PDF version Edition 2 - Fsa

y Hans Moerman
FIGUre 3 Multiple of ebITDa
12.0
10.0
8.0
6.0
4.0
2.0
0
7.1 7.0
4.4 4.3
2.7 2.7
Source: Goldman Sachs
6.7
4.2
2.5
7.4
4.6
2.8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 [H1]
Combining the large amount of funds
available at the private equity firms
with the cash need of potential portfolio
companies one would expect a
pretty vibrant market at the moment.
However, in the Dutch private equity
market (mid market LBO’s) we witness
a very special situation. Despite the
large amount of capital that is committed
to the funds and has not yet been
used (the dry powder) the activity at
the moment is very limited. Moreover
we find that many sale processes fail
recently, even private equity firms with
lots of dry powder choose to keep the
ammunition for the times coming. But
at the same time we see that the average
pricing is fairly constant (fiGURE 3).
Investors are still betting the bank, but
only on strong companies. This behavior
is in line with evidence from the
past from all kinds of markets. In upturns
one can sell any type of assets, be
it distressed government debt, a house
in a bad neighborhood or any company
for that matter. In times of crisis investors
flee only to the most high quality
assets, liquidity discounts for smaller
countries are huge, one can now only
expect to sell a house on a prime location
and processes with non perfect
companies are bound to fail.
Going forward we expect a very interesting
strategic game in the private equity
industry. Companies have to come
8.2
5.3
2.9
8.7
4.6
3.1
9.6 9.6
6.3
3.3
5.2
4.4
8.9 9.2
4.1
4.8
4.4
4.8
to the investors, with the banks out of
the picture and capital markets closed
they have no place to go. Investors have
large amounts of money at their disposal
and cannot wait forever to invest it.
At one point in time the firms will have
to decide between investing in less than
perfect companies versus returning the
committed money to the investors in
the private equity firm.
All private equity that have raised funds
in the recent years face these difficult
decisions in 2012 and 2013 and it is
likely that there will be a shake out of
the weaker firms
But the stronger firms, able to make
high quality investment decisions and
good governance, will prevail and come
stronger out of this period. We believe
that the strength of the fund will be
determined by the adaptability. Leverage
and multiple play are no longer instruments
at the disposal of the private
equity companies and all of us have to
redefine our strategy and the way we
make money. Sales growth and margin
improvement will be the driving forces
for private equity in the future. Private
equity companies will work actively
with their portfolio companies to define
a strategy to gain market share from
their competitors by improving their
proposition to the client or to increase
margins by concentrating on operational
excellence programs.
8.8
4.4
4.4
Debt
Equity
73
After years of “live now pay later” now
is the time for the Western economies
to pay. The Netherlands are not exempt
and we even expect that the Dutch will
have to pay more than their neighbors.
In the coming period where the banks
and the capital markets will be closed
there is one place left to go for companies
in need of cash: the private equity
firms. These firms will have to change
their strategy to adapt to the new needs
of the economic environment. There
will be no place for old fashioned locusts
in the new markets. There is light,
and we believe a bright light, at the end
of the tunnel for private equity firms
that live in a strong symbiosis with their
portfolio companies.
Hans Moerman is associate at
NpM capital
403