Roland Berger European Private Equity Outlook 20091211
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Transcript of Roland Berger European Private Equity Outlook 20091211
8/14/2019 Roland Berger European Private Equity Outlook 20091211
http://slidepdf.com/reader/full/roland-berger-european-private-equity-outlook-20091211 1/29
outlook 2010
Munich, Vienna, Frankfurt, December 2009
8/14/2019 Roland Berger European Private Equity Outlook 20091211
http://slidepdf.com/reader/full/roland-berger-european-private-equity-outlook-20091211 2/29
Contents Page
A. European private equity market overviewWhat will come after the crisis? 3
B. The PE environment is remaining difficultHow are the macro indicators developing? 9
C. A call for active PE performance improvement –What kind of fund manager is needed? 20
© 2009 Roland Berger Strategy Consultants GmbH 2
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A. European private equity market overview
What will come after the crisis?
3
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The European private equity market volume declined by 27% toEUR 54 bn in 2008 – 2009 looks even worse
European private equity investments [EUR bn]
39.4 -30.6 14.0 5.1 26.8% change p.a. 27.3 51.1
8.071.0
73.8
4.2 -27.0
16.0
7.1
54.0
47.0
10.7
19.79.8
8.4
10.3
.
29.127.7 65.8
46.9
15-20
FYVenture
55.0
35.0
25.1
36.9
24.3
.
8.5
20.717.9
1)
Buyout
.
12.115.314.4
26.6
4Source: EVCA; Roland Berger Research
Buyout Venture capital
1) No split in buyout and venture capital available – Full Year (FY) =estimate
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Most national PE markets experienced significant setbacks in2008 – market volumes in CEE still lag far behind WE
European PE investments by country, 2006-2008 [EUR bn]
3.44.24.3
13.75
20.90
23.48
5.755.53
0.630.680.30
9.0811.8610.80
0.440.170.35
.
9.2110.607.23
0.86
0.030.020.02
2.344.233.58
......
5.413.17
4.92
..
0.090.560.04
5Source: EVCA
2007 20082006
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Strong focus remains on late stage buyout financing – Now andin the future
European PE investments in terms of investment stage [EURbn; %]
715
870
Start-up
Seed
54.1
5
14
71.2
0
0
47.1
55
29.1
0
1
73.8
0301
24.3
2
33
21
7
Expansion
row
355
8
5
68 71
80
70
Replacement
capital5
45Buyout
6Source: EVCA; Roland Berger Research
2006 200820052003 20072001
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Divestments will probably decline by 50% for the second year ina row in 2009 – funds raised and divestments almost seized??
European PE activity flows [EURbn]
112.3
-49%
79.6
81.4
71.8
54.0
74.071.0
27.527.0
47.0
36.9
29.1 27.133.129.8
19.6
5.7 6.92.8
..
H1 200920082007200620042003 2005
7Source: EVCA; Press; Roland Berger Research
DivestmentsInvestments
Funds raised
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The question is: Will profits recover – or will the downturncontinue?
10-year rolling IRR(buyouts in Europe) [%]
REMARKS
>Only top funds can17.117.417.1
19.119.619.3
17.4
mee e g
demands of investors – thespread between
.14.9
11.2 11.611.7
15.415.3.
well performingfunds and lowperformers haswidened
.9.6
>Private equity fundsneed to take aclose look at levers
8Source: EVCA; Roland Berger Research
available for value
creation1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
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B. The PE environment is remaining difficult
How are the macro indicators developing?
9
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Judging by macroeconomic indicators, the PE environment willremain difficult
Current situation
>The number and size of leveraged buyout deals has
decreased further due to limited availability of debt
>Leverage levels have decreased from over 6 timesEBITDA to multiples below 5, reducing the return on equity
Will thesetrends
>Many investments by PE firms are ready to go public, but
stock exchanges are not
–
Outlook for
>Profits remain under pressure – only top funds achievesatisfactory returns
10Source: Roland Berger Research
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Market snapshot: The takeover market should have hit bottom – Recovery expected in the next few months
European takeovers by financial investors since 20071)
156151
187183184
200 25
20
189
97100
15
27
6355
50
5,0
10
0 0
Q4 20091)Q3 2009Q2 2009Q12009Q4 2008Q3 2008Q2 2008Q12008Q4 2007Q3 2007Q2 2007Q1 2007
11Source: Thomson Financial
Number of transactions [left scale]
1) Until November 23, 2009
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Where is the PE market headed? From a macroeconomicperspective, economic growth is needed
Private equity activity vs. economic development1)
Economic
[annual change]eve opment
[annual change]PE
400 15Recession opportunity
Real GDP200
300 10
,
in times of low GDP growth weremore profitable
0
100
0
1st wave: 1980s 2nd wave: 1990s 3rd wave: today
-100 -5
1009080706050403029089888786 91 92 93 94 95 96 97 98 99 00 01
12Source: Roland Berger Research; Thomson One Banker; EIU
rea ng up
conglomerates
u mar e an cras ga n – u mar e an
another crash
1) M&A with PE involvement
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Most European countries will achieve positive growth rates in2010 – Will this be enough to fuel growth in the PE market?
