Introducing Berger, Lahnstein, Middelhoff

London’s King’s Road is an unusual location for an alternatives manager. From BLM Partners’ minimalist office above the designer shops of Duke of York’s Square you can watch West London’s well-to-do flitting in and out of the Saatchi Gallery. Most hedge funds and private equity firms set up shop further east in Mayfair or the City. But then BLM Partners is making a point of doing things differently.

Florian Lahnstein (left) and Jason Carley

BLM was formed in the summer of 2008. Florian Lahnstein, son of a former German finance minister and long-time European investment banking player, had for a while been toying with introducing the SPAC – special purpose acquisition company – to European investors.

When Bear Sterns was acquired by JPMorgan in March of that year, Lahnstein, who had been running Bear’s European business since 2007, decided this would be an expedient time to put the SPAC plan into action.

The SPAC had until this point been an almost uniquely American investment product. The process is as follows: the sponsors raise a certain amount of cash via a public listing. They then have a specific amount of time – two years, say – to find a suitable target company. With the target identified the SPAC’s investors are invited to vote on whether the acquisition should go ahead. With the acquisition complete, the private company has essentially been taken public “via the back door”. The management team sponsoring the SPAC puts up between 3 and 5 percent as capital at risk and then receives up to 20 percent of the equity invested depending on the aftermarket performance of the target and hurdle rates.

THE BIRTH OF BLM

Lahnstein reached out to two long-standing business contacts – Thomas Middelhoff and Roland Berger – to bring them in. The Roland Berger name is one of the most readily recognisable among continental European businesses. Roland Berger Strategy Consultants has been running since 1967.

Middelhoff rose to fame at publishing group Bertelsmann in the 1980s and 1990s, among other things for an enormously profitable investment in a young America Online (AOL). He has since headed up Bahrain-based alternatives giant Investcorp’s European operations and was latterly chairman and chief executive of German retail giant Arcandor.

Middelhoff’s tenure at the now-bankrupt Arcandor – the owner of iconic German retailing brands – has in the last year been the subject of an investigation by German authorities into possible conflicts of interest, and has been widely followed by the German media. 

The controversy surrounding Middelhoff can lead, says Lahnstein, to a “delicate and sometimes difficult” situation with certain investors and families in Germany. Happily for BLM, however, the episode has not been detrimental to its development, he adds. “People who have just read the newspapers in Germany – which have been extremely harsh to him in the past 18 months – have their preconceptions, but these go away once you sit down and discuss it,” says Lahnstein. “People who know Thomas – businesses, management teams and politicians – are tremendously loyal to him.”

Lahnstein adds that while certain German investors require “some explanation”, it is a total “non-issue” outside of Germany.

Lahnstein describes Middelhoff as being his mentor and boss since his Bertelsmann days, while his relationship with Berger stretches back more than a decade. “I think the combination of city, consultancy and operational background works well,” he says, referring to the trio’s skill sets.

Florian Lahnstein

Unlike his two co-founding partners, Lahnstein bases himself in London, where the firm is headquartered. He is the firm’s chief executive officer. Middelhoff is the firm’s full time chairman and Berger, who has this year stepped down from his duties at Roland Berger Strategy Consultants, acts as consultant. “His contacts, network and reach are unparalleled in Europe,” says Lahnstein of Berger. “It makes us proud that he has put his name on the door. It is only the second time in his career that he has done that.”

EUROPEANISED

So the three set about the creation of their first SPAC, Germany1, in the summer of 2008. They raised €250 million from the likes of Fidelity, Deutsche Bank, UBS, Allianz and Generali. “Many had never invested in a SPAC, so for them it was new territory as well,” says Lahnstein.

“What we wanted to do with Germany1 was take a US idea and structure and – for want of a better word – Europeanise it.” This, says Lahnstein, meant moving from an investor base dominated by hedge funds – as the US SPACs traditionally had – and focus on European, long-only money and family offices. Importantly these would be investors who were familiar with the German Mittelstand: the country’s legion of “hidden champion” medium-sized businesses.

Germany1 spent the next 12 months scrutinising more than 100 different target companies and finally settled on AEG Power Solutions, a business Lahnstein describes as typically German: generally unheard of but with a 70 percent market share in its segment of providing power products to the cleantech sector.

The seller, US private equity firm Ripplewood Holdings, wanted transaction certainty, which is not easy to offer when the acquisition is subject to a shareholder vote. So Germany1 took its 12 largest investors “over the Chinese wall” to muster a pre-emptive “yes” vote. This gave the team more than the 70 percent required for approval and the acquisition was closed in July. AEG went from private to public in eight weeks. Lahnstein describes it as the fastest IPO Deutsche Bank had ever done.

Germany1 acquired AEG at an earnings multiple of 5.9 times. “It was a good time to be buying, as there was very little competition from traditional private equity firms,” says Lahnstein.

