver a rich source of opportunity to add value at all points of the cycle.
Why ESG goes to value:
The importance of good ESG practice in business was already coming to the fore before the pandemic, but has been shown to be even more crucial in the midst of the Covid-19 spread. High welfare, environmental, and staff standards have been vital reputationally as well as for maintaining operational continuity.
Investindustrial’s Carl Nauckhoff pointed out that rigorous ESG has now become essential when investing in new targets and existing portfolio companies.
“ESG is an important differentiator when it comes to positioning your firm, and increasingly you are meeting like-minded people on the other side of the table who really care about sustainability going forward,” Nauckhoff said, adding that his firm has three professionals dedicated to ESG in house and has recently implemented quarterly reporting on ESG to its LPs.
ESG had become an essential part of preparing an asset for sale, Nauckhoff said: “There is no excuse for saying a business has phenomenal profit margins but hasn't addressed ESG issues. It is a no-go zone, regardless of financial returns.”
Commons said that through the course of lock-down, Palico had seen a huge spike in interactions on their digital platform for PE secondaries and primaries. Specifically, PE investors were able to access buyers and sellers on their digital secondary marketplace or source investment opportunities on their primary marketplace. “A good digital platform works whether it is sunny or rainy,” Commons said.
Harnessing digitization to help portfolio companies improve profitability and engage with customers has been an ongoing theme for private equity firms. The coronavirus has served to accelerate this trend.
“Digitization is becoming more and more important. We will introduce consultants to all our portfolio companies to assess the opportunities for digitization,” Portobello Capital’s Juan Luis Ramírez said. Effective implementation of a digital strategy was now one of the most important levers for value creation, Ramírez said, citing the example of an ice-cream manufacturer backed by Portobello that had improved productivity levels by 25 percent after installing software to predict customer demand.
Helping portfolios access state support:
Although governments across the continent have put substantial business and financial support packages in place to help companies survive the economic fall-out from Covid-19, working through guidance and understanding what support is available has been challenging for already stretched management teams.
“Waterland has taken up the support systems put in place in a number of countries. We have had businesses that have been closed for three months,” Waterland’s Laura Dillon said.
Dillon added that there had been “mixed experiences” across regions where Waterland invested in, with some countries much clearer on “what will be available and when it will be available” and following up by getting that funding across. In other countries details around support packages had been more ambiguous, which had created uncertainty.
Financial sponsors have played a crucial role in providing the resource and expertise to secure the support packages portfolio companies are eligible for.
Dillon said her focus now was on preparing companies for later in the year, when government support schemes started to tail off.
Palico is the leading digital marketplace for private equity primaries and secondaries. Our digital platform is designed for LPs, from single family offices to large pension funds, to streamline investing in PE funds (like European mid-market funds) on our Palico primary marketplace and for buying and selling PE fund stakes through our Palico secondary marketplace.