Data forecast for 2010 –Year-on-year GDP change
>Not all European economies areback on track for recovery – e.g.S ain will continue to suffer in
2010>Economic stimulus packages in
many countries will support
Sweden(1.3)
UK 0.6
Poland (1.9)
v y
>The V shaped recovery seems tobe most likely
zec epu c .
France 0.9
Germany(1.0)
Hungary-1.0
Netherlands (0.5)
Austria Romania (1.0)
Slovakia (1.5)
key to securing returns especiallyin low-growth industries
Italy(0.6)
Spain(-0.8)
(0.8)Bulgaria (1.0)
13Source: EIU
Trend: Influence:
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Low interest rates are becoming increasingly crucial for bearing the financing burden
Private equity activity vs. lending ratesLending rate
PE400 15
[annual change]eve opment
[%]
200
300
10
0
1005
1st wave: 1980s 2nd wave: 1990s 3rd wave: today
-100 0
07 08 090099989796959493 06050403020192919089888786
14Source: Roland Berger; Thomson Financial; EIU
rea ng up
conglomerates
u mar e an cras ga n – u mar e an
another crash
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Interest rates came down strongly to stimulate liquidity in creditmarkets – However, restricted access to cheap debt for PEs
Lending rates in Europe and USALending rates [%] REMARKS
> Interest rates will most likely start torecover, increasing the price of
10
> Increasing interest rates could lead toover-leveraged companies anddefaulting credits
USA
6
7
8
> Due to the financial crisis banks frozetheir lax credit policies (e.g. tighteningfinancial covenants) and thus
negatively impacted the access of PEsEurope3
4
5
to cheap debt financing
> Investments will have to earn higherreturns to serve the credit lines; value
– –0
1
2
15Source: Roland Berger Research; Bloomberg; ECB
. .becomes more important
2009200820072006200520042003
Trend: Influence:
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A lack of confidence in European banks made moneyexpensive in 2008 – Spreads back to normal in 2009
Development of interest spread [discount rate vs. 3-month Euribor]
Euribor, 3-month offered rateStart of
subprime crisis
4.5
5.0
5.5
Main refinancing rate
3.0
3.5
4.0
2.0
2.5
0.5
1.0
.
16Source: Bloomberg
.
January 2009January 2008July 2007 July 2008 July 2009January 2007
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Healthy stock markets normally provide exit options for PEinvestments – In most cases with a time lag
Private equity activity vs. stock market developmentStock market
[Year-on-year change]eve opment
[Year-on-yearchange]PE
400 100
200
300
50
0
1000
1st wave: 1980s 2nd wave: 1990s 3rd wave: today
-100 -50
0908070605040302010099989796959493919089888786 92
17Source: Roland Berger Research; Thomson One Banker; Bloomberg
rea ng up
conglomerates
u mar e an cras ga n – u mar e an
another crash
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European stock markets not likely to boom in 2010 – Onlyslight growth expected
Forecast data 2010 –Stock market
Stock market development (example: Euro Stoxx)
Euro Stoxx, price development, since J an 2007 [index]
REMARKS
> European stocks recovered
after hitting rock bottom in5,000
March 2009
> IPOs for PE investments
remain difficult4,000
4,500
> Restructuring investments
to ensure profitable exits on
the secondary market is2 500
3,000
3,500
important
1,500
2,000
18Source: Bloomberg; BayernLB
Forecast
2010 Trend: Influence:
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OUTLOOK: The PE environment remains difficult
Outlook
> GDP growth in Europe will recover starting in 2010 and thus positively affect privateequity industry performance
> -
financing for existing portfolio companies –will be smaller in terms of volume,covenants will be stricter and costs will be higher
,increased risk of default
> After the rebound in 2009, the outlook for European stock markets in 2010 remainscautious very limited options for profitable IPO exits
Value creation through thorough due diligence, active portfol io management and
19Source: Roland Berger; DB Research
restructuring wil l separate successful investments from the rest
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C. A call for active PE performance improvement –
What kind of fund manager is needed?
20
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Where does the profit come from when the businessenvironment remains unfavorable?
Sources of profit
1. 2. 3.
