The global financial crisis took its toll on many venerable names in private equity; for some it proved terminal. At one point in 2009 it looked like PAI Partners would be among them.
That year, the firm was forced by LPs to slash its €5.4 billion fifth buyout fund to €2.7 billion after the departure of chief executive Dominique Mégret and senior partner Bertrand Meunier triggered a key-man clause.
The pair were ousted in what some investors regarded as a “coup” following months of lobbying by Lionel Zinsou, who replaced Mégret at the firm’s helm.
But not only did PAI survive, it came roaring back with an oversubscribed sixth fund. The difficulty of that fundraise shouldn’t be downplayed; the firm spent almost two years on the road. But the outcome speaks for itself. Not only did the firm comfortably reach its €3 billion hard-cap, it blew right through it, holding a final close in March 2015 on €3.3 billion.
Shortly after, Zinsou – who went on to become prime minister of Benin – was succeeded by Michel Paris, who has spent almost his entire career at PAI, joining the firm in 1984. Paris refers to the events surrounding the reduction of Fund V simply as “2009”.
“2009 has brought a tonne of good things to the organisation,” he says.
“The big consequence of 2009 is effectively the creation and emergence of a partnership. I’m the CEO, but I’m also the head of the partnership.”
He sees his role as to “run a business which is independent and which will have a very long life”.
“We are not interested in going public, we are not interested in being over-diversified. For the time being we are a pure leveraged buyout player, and we’re just trying to be as good as possible as a pure LBO player covering the whole of Europe.”
There’s no denying the events of 2009 tested the mettle of even the most loyal of PAI’s investors.
“It’s clear we significantly challenged the investor base last time,” Paris says.
“Also because some of our investors suffered a lot through the crisis and had a diminished capacity to come back. At least one large investor decided not to come back, which has forced us – or helped us – to think about new names. We have been able to find large, new investors all over the world. We’ve made a significant effort to reshape the investor base, and we are going to benefit from that.”
“We are not interested in going public, we are not interested in being over-diversified”
PAI has “kept our very best friends” – including BNP Paribas, GIC, Temasek, Kuwait Investment Authority, British Columbia Investment Management Corporation and MetLife – but also brought in new names, such as the Korea Investment Corporation, Dutch pension PGGM and Finnish counterpart Varma.
“I think we can be pretty proud of what we’ve been able to do, because we have welcomed large new pockets which we know will be able to bring far more money next time.”
Following our interview, placement agent and advisory group Asante Capital released a survey which revealed team composition and organisational stability are more important to investors than performance or track record. So how did PAI reassure investors that the firm was a steady ship after the dramatic events of 2009?
“Roughly by saying that, with the exception of two people, nothing has changed within the team,” Paris says.
“The same people, the same organisation, everything is the same. So in terms of stability, you can say what you want. There’s very good, very solid stability of the group.”
And even shocks can have their advantages.
“Sometimes a storm will sort out the issues that a firm finds it hard to deal with organically,” says Mirja Lehmler-Brown, a senior investment manager at Aberdeen Asset Management, one of PAI’s investors.
“PAI had quite a drastic change around leadership, and sometimes that’s actually a good thing. It’s like a turbocharged event where you have to deal with succession. In a fund where things have gone rather well, maybe you haven’t focused the right attention on the organisation [itself].”
GOOD STORIES, GOOD RETURNS
PAI has worked hard to safeguard performance. PAI Europe V has returned more than 110 percent of its capital to investors at an average of 2.4x money. The firm as a whole has made 15 exits since 2011, returning close to €9 billion to investors at an average money multiple of 3x.
“We were able to demonstrate pretty rapidly that, first, we could very efficiently manage the portfolio, show good exits, good cash-on-cash multiples, and that by doing so we were consistent with the key messages we sent to our investors,” Paris says.
“On Fund V we have only good stories to tell and we will only show good returns. It’s just a consequence of the many decisions we made about how to manage our portfolio, how to create a diversified portfolio in terms of sectors, geographies, stories, and also what sort of things we are able to do when transforming our portfolio companies.”
There are plenty of similar-sized private equity firms targeting assets in Europe – 24 funds of between €2 billion and €4 billion closed in 2008-16, according to PEI data. So why do investors keep entrusting PAI with their capital, despite having been put through the wringer?
“The big difference versus the rest of the industry is that we have always been organised by sectors,” Paris says.
“You will find some guys within PAI that have looked at the same sector for the last 20 years. Take Frédéric Stévenin, who is our CIO and the head of, among other things, the consumer goods team. He’s done deals in that sector for the last 20 years. I’m not sure you can find the same sort of profile within some other European players.”
