Transcript Diapositive 1 - Entrepreneurs Partners LLP

Current Financing Environment in Europe for
Entrepreneurs & Investors
23 nov 2011
Bruno Deschamps
• Chairman & CEO of Entrepreneurs Partners LLP and EP Capital Ltd, an innovative business angel
syndicate.
• Senior Executive Advisor to Arcapita, a global leading Private Equity, Infrastructure and Real Estate
firm headquartered in Bahrain with investment activities in London, Atlanta and Singapore.
• 10 years in the Private Equity industry: Partner of 3i plc (London) and Clayton, Dubilier & Rice.
Responsible for private equity investments in Europe, including companies such as Brakes Bros of
which he was the Chairman and CEO, VWR, Culligan and Rexel.
• 20 years as Senior Executive of large int. corporations in the US and Germany:
President and Chief Operating Officer of Ecolab Inc (Fortune 500 company headquartered in
Minneapolis, USA). CEO of Henkel Industrial adhesives worldwide, CEO of Henkel Ecolab
headquartered in Duesseldorf, Chairman & CEO Teroson Gmbh.
• Started career managing family-owned speciality chemical company in France: S.A.I.M
• President of the French Foreign Trade advisors in the UK, a Director of the Franco-British Chamber of
Commerce, a member of the think tank le Cercle d’outre-Manche, a member of the Chatham House,
the Institute of Directors London and the Institut Montaigne Paris. He is a Knight of the Legion
d’honneur France.
2
The outlook for European SMEs
3
Europe needs SMEs…
M. Zuckerberg (30 Oct 2011, Y Combinator)
“We never went into this wanting to build a company. But a company is the best vehicle in the
world to align a lot of people to achieve a mission”.
In a mature market (Europe), is there any other way to achieve economic growth and create
jobs than through innovation/entrepreneurship?
SMEs of 250+ employees in several EU countries
# firms
# employees
Average
revenue (€M)
4 168
4 195
4 646
10 021
10 428
796
768
735
994
989
205
217
206
Source : Ernst&Young et ESCP-EAP, Grandir en Europe : hasard ou état d’esprit, 2008.
418
368
In the 1970s (flat real GDP, declining living
standards, high unemployment, social
unrest) the West was saved by potent mix of
technology and globalisation.
The UK has historically been good at
encouraging SMEs and today has a stronger
network of large SMEs than other European
countries.
4
… and for growth, financing is key
 The probability of success of a SME is
highly correlated to its access to
financing.
Evolution of average capital in €K
for UK (in RED) and French (in BLUE) SMEs
 Seven years after launch, a UK SME
has on average 5x more capital than
its French equivalent and creates 4x
more jobs.
Survival rate after 3 years for firms created in 2006
depending on invested amount at launch
Less than 2k€
Note : average capital of companies founded in year n, with an initial capital superior
to €100K
Source : (IFRAP), 2008
60%
Evolution of jobs created by UK and French SMEs
2k€ to 6k€
62%
8k€ to 16k€
66%
16k€ to 40k€
71%
40k€ to 80k€
74%
80k€ and more
81%
0%
20%
Source : France, Insee 2006 and 2009.
40%
60%
80%
100%
Note : Jobs created in SMEs created in year n with an initial capital superior to €100K
Source : (IFRAP), 2008
5
The startup financing cycle should be
Equity, Equity, Equity… then Debt
 The “Valley of Death “ is not - and cannot - be financed through traditional banking services….even for tangible asset intensive SMEs
which are increasingly less in the “start up blocks”.
 By definition, traditional loans are not suitable for non-mature businesses: expose lenders to all the downside but only limited upside!
 Only equity – or convertible loans (if valuation is really un-definable/agreeable) are adequate.
 Who better than ex-entrepreneurs/corp. execs to allocate capital efficiently to new SMEs?
 Besides finance, business angels may provide intangible capital (advice, contacts etc...).
Early stage: business angels,
small VC funds, (grants)
Seed stage:
savings + FFF + (grants)
6
Fiscal incentives are crucial to encourage direct
investment into SMEs… and the UK has understood it!
 One of the main measures undertaken during the last UK
