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mid-market unquote Mid-market: pulling the value levers Even though big buyouts have staged a spectacular comeback in 2010, mid-market transactions are widely expected to be at the forefront of dealflow and value creation going forward; it might not always be easy though, as Greg Gille reports An electronic polling session during November’s SuperInvestor conference in Paris showed that a clear majority of LPs and GPs saw mid-market buyouts as the main source of value creation in the near future. The following panel discussions and keynote speeches highlighted the industry’s expectations for this bit of the market. The current leverage environment plays a part in this downscaling trend. Debt is no longer available at the levels seen in the boom years; facilities are more expensive and EBITDA multiples in the 3.5-4.5x region are now the norm. This has resulted in higher equity checks being required from GPs, and relying on leverage to create value on the exit is no longer a viable strategy in most cases. Now investment managers are expected create significant returns by growing businesses by means of operational improvements, consolidating national markets and internationalising. Arguably, these challenges are easier to meet with a business that hasn’t reached its full potential, hence the current competition for strong mid-cap assets. A shift towards mid-market transactions would also resonate with the LPs’ current expectations. As investors are considering reducing their commitments and feel ambivalent about the fee structure of larger funds, managers with a modest but focused strategy could very well stand out. While these factors point towards growing interest for the mid-cap space going forward, GPs are not expecting a smooth journey. The relative scarcity of resilient businesses, combined with a significant amount of dry powder waiting to be deployed on short notice, has sent prices soaring. With average entry multiples hovering around the 10x EBITDA mark, generating strong returns will be tricky and will require GPs to create tangible value during an investments’ life when Europe’s macroeconomic outlook is bleak. Most mid-market GPs admit that while the crisis has created sourcing opportunities, it hasn’t made their job any easier. Vanilla deals are rare, as investors tend to spend more time on sourcing standout assets and carry extensive due diligence. Moreover, a large number of mid-cap players are likely to be competing for a smaller side of the fundraising pie. LPs may show an increasing appetite for this segment of the industry, but their cautious approach and the likelihood of them reducing overall commitments in the coming months will likely lead LPs to concentrate on a few standout GPs. According to several placing agents, up to 50% of generalist European mid-market vehicles could have real trouble fundraising and fall short of their targets. The lucky few will have to exhibit a strong track record and a clear strategy of differentiation to turn heads. Even if the mid-market space is attracting considerable attention at the moment, private equity players are not expecting a silver bullet. If strong returns are to be had, it will be through hard work from GPs, as well as a careful selection process and a good deal of patience on the LP side. Yet this downscaling effort could also highlight the best in the private equity model at a time of increased public scrutiny: supporting economic growth through sound management and value-creating buy-and-build strategies. 12 UNQUOTE JANUARY 11 ENTIRE CONTENTS COPYRIGHT 2010 INCISIVE MEDIA INVESTMENTS LTD www.unquote.com/nordics
unquote Nordic watch period to end December 2010 PERIOD TO END DECEMBER 2010 Figures are based on all buyouts in Norway, Finland, Denmark & Sweden with a recorded or estimated value of €10m+ that were confirmed as having an institutional private equity or mezzanine investor as a lead or syndicate partner. For further information on Incisive Media’s data and research call Emanuel Eftimiu on: +44 20 7004 7464. Volume 8 7 6 5 4 3 2 1 YTD 2010 Value €2,296m YTD 2010 Volume 11 0 0 Q2 2006Q4 2006Q2 2007Q4 2007Q2 2008Q4 2008Q2 2009Q4 2009Q2 2010Q4 2010 Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008 Q4 2008 Q2 2009 Q4 2009 Q2 2010 Q4 2010 Norway 1500 1200 900 600 300 Value (€m) Volume YTD 2010 Value €216.5m YTD 2010 Volume 8 8 7 6 5 4 3 2 1 0 0 Q2 2006Q4 2006Q2 2007Q4 2007Q2 2008Q4 2008Q2 2009Q4 2009Q2 2010Q4 2010 Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008 Q4 2008 Q2 2009 Q4 2009 Q2 2010 Q4 2010 Finland 1000 800 600 400 200 Value (€m) Source: unquote”/Private Equity Insight Source: unquote”/Private Equity Insight Volume 8 7 6 5 4 3 2 1 YTD 2010 Value €204m YTD 2010 Volume 3 0 0.0 Q2 2006Q4 2006Q2 2007Q4 2007Q2 2008Q4 2008Q2 2009Q4 2009Q2 2010Q4 2010 Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008 Source: unquote”/Private Equity Insight Q4 2008 Q2 2009 Q4 2009 Q2 2010 Q4 2010 Denmark 2.5 2.0 1.5 1.0 0.5 Value (€bn) Volume YTD 2010 Value €4bn YTD 2010 Volume 30 12 6 10 5 8 4 6 3 4 2 2 1 0 0 Q2 2006Q4 2006Q2 2007Q4 2007Q2 2008Q4 2008Q2 2009Q4 2009Q2 2010Q4 2010 Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008 Source: unquote”/Private Equity Insight Q4 2008 Q2 2009 Q4 2009 Q2 2010 Q4 2010 Sweden Value (€bn) ENTIRE CONTENTS COPYRIGHT 2010 INCISIVE MEDIA INVESTMENTS LTD UNQUOTE JANUARY 11 13 www.unquote.com/nordics
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