For many years now, Southern Europe has often been seen as a no-fly zone by investors. Is this changing?
There’s definitely reluctance, but some people are looking into these countries right now. We have seen more deals in those areas and there have been more people talking to us about deals in those areas. We are working on a number of examples in this region.
There are a lot of [good features]; having the opportunity to invest at lower multiples [for instance]. The other place where there are going to be opportunities is financial institutions selling assets. The Solvency II rules are incentivising banks to offload underperforming loans. It hasn’t happened at the level that people expected it, but it definitely has been happening and it may well accelerate.
Where do you see most deals happening and what kind of deals are happening the most?
In principal you see deals in countries that are having liquidity issues where local businesses or medium sized businesses are having problems raising the kind of financing that they need to run or expand their businesses. You can think of the periphery of Europe; Ukraine, Bulgaria, former Yugoslavia, Cyprus, Greece etc.
Any relatively stable business that has some kind of international footprint which relies on customers for demand driven from places outside of their own borders [can be attractive]. They don’t necessarily have to be export-driven companies alone, but ones that have a healthy exposure to international markets. There are also opportunities for businesses that would rebound with an economy coming back up – so that could be construction-related, infrastructure-related projects. Those [Southern European] economies are still flat, but there will be a rebound at some point.
Are there any other reasons to assume deal flow will pick up in these regions?
Some funds are facing long term holding problems and they really need to start selling and getting money back to their investors and become busy with fundraising and new deals. It’s hard to say, but the pressure for those 2005-2006 funds is increasing and at some point that is going to unlock.
Prices may be lower in struggling European economies, but many banks are reluctant to finance deals in Southern Europe for instance. So surely that makes the investment climate a lot more challenging?
It is harder to obtain leverage for businesses in Southern Europe, but one reason why the investment opportunity is there, is because traditional debt financing can be difficult to come by. Companies are often willing to take some more expensive kind of equity financing in order to function or to expand. We have worked on numerous deals that are equity only, often where the investor is not acquiring overall control. We have also worked on some deals where debt has stayed in place and where lenders have agreed that a new owner can come in, without necessarily accelerating the debt. They are some funds out there whose sole business model is to acquire bank debt or debt that is trading below par because they believe that in a restructuring these loans could become a controlling equity stake in the company.