Budget (announced on 23 march2011) has been the
clear strengthening of the fiscal incentives (EIS) in
favour of business angels investing in UK SMEs.
 The UK government therefore chose to acknowledge the
value added of business angels in the financing of SMEs
and the important risk inherent to this asset class (long
holding period, lack of liquidity, uncertainty).
 The survey undertaken by NESTA et BBAA(a) shows that in
the UK, 80% of investors use the EIS and 53% state they
would be doing less investment without this fiscal
incentive (and naturally these statistics should further
increase following this strengthening of the EIS
programme).
 Via an important ‘PR effect’ these fiscal incentives
encourage citizens to discover business angel investing
and thus bring the overall population closer to
SMEs/innovation.
 The maximum annual relief for a French business angel
is €45k, vs £300k (i.e. €340k) in the UK.
 As of today, the maximum loss that a UK business angel
(taxed at 50% level) may incur is 35% of invested
capital.
(a) Sources: BBAA, May 2009, Business angel investing – promising outcomes
and effective strategies
EIS(1)
Mechanism
1
Mechanism
2(2)
Launch date
1994
1994
2008
% Tax relief on
invested amount
30%
22%
50%
Max investable amount
£1 M(3)
€20k (3)
or €50k (3)
for seed (JEI)
€90 k
Min Holding period
3 years
5 years
5 years
NO
(unless classified as Jeune Entreprise
Innovante)
Tax relief if capital loss?
YES
Inheritance tax ?
NO
Other
Ongoing consultation in the UK to possibly
remove remittance tax for those repatriating
funds to invest in UK SMEs (EIS eligible)
Number of business angels
50k
8k
Average amount by business
angel and by project
£77k
€16k
YES
YES
Source s: BBAA, PBA, Centre d’Analyse Stratégique, Sept 2011
But UK still needs to close the gap with the US:
250k BA, ~£18bn pa, £72k pa per capita, 3.5x more BA investment per capita
Entrepreneurs turned ‘Super Angels’
An efficient re-allocation of savings
Jon Moulton, Better Capital, Alchemy
100+ investments
Stake in Ashmore Plc, for example, initially an angel investment, is worth ~ £70m and he admits that “he
has made more money as an angel than through working”.
However, keen to stress the risk involved: “lost at least a third of the cash put into angel deals, while a
handful of investments have made over a thousand times the money”.
Xavier Niel, Free, through Kima Ventures
‘Officially The Most Active Angel Investor In The World’
‘100 tech startups each year, every year. Forever. In any country in the world.’
Reid Hoffman, Cofounder of LinkedIn; former exec at PayPal
80+ investments
‘After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally
know if I will’.
And hundreds of other prominent ex-entrepreneurs/senior execs turned full-time business angels:
- Europe: Kevin Eyres (ex MD Linkedin Europe) for tech, Sir Terry Leahy (ex CEO Tesco) for retail.
- Silicon Valley: Peter Thiel, Jeff Clavier, Dave McClure (Paypal)...
The outlook for EU start-ups is good….
We are the ‘BRIC’ of entrepreneurship
In its infancy, an innovative startup’s results are not correlated to the overall macro environment
eg. Did Facebook/Linkedin etc.. stop growing because of economic slowdown in 2008/09/10?
Mature EU markets (low growth, high trade deficits). Recovery can only come from innovation.
“FB effect”: drastic change of mentality towards entrepreneurship, visible esp. in Continental Europe.
EU full of large/mature firms, who want/need to acquire growth : strong M&A exit potential for SMEs.
Less advanced innovation market logically means “catch-up” to come, more opportunities for current
entrepreneurs/investors + EU start ups have learnt to be capital effective (at least a pro to absence of capital!).
In Tech, strong consensus that Silicon Valley is becoming overpriced. EU stands a chance for new global hub.
The outlook for EU start-ups is good….esp. in the UK
We are the ‘BRIC’ of entrepreneurship
UK focused on encouraging enterprise: Improved EIS + Improved Entrepreneurs relief + TechCity + SU Britain.
UK government is listening to entrepreneurs to make their life easier: will soon launch ‘one-click’ platform for
