Only for the brave.
Discovering opportunities in an uncertain world.
David Allen, Chair, Global Private Equity
WELCOME to our 2018 edition of Global Private Equity Insights, a look at some of the trends in the global private equity market and how industry leaders are finding opportunities in an uncertain world. Our goal is to share perspectives from a diverse set of market participants in order to help you navigate through rough waters and stay on top of market developments.
Since our last edition, the global political and economic environment has become increasingly uncertain. With Brexit a reality that still lacks clarity around implementation, an unpredictable US political administration and political upheaval threatening country after country, investors around the world are facing unprecedented levels of risk and uncertainty. Turbulent times have, however, not stopped the highly competitive race for quality investment opportunities and a quest to find and deliver value
In the face of all of the current disruption, private equity managers are finding ways to distinguish themselves – from investing in new strategies to maintaining strict discipline around the qualities and principles that have made them leaders in their fields. In the following pages, you will hear from managers, bankers and advisors about their strategies for charting a successful course in the midst of difficult currents.
One approach to discovering opportunity is setting sail for new territory. Iain Ware and Chris Cozzone of Bain Capital Double Impact talk about combining social good with environmental and financial bottom lines. Similarly, Gary Cleaver of Core Equity talks about keeping an eye on the long-term horizon in order to create and realize value over a longer holding period. New strategies are not the only answer and Matthias Boyer Chammard from Bain Capital and Mark Bulanda from Emerson talk about taking a new look at previously overlooked assets in a piece on
Some firms have spent their time and energy on making inroads in new regions. Johan Bygge of EQT and Jimmy Phua of Canada Pension Plan Investment Board speak about adapting their strategies and building teams in Asia.
While others look to new ideas and frontiers, some managers prefer to stick to their sweet spot at home. Jaime McKenzie of US firm Monomoy Capital Partners tells us about sticking to a disciplined focus on operations and Ramón Betolaza of Black Toro Capital talks about Spain’s resurgence and how to unlock previously unrealized value. Daniel Meuthen of AUCTUS Capital Partners and Juan Pablo Gomez of Altra Investments highlight how a focus on truly partnering with a business and its founders to create tailored solutions pays dividends over the long term.
Nabeel Laher of Old Mutual Alternative Investments opines on how the investment landscape in Africa is changing and how investors with a local perspective or connection are stepping up to capitalize on those opportunities. Wilson Rosa of Advent International and Ettore Biagioni of the Alothon Group provide two perspectives on maintaining
a steady course through Brazil’s tempestuous
Finally, we get a crow’s nest view from investment bankers in New York, London and Hong Kong. Three leading voices provide a look into the future of bitcoin and cryptocurrencies and two experts in W&I insurance address the changing landscape of risk mitigation.
We hope that whatever cross-currents the near future brings, that the wind fills your sails and you find success in your deal-making in 2018 and beyond.
Enjoy the report,
Emerson / Bain Capital
Mark Bulanda /Matthias Boyer Chammard
The opportunities and challenges of corporate carve-outs
Lazard Middle Market / UBS / Standard Chartered Bank
Joseph Conte / Simona Maellare / Eric Chen
What do the bankers think?
Bankers in London, New York and Hong Kong offer their views on trends in the global market and each region
Boots on the ground in Asia
Bringing a global investment strategy to Asia Pacific
Canada Pension Plan Investment Board
The lure of Asia
CPPIB’s strategy in Asia
Playing the long game
Strategy and holding horizons
Bain Capital Double Impact
Iain Ware / Chris Cozzone
Making an impact
How impact investing can drive both meaningful change and good returns
US Tax Reforms are changing the equation for private equity transactions
Monomoy Capital Partners
A unique approach in the US
Black Toro Capital
Taking the bull by the horns
Flexible capital in Spain
Riding out the storms
The opportunities and pitfalls of investing in Brazil
AUCTUS Capital Partners
Tailor-made solutions for a complex world
Managing complexity in Germany
Alothon Group LLC
An insight into Brazil’s Middle Market
Juan Pablo Gomez
Building visions together
Insight into investing in Colombia and the Andean region
Old Mutual Alternative Investments
Time to leap
Investing in Africa
Outlier Ventures / Redsand Partners / Cruxy & Co.
