Where do you see the biggest opportunity at the moment?
Europe has so many opportunities in the mid-market. We try to focus on places where the opportunities are best
priced, where we see the fewest competitors, and where the preference is for solutions rather than auctions.
There’s an enormous opportunity in deploying capital where the capital markets are the least efficient. So in certain countries where you can count the number of IPOs on one hand, there’s clearly a lot more need for permanent capital. It’s also true that in Europe, family ownership is much more common in Europe than it is in the US and the UK, which presents a continuous generational problem – and that’s an excellent source of dealflow, if you’re in the right place at the right time and you’re prepared to be flexible.
Southern Europe has been a big focus lately. Does that make LPs nervous?
We’re not painting it as a walk in the park, or saying that the rest of the world is concerned about nothing. Clearly there are structural issues in both countries, and political choices that they need to make. But at the same time there are unique opportunities.
There are some companies that are based in Italy and Spain but only 20 percent of their revenues are derived from their home market; these companies are generically affected by market sentiment in the country, but their business is not. These are the companies that need us most right now. And we feel that the opportunity flow is there to stay, because it will take years for the imbalance between supply and demand to be corrected.
Your mandate is presumably much broader, though?
Bear in mind that this strategy is only two years old; in the previous investment cycle, we didn’t invest in southern Europe for five years. It’s just that right now, southern Europe is where some of the best targets at the most reasonable prices seem to be. One has to be very wary that there will be a two-tier recovery in these countries; domestic unregulated businesses like retailers are not going to thrive any time soon. But if one looks for quality, there are some fantastic companies there. There are some fantastic companies in northern Europe too – but there tends to be a 45-50 percent price differential.
We don’t exclude anything, though. For instance, we’re seeing some interesting opportunities in Germany. We try to focus on companies where we can add something – if they have a big presence outside Germany perhaps, maybe even in southern Europe.
What about emerging markets? You’ve previously invested in Turkey and the Czech Republic.
We go where the opportunities are best priced – and in Turkey for example, there’s been a real ramp-up in values even for smaller transactions. Plus we have a need to concentrate geographically now we’re not part of a
very large organisation. So we’re not going to go into businesses that we don’t know in countries where we don’t have a physical presence – especially as the multiples there are in line with or maybe even higher than those in Italy, Spain and France. So for now, we prefer to invest in European companies that are exposed to or need help to grow in emerging markets, rather than going direct to these markets.
But we exited all our emerging markets investments in excess of 2x with a very good IRR; if you look at the same period in western Europe, it would have been hard to repeat results like those.