SMEs + ‘Asking to tell where rules and regulations get in the way of innovation’.
UK government is proving to be very reactive: UK determined to get away from high historical dependence to
Financial Services sector + Incentivise ‘create-your-own-job’ approach to unemployment.
Relayed by organised mid-stage finance: £2.5bn BGF by 6 high street banks + £1.4bn UK RGF.
Ecosystem: Effective ‘Cluster’ model has emerged in the UK: Cambridge (~24% of UK VC) + Silicon Roundabout.
Attractive and recognised business-friendly environment + low bureaucracy + int. language + soon lowest corp.
tax rate among G7 countries (@23% in 2013) -> 16% less than US, 11% less than France, 7% less than Germany!
EP Capital: UK/France venture syndicate
Benefit from
full tax relief
UK: 30% on day 1 + no CGT +
deductibility on any loss
+ inheritance tax relief
Access to an
attractive asset class
Average 22% IRR(a)
on UK angel deals
Premium EP offering
Focused screening and facilitated
investment process
Build a diversified
portfolio of SME investments
Widely regarded as the winning
strategy
(a) As shown by May 2009 study
published by Nesta and BBAA,
surveying 158 UK-based angel
investors who have invested
£134m
into
1,080
angel
investments between them.
Tax-free capital gains
Limited and fair transaction costs
Benefit from network’s expertise
and credibility
Proactive investors focused on
nurturing tomorrow’s leaders
You only ‘lock-in’
what you invest
No committed funds, therefore
low opportunity cost of capital
www.entrepreneurspartners.com
11
The financing environment
for larger companies
Private Equity : how we work, what
happened, what is likely to happen
12
The PE industry
13
Private Equity: 80 years of history
< 1970
1980 -1989
•1934: Launch of Charterhouse
Development Capital
2000s
•1983: Launch of EVCA
•2001: Burst of internet bubble.
•1945/46: Launch of
•1985/1987: Launch of Blackstone
Group and Carlyle.
- ICFC (Industrial and Commercial
Finance Corporation), ex 3i in the UK
•2002: Legrand taken over by KKR and
Wendel. Brakes is taken over.
•1988: KKR LBO of RJR Nabisco.
•2004: Rexel taken over by CD&R,
Eurazeo and Merrill Lynch.
- ARD (American Research and
Development Corporation) in the US
•1989: High Yield market crisis.
•2007: Largest European buyout,
€14.1bn (Alliance Boots).
•1958: Small Business Act (US)
•1964: First LBO by bankers from Bear
Stearns (MM. Kohlberg, Kravis and
Roberts)
1990 -1999
•1990: Launch of ILPA.
1970 -1979
•1995: Launch of AIM.
•1971: Launch of Nasdaq.
•1997: Asian financial crisis.
•1972: Launch of Kleiner Perkins,
Sequoia Capital, Sofinnova Partners
and Adam Street Partners.
•1998: Russian financial crisis.
•1973: Launch of USNVCA.
•2007: Walker recommendations on
transparency for PE.
•2007: Sub-prime crisis.
•2007 : CD&R sells Brakes.
•2008-2009: Economic crisis spreads.
•2010: Short-term boom of High Yield
debt market, replaces loan market for
refinancings and allows PE to generate
some returns in unconventional ways
(eg « dividend recaps »).
Many different types of Private Equity
Differentiating between VC and Buyouts
Minority stakes
Main Focus is
growth
Look for firms
with: innovation,
IP, potential to
scale, revenue
Buyouts, LBO : small ,mid or large cap
(ex: Blackstone, KKR, Apax, CVC,
CD&R, TPG, 3i, Arcapita ...)
Growth Private Equity
(ex: Carlyle, Summit, TA, GA ...)
Venture Capital: Seed to Late
(ex: Balderton, Index, Accel ...
Unilever Ventures, Google Ventures)
Majority stakes
Main Focus is
efficiency
Look for firms
with predictable,
recurring cash
flows,
optimisation
potential
The PE Buyouts industry
as % of amount
European Buyouts historical geographic split
 €1 400bn invested between 2004 and
2008 globally, inc €280bn in Europe
 33 000 companies in Europe
 Cumulatively 6 million jobs in Europe
Rest of world
5%
Rest of Europe
15%
United Kingdom
27%
Sweden
5%
Spain
6%
Italy
6%
Netherlands
7%
France
16%
Germany
13%
Source: PEREP_Analytics for 2007 & 2008; Thomson Reuters/PwC for previous years
 The UK has historically been the leading
recipient of PE Buyouts investment in
Europe, despite an economy that is
mainly services focused (although it
brielfy lost to France this year).