Jamie Burke / Nicole Anderson / Carrie Osman
The future of finance
Three leaders in cryptocurrency and blockchain technology talk about how it is transforming the investment landscape
Joe O’Brien / Caroline Rowlands
Playing the risk
Trends in the W&I insurance space
Baker McKenzie Private Equity
Global Private Equity at Baker McKenzie
Emerson and Bain Capital
Both leaders in their fields, Mark Bulanda and Matthias Boyer Chammard talk about the opportunities and challenges of corporate carve-outs. Mark provides corporate strategic insight into the importance of carve-out transactions and Matthias discusses the evolving role of private equity in carve-outs as they become increasingly attractive investment opportunities.
Mark Bulanda, Senior Vice President, Emerson Electric Co.
Mark Bulanda is an Emerson senior vice president who oversees the company’s acquisition planning and portfolio management activities. He was appointed to this position in April 2016 and works with Emerson’s businesses to identify potential acquisition candidates. In 2016, he was named to Emerson’s Office of the Chief Executive, which helps develop and guide the company’s global business strategies.
You’ve been involved in a number of high-profile carve-outs in recent years, as both buyer and seller of assets, can you tell us a bit about your strategy and the motivation for those transactions?
Active portfolio management is incredibly important for the success of a corporation and Emerson continually reviews its portfolio and the fit our businesses have with our long-term corporate strategy. Recently we divested Network Power and CT/LS businesses, for USD 4 billion and USD 1.2 billion each. We found there were structural changes in the end markets that made it difficult for those businesses to achieve our long term growth, margin and asset performance targets. They are great businesses and will thrive, but with different expectations from their
What were some of the unique challenges and opportunities – and what do you do to ensure successful completion? What does “successful” look like for you?
Divesting businesses is hard work and can take up considerable internal time and resources alongside continuing to operate the underlying business.
In order to have successful completions, within Emerson we go through our own full reverse due diligence process so we are able to answer all of the questions the potential buyers may ask and provide a very robust data room. As such, there was a ton of work for us to get done as we were pursuing a spin/sale of Network Power, a sale of CT/LS and the purchase of Pentair’s Valves & Controls business – all at the same time. It was a very busy time for a lot of people at Emerson.
What do you see as the key elements to realizing the full potential value of a carve-out transaction?
On a sell-side carve-out, we focus on value but you may not always have the luxury of divesting at the right time in the cycle. We also like to place our divestitures with financial sponsors or strategics that value the people. On the buy-side, we definitely look at how the acquisition fits into our overall strategy as one might expect. Many times, they are assets that we know well and that have developed relationships with the corporate parent for some time to be in a position to acquire the company when they decide
The interest from financial buyers in these types of assets is increasing – are there any differences when dealing with a strategic buyer v. a financial buyer? How do you select the right buyer?
We tend to favor selling to a strategic buyer as they typically are able to create a broader solution with their business and are focused on longer term success. However, there are many financial buyers that are doing the same thing, so at some level it does come down to value. At the end of the day, if the many dimensions of value are equal, we look at the buyer’s culture, motivation to do the deal and how they treat the people to make the decision on who to sell to.
There is a lot of market attention on carve-outs/break ups right now. How do you view the market for these types of transactions going forward (12-24 months) for both sellers and buyers?
I think the activity will remain very healthy (and highly competitive). There is a lot of money that can be put to work and my view is that there is additional pressure, whether it is by activists, the board or management, to push portfolio reviews.
If you look at Emerson, we have historically remixed our portfolio and will continue to do so. The US tax reform has made it easier for companies to look at their long held, low tax basis companies in a new light as they won’t take as big of a tax hit as before, so this is another motivator. We look forward to seeing what carve-outs are made available and being very proactive in reaching out to other companies to inquire about the assets we are interested in to perhaps provide some additional motivation to sell if they are on
How do you see PE’s role in carve-outs evolving?
PEs will always be competitive and will figure out how to work all the different levers to be competitive against a strategic buyer. Generally, strategic buyers have more synergies which allow us to provide a higher headline price, but the PEs go into a perhaps, different toolkit, to figure out the financing side and then take a different approach on their valuation of the acquired business to be competitive.
"Divesting businesses is hard work and can take up considerable internal time and resources alongside continuing to operate the underlying business."
Mark Bulanda, Senior Vice President, Emerson Electric Co.
MATTHIAS BOYER CHAMMARD
BAIN CAPITAL PRIVATE EQUITY
Mattias Boyer Chammard, Managing Director, Bain Capital Private Equity
Matthias Chammard joined Bain Capital Private Equity in 2011. Matthias is a managing director and focuses on retail, restaurants and building materials. He also has coverage responsibility for the French market.
The interest from financial buyers in carve-out assets appears to be increasing. Why do you think that is?