And it seems the market agrees. Mounir Guen, chief executive and founder of placement agent and advisory firm MVision, which does not raise capital for PAI, also highlighted the firm’s deep sector knowledge as a key driver of LP interest, describing them as “one of the key groups in Europe”.
“They have very strong industrial knowledge, they have very good practices,” Guen says. “The performance is there.”
This focus on sectors over and above everything else means PAI thinks very differently about its “sweet spot”. Size is irrelevant, Paris says.
“We are able to look at any size in terms of transactions. There are no big differences when dealing with a €1 billion transaction or when doing a €5 billion transaction; the only difference is the size of the equity cheque. In terms of technology, efforts to be deployed, it’s exactly the same. As far as we’re concerned, on a sector-by-sector basis we are able to do deals [of] €500 million EV but also we are able to look at €3 billion EV transactions.”
The size of the next fund, Paris says, has yet to be decided.
“For the time being I don’t know. It’s a debate we will have also with some of our largest investors.
“It’s about the speed of investment,” he says, adding that, in a “world where you have to move fast”, €4 billion could be “largely sufficient”.
However, there are “some limitations to that reasoning”, namely that in today’s world more resources are required to deploy capital effectively and transform portfolio companies.
“You could easily say ‘No, we are in a world where we need to recruit additional resources and therefore we need a bigger fund to continue to develop the firm’. I could easily say, ‘Next time it should be €5 billion.’”
Fund VI, which has 11 portfolio companies, is between 55 and 60 percent called. Across the 11 investments in the fund, PAI offered €650 million of co-investment to its LPs on a syndicated basis.
“We are trying to be consistent in the sense that it’s a promise we’ve made to our investors in raising Fund VI, and we are delivering on that. We will do exactly the same when talking about the next fund,” Paris says, adding that the potential to offer co-investment is part of the debate around the correct size of Fund VII.
“My reasoning, which is theoretical, consists in saying, in each of our sectors we are able to look at any sort of deal in terms of size.”
“We’ve made a significant effort to reshape the investor base, and we are going to benefit from that”
Last year PAI opened a New York office to help its portfolio companies find new opportunities and to assist investor relations.
“We want to help our portfolio companies become global champions and grow in the US. Our presence in the US will help support them.”
The firm has no plans to seek platform deals outside Europe, Paris says. At present PAI covers five sectors: consumer goods (mostly in the food industry), business services, industrials, retail and healthcare. These sectors are under constant review and, were the firm to decide to expand them, top of the list would likely be tech.
On the transaction side, PAI sees today’s environment as one in which it should continue to sell assets. Acquisitions are challenging, thanks to increased interest from Chinese buyers, a strong IPO market in several key European countries, Canadian investors looking to invest directly and infrastructure funds beginning to play in the private equity arena.
“We have to be very selective when thinking about the deals we are chasing. We have to understand the competition, who are the key guys really interested in the assets. It’s a pretty difficult world,” Paris says.
“Everybody is trying to be opportunistic. It’s difficult at the start of a process to assess correctly the competitive landscape and to be sure about who will be there at the end, what will be the real competition when you’re putting your firm bid. We are trying to be as tactical as possible. In some cases we are moving full-speed, in some other cases we are just taking our time to have the opportunity to better assess the competition. I think everybody is doing the same.”
ICE CREAM FLOAT
One of the more extreme examples of PAI’s ability to transform its portfolio companies is shown by its investment in UK-based ice cream company R&R, which it acquired in July 2013 in a €926 million deal. Last year PAI backed a joint venture between R&R and food manufacturing giant Nestlé called Froneri.
“It’s the first time in Nestlé’s history they have accepted to work on a 50-50 basis with a private equity firm,” Paris says.
When PAI acquired R&R from Oaktree Capital Management, the business had an EBITDA of around €90 million. In 2016 Froneri’s EBITDA was around €360 million, and PAI wants the measure to hit €500 million in two to three years. The firm intends to list the business at the end of 2018, and expects to generate at least five times its initial investment on a cash-on-cash basis.
“It’s one extreme example of what we are able to do,” Paris says. “In a perfect world we would like to do the same on each of our portfolio companies, which is unfortunately difficult.”
Paris says although the intention is to completely transform all its portfolio companies, “in certain cases we are failing because we’ve not been able to find interesting acquisitions that will fully change the parameters, the size, the geographical exposure, etc”.
“There are some situations where it will be impossible. But we are really doing our best, and we are pretty aggressive in the sense that we are willing to take risks, we are pushing our management teams hard on making acquisitions.”