 This is largely thanks to a business
friendly environement.
16
The PE Buyouts industry: LPs Funding
From FI to PE
Provenance of PE funds (LPs)
Fundraising from financial
institutions (fund life
expectancy: c.10 yrs)
Unknown
12.8%
Academic Institutions
1.8%
Banks
13.1%
Private Individuals
6.4%
3-4 years: investment in
unlisted businesses
Pension Funds
23.6%
Value creation in 6-7 years
Return funds to
financial institutions
with gain/loss
Other Asset
Managers*
2.4%
Insurance Companies
9.2%
Capital Markets
2.8%
Corporate Investors
3.7%
Endowments and
Foundations
1.4%
Family Offices
1.3%
Fund of Funds
14.5%
Government Agencies
7.2%
Typical fee structure for PE Buyout firms
• 1.5% to 2% of invested funds (‘management fee’)
• 15% to 20% of realised capital gains…if gain above 8%
IRR, cash to cash (‘carried interest’)
17
PE Buyouts : value creation 1/2
Buyouts are an ‘efficiency mechanism’ for the corporate world
1. Strong focus on OPERATIONAL performance and OPTIMISATION of resources (eg
Working Capital).
2. Alignment of incentives on a medium term partnership between investors and
management.
3. Away from the distraction of the « short-termism » of public markets, PE implies
strong relationship with limited number of shareholders.
4. Knowledge, network from PE investors (eg Operating Partners). PE Investors use all
available resources to help management team achieve its objectives.
5. Efficiency : « back to basics », needed after long periods of time focusing on growth.
6. Some leverage increases discipline (eg constant focus cash flow) and debt is inherently
tax-efficient (deductibility of interest payment).
7. Frequent comprehensive strategic review with Management and potential acquisitions
or disposal of « non-core » assets
18
PE Buyouts : value creation 2/2
Buyouts are an ‘efficiency mechanism’ for the corporate world
E&Y recent study hows better OPERATIONAL
performance of PE in Europe relative to average of
equivalent listed businesses , with annual growth of:
– 15% of operating income
– 5% of employment
– 9% of productivity
Growth in profit, employment and productivity vs. public
companies: PE exits 2006-2008
N = 149 (profit), 110 (employment), 109 (productivity)
In an LBO situation, most value creation comes
from growth in operating results.
Contribution of value creation to LBO performance for the 59
exits of 3i since 2001 (completed exits)
CAGR
20
18
16
15
17%
14
15%
4
12
10%
9
10
8
6
58%
3
5
11
1
4
6
4
2
0
Profit
Employment
Equivalent public companies
Productivity
PE outperformance
Source: Thomson Reuters/EVCA
Total
Equity value at
entry
Earnings growth
Market
enhancement
Strategic
repositioning
Debt reduction
Equity value at
exit
19
PE Buyouts Case Study
Brakes (LBO CD&R, 2002-07)
20
Brakes : First LBO with CD&R
Different steps we used to create operational value
2002 - 2004
2004- 2006
2006-2007
•Strategic repositioning
•Start thinking about growth initiatives
•Crisis situation
•Integration of past acquisitions
•Turnaround of company (near bankruptcy)
•Crisis situation – Turnaround
•Big Bang IT / Logistics
•Regional P&L
•Consolidation
•Rationalisation of activities
•Management team strengthening
•Profitization
•Stabilisation
•Growth
•Acquisitions
•Growth
•Preparation for future acquisitions
Goal was to reach perfect equilibrium between offensive and defensive measures …
21
Brakes : First LBO with CD&R
Strong operational improvements achieved under LBO
Sales turnover
EBITDA
2.500
Cash Flow
160
160
150.0
144.0
2.200
140
140
130.0
2.000
1.800
120
120
106.0
100
1.000
Value (£mios)
100
1.500
Value (£mios)
Value (£mios)
1.600
80.0
80
80
60.0
60
60
40
40
20
20
0.500
0.000
0
0
2003
2007
2009
2003
2007
2009
2003
2007
2009
22
Brakes : First LBO with CD&R
Positive experience for all actors
Staff
•
•
•
Stabilised future
Healthy corporate culture implemented
Rigorous and ethical standards
Clients
•
•
•
A unique offering of « one-stop shopping » in multi-temperature
Important and needed innovations in Quality, Traceability
Improved service to restaurants
•
•
Having been rescued, Brakes is a ‘healthier’ client to deal with.
Bargaining power re-equilibrated with suppliers (bargaining power -> working