History shows that carve-outs can be more lucrative than conventional buy-outs, evidenced by the fact that some carve-outs have achieved returns of 4x, 5x and even 6x. Corporate groups tend to focus on their core business, so a non-core division may not incentivize its management to optimize the running of the business as a financial sponsor might. Private equity incentivizes management in a big way to focus and deliver results through sweet equity packages, enabling real value creation. For example:
- Optimizing pricing: We often find that corporates fail to fully leverage the pricing power of their non-core divisions. In small niche businesses, it can simply be an oversight. But generally, there is also an incentive issue. Significant changes to pricing policies can be very painful for divisional management to implement: it generates a lot of attention from longstanding customers and often results in a trade-off between market share and bottom line. Our experience has been that the PE incentive structure is far superior to corporate’s to enable such long term value arbitrages. Equally, head-office doesn’t necessarily want that kind of noise from a non-core division. When private equity does a carve-out, it will leverage the business’ pricing power to properly reflect the true value delivered, boosting returns and enabling better customer service.
- Cost efficiency: Non-core divisions often are not cost efficient. Cost reduction can be painful – creating redundancies, closing non-profitable sites and such. A non-core division has little incentive to do that.
- Prioritization of CAPEX: Private equity firms think of CAPEX differently from big corporates. There is often a misconception that PE doesn’t invest in CAPEX – but in fact we do. You often find that non-core businesses have been starved of CAPEX investment because CAPEX is prioritized for the core business. In a carve-out there is often a surge of CAPEX in the first few years post buy-out. With sensible CAPEX investment, we can often deliver operational improvements that enhance returns over the longer term.
The deal perimeter of many carve-out deals is often less of a bright line than a standard buy-out deal. How do you de-risk or optimize that in your valuation and financing structure?
Carve-out sellers are becoming more sophisticated about how they position stand-alone costs. Historically, there were a lot of carve-out deals where the stand-alone costs were presented in the target’s financials as the historic management charge levied by head-office. That management charge does not necessarily correlate to the actual stand-alone costs and that creates arbitrage. Carve-out sellers are increasingly commissioning independent surveys on the actual costs to minimize that kind of value leakage.
In many carve-out deals the transaction structure is more nuanced than a simple share sale of a stand-alone box by way of a share purchase agreement (SPA). Often there will not be clean separation from the parent and there may be some ongoing commercial relationship, which may be short-term under a transitional services agreement (TSA) or constitute a longer term relationship – e.g., sharing a factory or relying on the parent for certain supply or output. SPAs are sweet-spots for PE buyers. We know where value is won and lost on those. In a carve-out, there is an asymmetry of information when it comes to negotiating the commercial agreements; we are in a much weaker position compared to the corporate seller. That is not something you can completely de-risk but we are likely to be much more conservative around these types of agreements than we would be an SPA. This is where we see the greatest
What do you see as the key differences between the way strategic sellers and financial sponsor buyers approach carve-out deals?
The parent has committed to sell a business because it is non-core. It is often less focused on squeezing every cent of value out of the deal but instead on the separation itself and the way the sale will be seen by analysts who scrutinize the head-office. Conversely, we are incredibly focused on value creation and implementation.
What do you see as some of the traps for sponsors on carve-outs?
We know much less about the business being sold than the corporate parent. When there is asymmetry of information there is always risk. When we buy assets from other financial sponsors, due diligence materials tend to be good and there are rarely surprises. In carve-outs, the quality of due diligence information may not be as good. That isn’t because corporates don’t know how to present information but, instead, that information regarding the stand-alone sale perimeter has often not been populated prior to the sale process. Information often has to be created at the time of the sale and this carries risk. On top of this, carve-outs are now trading at a premium to conventional buy-out assets so, if something goes wrong, it can be much
Any favorite carve-out experiences you want to share with us?
WorldPay was a good deal for us. That is an example of carving out an asset that did not exist before. It was a division of a division that was fully embedded in the parent that many people didn’t think could be made to be stand-alone. We had to disentangle it from the parent and give it a stand-alone identity. It was incredibly complex and the price reflected our ability to do the deal.
How do you see PE’s role in carve-outs evolving?
There are more and more carve-outs happening and deals are getting cleaner. The sell-side advisors are helping corporates be more sophisticated about minimizing the stand-alone costs of the target and explaining the upsides. Sellers are also beginning to explore carve-outs that are deeply embedded in the parent. It remains an area of the market that presents the biggest opportunity for value creation but also the biggest risk for value erosion.