Due dil igence &purchase price
Investmentperformance
Selling price Investors have tomanage three
Assess target
potentials in effective
Actions designed to
ensure and drive
Selection of the right
moment and exitorder to meet the
high performance
Low purchase price in
relation to fair value;
(cut costs, improve
sales, reduce working
highest value
focus on
acquisition and
21
,
Source: Roland Berger
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Today, the financial value creation drivers in buy-outs cannotachieve satisfactory returns
Financial drivers for value creation
> Interest rates in Europe low but
expected to start rising
> Avera e levera e on LBOtransactions
today still at around 5*EBITDAIncreased risk of financial distress Leverage
> Most companies restructured
> Returns for strategic
buyers
> Increased competition for VALUE
ManagementMultiple
> Many secondary buy-outs
Realizing the improvement
otential is becomin more
PE players
"Buy low, sell high"
more and more
22
s are o ngncreaseand more challenging difficult
Source: Roland Berger
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ACQUISITION – DUE DILIGENCE1.
To extract the ful l investment value, operational improvementsare necessary – Due diligence to assess potential
Operational value creation drivers
Carefully selecting andGenerating synergies by
companies
REALIZING V ALUE
Realizing stand-alone
improvements through
cost savin
Growing through
strategic realignment
and sale -u action
23Source: Roland Berger
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ACQUISITION – DUE DILIGENCE1.
Revised business plans are the basis for company valuationand decision making
Overview –commercial due diligence
due diligenceMarket
Drivers, volume, growth
potentials, trends
C O M
M A K I N
CompetitivenessCorporate and business
strategy, products, competition
E R C I A L
T H E
Business plan
Plausibility checks (revenues,
Balance sheet
Cashflow
D U E
D
I G H T
D
Identification of improvement levers
Synergies, stand-alone cost savings,
I L I G E N
E C I S I O
24
growth opportunities Improvement actionsE S
Source: Roland Berger
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ACQUISITION – PURCHASE PRICE1.
Leverage ratios are coming back down – In the first half of 2009, total debt to EBITDA was 4.9
Leverage ratios [total debt to EBITDA, European LBOs]
4.905.17
6.12
5.505.23
.
4.254.164.17
4.39
25Source: EVCA Barometer; S&P LCD; Roland Berger Research
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HOLDING PERIOD2.
The holding period offers the largest potential for valuecreation – This requires active PE investors
ROI improvement1) in 2 years, US restructuring cases [% points]
63.462.1 64.7
involvement inrestructuring29.7 29.8
45.7
"
return for
investor
investor
position" (w/o board
participation)
function function
26Source: Roland Berger
1)Operating profit to total assets
Investor influence
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HOLDING PERIOD2.
Comprehensive restructuring definitely has a positive impacton value creation
Development of cumulative abnormal return in comparison to CDAX
500% 500%
MINOR DOWNSIZING –
FOCUS ON COSTS
SUBSTANTIAL DOWNSIZING –
FOCUS ON COSTS AND GROWTH
300%
400%
300%
400%
+245%
+483%Top 20%
100%
200%
100%
200%
+54%
Top 20% +136% Average
-100%
0%
-100%
0%
-54%Flop 20%
-100%Flop 20%
27
0-20
days
+2
years
+1
year
-20
days
+2
years
+1
year
0
Source: Thomson Financial; Datastream; Dow J ones & Reuters; Factiva; Roland Berger Research
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EXIT3.
Generating value through exit is rather l imited within currentchannel options
Exit channels by number of divestment [%]
>Trade sale to strategic investorsremains the most important exit10.6
23.9
23.0
Trade sale
c anne n
>Sale to secondary PE investorsremains difficult given restricted
6.6
10.9
11.7
Total loss/
writeoff
ava a y o e
>Writeoffs increased to over10% of total exits9.4
7.4
5.8
7.5
IPO
Sale to mgmt.
(MBO)
>IPO in current market conditionsnearly impossible
42.1
41.0
.
Other (mainly
repayments)
28Source: EVCA Yearbook 2008; Roland Berger Research
2007
2008
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Conclusion: A successful fund manager must be a companydealer and a top manager rolled into one
Conclusion
>Private equity funds are facing high return expectations by their investors that only few in the industry
can meet
" ". ,
in companies is very difficult
>To stand out from industry average, all available value creation levers must be used, especially in the
holding period
>Established management approaches are the main tools – restructuring, por tfolio management and
value mana ement. In a l in these tools, the rivate e uit fund mana er has to demonstrate that heis superior to "normal" conglomerate managers
> A successful private equity fund manager must be a company dealer and a top manager rolled into
–
29