capital.
Suppliers
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PE Buyouts : Many Strengths and
Weaknesses but the rationale still holds
+
 Effective governance mechanism.
 Alignment of incentives between management,
employees and investors.
 Additional expertise, particularly useful for « Buy &
Build ».
 Medium to long term horizon useful to implement
change.
 Long term operational performance > listed
companies.
 Remuneration of investors directly linked to
investment performance.
 Suitable for some companies and situations but not
all companies (need for recurring and predictable
cash flows, low and predictable Capital
Expenditure).
 High dependence to debt market.
 History shows many excesses + bubbles due to:
– a surplus of capital on the market (which has
pushed investors to use financial engineering
techniques rather than operating work).
– pressure for PE managers to invest once funds
have been raised.
1. An excellent solution for some companies, but not suitable to all.
2. The industry is young and still learning/adjusting.
3. ‘Do not throw the baby out with the bath water’.
24
PE industry, what’s happening
25
Private Equity Buyouts
An industry which has gone through important cycles
Growth / bubble
creation(volume,
leverage, valuations)
Financial crisis
(Volumes drop
drastically)
Hopes and
uncertainities
Transition from
financial crisis to
economic crisis
Source: Mergermarket
26
Evolution of the Buyouts industry
Debt financing
Valuation multiples, Debt/Equity split
2002 – 2004
2005 - 2007
2008-2010
Today
Senior Leverage max
(xEBITDA)
3.5x
6.0x
3.0x /3.5x
2.5x / 4x
Total leverage max
(xEBITDA)
4.5x
7.0x / 8.0x +
4.0x
4.0x / 5.0x
% of debt
60%
80%
50%
40-55%
Any Covenant?
Yes
No
Yes
Yes
Fair to say PE investors became somewhat ‘greedy’.
Used excessive leverage thanks to low interest rate environment and open bank debt market.
-> Implied very high ‘entry ‘valuations during 2005-08 : 10x + EV/EBITDA...
-> Breach of covenants: Hard/impossible to keep up interest repayment if economic assumptions don’t hold up
eg EMI, Terra Firma, Citi drama
eg Icelandic generic drugmaker Actavis and DB drama
27
Impact of the economic/financial
crisis on PE Buyouts
1. Difficult to exit 200X vintage. Longer
holding period. Unstable IPO market +
trade buyers ‘wait & see’.
Holding period for PE Buyouts
is logically trending up
2. Operating results correlated to weak
economic outlook.
3. High leverage -> renegotiation with
banks and leveraged loans investors.
4. Little refinancing debt available.
HY market reopened aggressively in
early 2010 but HY is expensive and
unstable (eg closed since summer
2011).
5. Commodities markets have further
impacted operating results.
LBO debt (€bn) by maturity: the liquidity wall
40
€67bnparLiquidity
Dette LBO en Europe (€bn)
maturitéwall
37
30
22
20
10
1
2.5
2011
2012
8
0
2013
2014
Source: Grant Thornton, Private Equity News
2015
28
Current crisis
LBO valuations are still high, in an uncertain environment
US
Europe
8.0x
6.7x
7.0x 7.2x
7.8x
6.6x
5.9x
4.0x
2.0x
8.9x
9.2x
9.0x
8.8x
7.9x
8.0x
7.1x
6.4x
6.3x
6.0x
4.0x
2.0x
NA
US mid-cap
Source: S&P LBO Quarterly Review. Q3 2011.
YTD 3Q11
2010
2009
2008
2007
2006
2005
2004
2003
2002
3Q11
YTD 3Q11
2010
2009
2008
2007
2006
2005
2004
2003
0.0x
2002
0.0x
8.6x
2001
6.0x
8.4x
8.3x
8.1x
8.9x
EBITDA Purchase Price Multiple
8.5x
9.5x
10.0x
9.3x
2001
EBITDA Purchase Price Multiple
10.0x
Europe mid-cap
Source: European S&P LBO Quarterly Review. Q3 2011.
29
Current crisis
Absence of visibility on macro outlook changes the game
 More than ever, seek top management team for portfolio companies.
 Use international expansion to seek growth.
 Large ‘public-to-privates’ are clearly out of question.
 Imperative to create value through operational efficiency only. Leverage
‘kicker’ is gone and need to compensate for high entry prices.
 Some large corps are offloading non-core assets to focus on emerging
markets.
 Many restructuring, secondary buyout/distressed debt opportunities.
 Work on PE PR.
30
Current crisis
Disequilibrium between univested capital and
availability of debt financing