CREDIT DEMAND

It was during the search for Germany1’s target, that the team concluded there was demand among mid-market businesses for another product altogether. “It became apparent that a lot of the family-owned companies do need capital, but do not want to go public,” says Lahnstein. The obvious alternative – private equity – does not appeal to many of them because they “don’t want to give up control and they don’t like to have leverage on their balance sheet”, says Lahnstein.

So they decided on a credit product. “When Jason Carley and his team from [credit fund management group] Blue Mountain came through the door, we knew this was the perfect fit for alongside the SPAC product.”

With an upcoming credit fund led by Carley, BLM hopes to “fill the gap” medium-sized businesses can encounter when trying to find two- to three-year financing. BLM embarked on a fundraising campaign for a European direct credit fund earlier this summer and indications are encouraging for a first close in the fourth quarter. The fund has a target size of €250 million, according to sources.

Direct lending funds have typically been difficult to execute in Europe, says Carley. Sourcing transactions is not an easy task and there is a “distrust of people perceived to be using lending strategies to get control”.

“What we are trying to do is make sensible two- to three-year loans, but we don’t want to own the company,” says Carley. “At the end of the day the borrower gets to keep their company.”

The launch of a five-year credit fund fits BLM’s wider theme that investors in alternatives are looking for change. “There is a tendency among investors to move away from the 10-year, blind pool fund,” says Lahnstein.

THE NEXT STEP

While the credit side of the business moves forward, the destination for BLM’s next SPAC has been set for Italy. The firm will begin marketing Italy1 in September.

To get the process moving, BLM used its connections in the European corporate world to bring in Italian industrialist and infrastructure veteran Vito Gambarale, former general manager at Telecom Italia and chief executive officer of TIM and Autostrade, as a co-sponsor.

One obvious question is “Why Italy?” The SPAC is due to be launched at a time when the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are no-go areas for many investors.

One answer is that Italian family-owned businesses have similar needs to their German Mittelstand counterparts, says Lahnstein, namely succession issues, growth capital needs and a sometime desire to go public. Exploratory discussions with target companies underline this, he adds.

Another is that Berger’s network is as strong in Italy as it is in German-speaking Europe, says Lahnstein. Berger opened his first non-German office in the country more than 40 years ago and currently sits on the boards of Fiat, Mediobanca and Telecom Italia.

Premarketing for the vehicle has gone well, says Lahnstein. Based on positive investor feedback the target size has been upped to €200 million from €150 million. The investor base will be predominantly Italian families and institutions.

On the ground, BLM has hired 20-year private equity veteran Carlo Mammola from Argan Capital. It has also built up a sales force led by Alessandro Falconi, the former head of European institutional sales at IBS Securities.

And after Italy? The firm is likely to turn its attention to a pan-European SPAC targeting the cleantech and renewables space, says Lahnstein.

LONG-TERM GOAL

SPACs may be the right vehicle for this dislocated stage of the market cycle. Investors have become less keen to tie up their money for 10 years. They want more control of the investment process and they appreciate an unleveraged transaction. They also like the transparency that a public listing affords.

But deal-by-deal funding is rarely a long-term plan for those in the private equity investment universe. The security of a 10-year fund must surely be the ultimate goal for BLM Partners. 

“When Gary [Long] came on board last year it meant the time for us to raise a traditional private equity fund will come,” says Lahnstein. “And it will probably come sooner rather than later.”

Gary Long, the former chief operating officer of Bahrain-headquartered alternatives giant Investcorp, joined BLM in 2009. He spent 15 years at the firm and managed all lines of its business: private equity, hedge funds and real estate.

“He has a fantastic record for building up and growing an alternative asset manager,” says Lahnstein.

EVOLVING THE STRUCTURE

When the firm does bring a more traditional-looking private equity product to market, it will “probably try to do it with certain innovative aspects”, says Lahnstein. Aspects of the traditional fund to be tweaked by BLM have not yet been decided, but the three areas under the microscope include fee structures, transparency and co-investment opportunities.

“Ultimately we want to attract the highest quality investor base we can get and take them through different and interesting products,” says Lahnstein. “Look at the investors themselves: what has changed in their appetite?” he asks. A lot, he continues, but the common denominator is that they want more direct co-investment opportunities and transparency. These will surely be important elements of any BLM private equity programme.

BLM’s plans don’t end at private equity and credit strategies. The firm is in fairly advanced stages of a hedge fund product, to be run by former Investcorp asset management co-head Ibrahim Gharghour, who left the Bahrain-based business in 2009. The product will provide “acceleration capital” to sub-scale hedge funds that need to increase their asset base to reach critical mass.

Related to this development, the firm is scheduled to open a New York office in October and by the end of the year will have doubled its headcount to 30 staff from 15.

Like the other offerings, the hedge fund product looks unusual. But that is what one might expect from BLM.