| ||||
In recent months the old chestnut, "Timing is everything," has been particularly true for members of Europe's venture capital and private equity community. At the Europe Business Conference, a panel reporting on the market's temperature suggested that while investing opportunities are still available, considerably more patience is required to see a good rate of return in today's tighter, tougher climate.
Moderator Nick Gaynor provided background on current industry trends. The leveraged buyout volume in Europe for the first half of 2001 was about £13 billion, or $20 billion, sharply up over the same period one year ago. "Inevitably, third quarter volume has gone done quite a lot, perhaps as much as half," stated Gaynor, managing director at Goldman Sachs' London office. Fundraising is still active, however, with more deals occurring in traditional manufacturing trade industries than the high tech and cable sectors.
 | |
| The current market, from a valuations perspective, represents some great buying opportunities. | |
 |
|
| —Nick Gaynor |
"The current market, from a valuations perspective, represents some great buying opportunities," he continued. "One of the issues that will have to be faced, however, is that portfolios are not as robust as they were a few years ago. Auctions are failing, and certainly in Europe there have been a large number of deals that haven't gone through, which creates a serious domino effect. Banks say they're always open for business, but is financing really available?"
Panel member Edwin W. Datson (HBS MBA '97), a principal at Bain Capital Europe, described how his firm navigates this challenging environment: "The transactions we work on tend to be summarized as 'messy,' where perhaps the management and information systems don't make it clear what will happen in the future. We think our approach is particularly relevant in Europe, where the companies in general tend to be less cleanly defined than U.S. equivalents. That lack of clarity creates opportunity for us."
Mark Kelly (HBS MBA '96), director of TD Capital Communications Partners in London, said that simply being in the right place at the right time doesn't hurt. "Thank God we set up when we did and not two years earlier," he said. "We opened for business in 2000, when the market was on its downside, and were able to sit still until the prices had bottomed out."
| |
| We just put $300 million into a cable company in Northeastern England; we're not going to get out of that deal for at least six years. | |
|
|
| —Mark Kelly |
Big funds wait it out
Some continue to wait out the market, said Marko Maschek, director of 3i Germany. "As far as new stage technology investing goes, the big funds are still sitting on their money. If they do invest, it's in companies they have more or less co-created with partners they've worked with in the past. They're hibernating, waiting for things to happen."
Maschek, who has a portfolio of seven companies, says he's most interested in ventures that focus on IT security or meet at the intersection of IT and life sciences.
As an indicator of how the market has changed in the past year, Mark Kelly used the example of an unnamed start-up that forecast revenues of $650 million in just over two years. "This was a highly contested transaction; they raised around €400 million, and we wondered what we were missing," he recalled. The company, he continued, no longer exists.
Deals at a discount
"A lot of people who didn't know any better were riding the crest of a wave. We're finding that competition in our space is gone, while the deals have not really disappeared. By and large, we're able to buy businesses for thirty to sixty cents on the Euro, which is extraordinary compared to last year's prices."
An ongoing challenge, Kelly continued, is securing a solid management team at a time when many executives are feeling less than adventurous. "In the States, there's the idea of, 'If at first you don't succeed, try, try, again.' I think in Europe there's more of a stigma associated with failure."
Dimitris Tsitsiragos, manager of new investments for Eastern and Central Europe at International Finance Corporation, explained his firm's strategy when portfolio companies get into trouble: "We try to take an active role and work directly with managers, which can be quite difficult with private, family-owned businesses. We also limit our exposure, of course—it's really a function of how much confidence we have in a company."
"Businesses have to be carried much longer than was the case a few years ago," said Maschek. If one of our companies experienced difficulties, we'd become a more active participant, possibly bringing in outside directors to work with the team and develop new goals. I would look very hard at the burn rate and recalibrate the time of evaporation."
"People are going to have to take a much longer view in terms of financing," agreed Edwin Datson. "The initial capital structure on a deal is much more modest, especially because the operations in that economic environment are highly uncertain. Before the ultimate exit, you're going to need some form of refinancing."
Investment returns take longer
A few years ago, said Mark Kelly, the average time horizon for most of their investments was one to two years, a goal they usually achieved in a bull market. Today's expectations are quite different. "We just put $300 million into a cable company in Northeastern England; we're not going to get out of that deal for at least six years. By that point, we believe the capital markets will have opened." At some point in the cycle, he added, his company may have to put in another sixty percent of its total investment.
When prices were high, added Datson, there was no more benefit in terms of the multiple—the primary advantage was how quickly a company could be turned around. "Today, some boards are saying, 'No more acquisitions at any cost.' Whenever you have those inefficiencies, you can buy a company at a price that makes sense. And if you're going to have to hold it for nine years instead of three years, you know your returns are going to go down. It's just math."
If today's market requires more patience and is somewhat less dramatic in its immediate rewards, panelists agreed that knowledgeable shoppers could continue to do well. "You can't just decide that the IPO market is shut down and not see any upside to the future," said Datson. "It all comes down to the question of finding interesting deals at a fair price."
· · · ·