“A classic rough diamond” was how VAT Group was described by Capvis and Partners Group, the two financial sponsors that acquired the business in February 2014. Its technology – high-end valve components for various high-tech industries – was “unmatched” in the industry, but the family-owned business was “less mature in non-technical areas and lacked breadth in its management team”, the two firms said.
In many ways the task at hand for the two firms and the management of VAT Group, was classic private equity value creation; focus on institutionalising the company and provide it with a road map for transformation that would improve its organisation, processes and financial sophistication and unleash the potential of its already market-leading technical know-how. In other words, the VAT Group case study reads like a comprehensive private equity playbook.
During the investment period, a number of initiatives were undertaken to grow top-line growth at the company. Number one was an expansion of the product offering, widening the original focus of the business on selling individual valves to include more complex multi-valve modules (essentially acting as a development partner for key clients). Second was to push sales further into adjacent markets: specifically bellows, which like valves are advanced components used in processes that demand “high cleanliness”, but are used in completely different end-markets. Third was to crank up the formerly marginal after-market business in spare parts, repairs and upgrades.
No modern value-creation story for a European company with global ambitions would be complete without an Asian sales component; VAT Group is no exception. At the time of investment, VAT’s market share in Asia, one of its largest target markets, was comparably low. The company addressed this by introducing some Asia-specific products, bringing on a local sales team and using a “pull-marketing strategy”: influencing end users to specify VAT components in the production process.
“Bottom-line” transformation focused on three areas: boosting production at VAT’s plant in Malaysia to act as natural currency hedge (the company was billing mostly in US dollars and yen while its cost base was largely in Swiss francs); creating a more sophisticated procurement process; and implementing lean manufacturing best practice in VAT’s production process.
VAT Group had never undergone such a deep transformation process before. To support the various initiatives, the company installed a “project management office” of two full-time employees.
The company floated on the Swiss Stock Exchange in April 2016. It priced at SFr45 per share ($47; €39), giving it a market capitalisation of SFr1.35 billion, which at the time realised a 40 percent IRR for the private equity backers. At that point in time, circa 54 percent of the shares were sold at a multiple of 11.6x EBITDA, with further share sales by the sponsors within the last 12 months. The business had been acquired for 8.1x EBITDA in 2014.
Since then the share price has soared to reach an all-time high of SFr135 in May 2017 and as of mid-September the shares were trading around SFr124, making it one of the most successful private equity-backed IPOs in history.
Judge Antoon Schneider of Boston Consulting Group described the VAT Group investment as “a comprehensive transformation, including strategic, operational and organisational initiatives”.
“The numbers speak for themselves, revenue and EBITDA growth of 11 percent and 28 percent per annum respectively.”
Large-cap: The Carlyle Group – Vogue International
Upper mid-market: Cerberus Capital Management – Bowlmor AMF
Lower mid-market: Francisco Partners – Paymetric
Small-cap: The Riverside Company – YourMembership
Upper mid-market: ShawKwei & Partners – YongLe Tape
Lower mid-market: Advantage Partners – Hisense Broadband Multimedia Technologies*
Small-cap: Mekong Capital – Mobile World
*Hisense is not included in the write-ups due to confidentiality issues