Access to debt financing still
compromised, expensive and unstable.

Substantial portion of capital raised by
PE yet to be invested.

Yet still high valuations and competition
between funds for strong assets.

Weak fundraising outlook given
increasing pressure on LPs (eg Basel III
for banks, Solvency II for insurance
companies).
31
Conclusion
Outlook for the PE Buyouts industry

Painful but natural/healthy readjustment of the industry following excessive profitability in 2005-07.

Role of new emerging actors : strategics, SWFs.

Increasing regulation: pressure on funds and their LPs.

New type of relationship between PE funds, LPs and managers is emerging.
-> Changing fee structure? (eg Apax has compromised). Longer fund life than 10/12 years?

Lenders to PE have changed. Substantial leveraged debt writedown for some banks so institutional
investors, inc. hedge funds are taking over as top debt providers now -> higher debt prices.

Clear evolution of the PE Buyouts business model: some (major) actors disappear (eg Candover officially
in run off mode), less competition means more opportunities.

Move away from returns creation through financial engineering and more than ever, imperative to focus
on operational improvements for old and new buyouts. Therefore, probably less financiers and more ex
senior corporate executives at the helm of large PE houses.

Careful not to ‘throw the baby out with the bath water’. Basic rationale still very much makes sense.
32
Your Entrepreneurs Partners
Benefit from
full tax relief
Access to an
attractive asset class
Premium EP offering
Tax-free capital gains
Benefit from network’s expertise
and credibility
Build a diversified
portfolio of SME investments
You only ‘lock-in’
what you invest
www.entrepreneurspartners.com
33
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Get in touch:
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