Participate, Profit & Celebrate:
Neil MacDougall shared insights with Global M&A Network about the resurgence and intense level of competition for mid-market private equity deals in Europe, when the strategy of "buy and build" generates value, why strategic buyers prefer "off-market" transactions, along with his views on why secondary buyout deals are more common in Europe and the disciplined approach to pricing deals is a key skill for private equity.
Q.: What is the underlying cause for the rebound in European private equity deals beginning last year, and do you foresee a continuation of this trend?
Mr. MacDougall: 2010 was a better year compared to 2009, which was the cyclical low point for buyouts, but by no means a good year in terms of deal volumes. We expect that 2011 will see a further increase in deal activity due to greater confidence, more competitive debt markets and increased numbers of sellers as a result of higher prices.
Q.: As the economy continues to improve and the debt markets are fluid, do you believe that competition will heat-up for buyout deals? How will competition effect valuations and deal structures?
Mr. MacDougall: The competition for buyout deals is already intense. The debt market for mid-market deals in Europe works differently to the US debt market as it is largely based on banks taking and holding loans on their balance sheets. There are now more lenders competing for business and they are being more aggressive about the amounts lent and in some cases on the terms as well. As a consequence of this more competitive debt market, deal structures are becoming more highly leveraged and valuations are rising.
Q.: Can you provide any specifics on deal structure, such as equity/leverage ratio and regions where competition is particularly “intense?”
Mr. MacDougall: Minimum equity percentages on mid-market deals were at 50% in 2009 and this has now fallen close to 40% and could go lower in 2011. France and the Nordic region are hot markets at the moment but it is certainly not easy anywhere.
Q.: What types of companies are attractive to private equity investors in the context of global economic conditions?
Mr. MacDougall: In general companies that have global activities and are therefore able to benefit from the rise of the BRIC nations are attractive. Also companies supplying products or services to energy producers are benefiting from the rising prices of all forms of energy.
Q.: What sectors are appealing to Silverfleet Capital?
Mr. MacDougall: We actually focus on a limited number of sectors: business & financial services, healthcare, manufacturing, retail, leisure and consumer products. Each sector is led by a partner in our firm and this enables us to identify attractive deal opportunities well in advance and to concentrate our efforts on them.
Q.: Per your strategy, what makes a company a “market leader?”
Mr. MacDougall: As a former Bain consultant I have to say that the market leader has a relative market share of 1 or greater in the correctly defined market. Relative market share is the market share of the company divided by the market share of its nearest competitor.
Q.: Why does investing in Western Europe and US firms with operations in Europe, create compelling investment opportunities for mid-market PE funds?
Mr. MacDougall: Europe and the US are huge economic regions and have many really attractive investment opportunities for mid-market private equity firms. These are often companies operating in fast growing niche markets led by great management team providing innovative value-added products or services to their customers. Such companies are often growing much faster than the economies in which they operate. As for differences between regions you could write a book about that but one small practical thing to look out for is when people in different countries go on holiday and how they feel about doing business at this time.
Q.: Can you elaborate on “how they feel about doing business,” during holidays?
Mr. MacDougall: In certain European countries (particularly the Nordic region) people, including senior executives, are simply not available during the summer holiday period, which is normally often between two and three weeks long. The Nordic region goes on holiday after mid-summer (the summer solstice), France goes on holiday from 14th July, the British and Germans during August and then the USA around Labor Day.
Q.: As a proponent of"buy and build" strategy, do you have a checklist for evaluating platform acquisition?
Mr. MacDougall: We do not have a specific checklist. However, we prefer smaller bolt-on transactions to so-called transformational deals as these are both lower risk and often more attractively valued especially if they are"off-market." The recent acquisition of Jif-Pak Manufacturing Inc. by our portfolio company Kalle is a good example.
Q.: What do you mean by “off market,” and why is this is a better value proposition?
Mr. MacDougall: Off-market means not sold through a wide auction run by a major corporate finance firm. These are usually smaller transactions which can often be acquired at lower entry multiples sometimes with earn-outs or other forms of contingent consideration so the buyer is not taking all the risk on future performance.
Q.: What are the limits to"buy & build" model?
Mr. MacDougall: Buy & build in the later stages of an investment gets more difficult simply because the chances are that the costs of doing each incremental bolt-on deal will earn a lower return on exit. To put it another way around, buy & build is something that needs to be done with some pace if it is to generate a good return. In general, good buy & build creates value while poorly executed deals will destroy value and reduce returns.
Q.: Silverfleet has completed a number of successful exits, including the sale of Histoire d'Or to Bridgepoint and the sale of Sterigenics International to GTCR. What was the starting point of these deals?
Mr. MacDougall: Each deal has its own story and generalisations do not do them justice. The central theme to many of our most successful investments is that the starting point of each one is often much earlier than the outside observers would expect. For example we first met the previous owners of Sterigenics in early 2003 and finally bought the company in mid-2004.
Q.: What's the process of executing a sale to strategic and other PE firms?
Mr. MacDougall: We have had over 100 exits of portfolio companies since 1990 and many of these have been to strategic investors provided they are prepared to offer the best deal. Our recent sale of European Dental Partners to Lifco International AB is an example. Private Equity firms usually as the prospective buyers often approach another PE firms about their portfolio companies when they feel the business could be attractive as a secondary deal.
Q.: In your experience having executed transactions on both sides of the Atlantic, why are secondary buyouts far more popular in Europe vs. the US?
Mr. MacDougall: The statistics that I have seen suggest that take privates are far more prevalent in the US than they are in Europe. I strongly suspect but cannot prove that the reverse is also true and that IPOs are more common in the US as well. This would mean that in Europe the secondary buyout is more common because exits to public markets are either more difficult or unattractive. As for the"bad press" that secondary transactions get, I think this is largely unjustified. If LPs have committed capital to GPs that overpay for secondary buyouts that is a different issue.
Q.: In concern to your comment -“If LPs have committed capital to GPs that overpay for secondary buyouts that is a different issue,” could you elaborate?
Mr. MacDougall: A disciplined approach to the pricing of transactions is a key skill of a PE firm. A secondary may be a good or bad deal but that is more likely to be a function of pricing not simply because it is a secondary buyout.
Q.: Congratulations on sale of European Dental Partners to Lifco. What was the transaction process here?
Mr. MacDougall: The transaction process was an"off-market deal." Many trade investors much prefer this approach and we find as a seller it can yield just as good results as an auction if the buyer is really committed to the deal.
Q.: Why do strategic investors prefer “off-market” deal?
Mr. MacDougall: Many strategic or trade investors do not feel comfortable participating in wide auctions alongside lots of private equity firms. This may reflect the fact that their core business is rarely buying and selling companies like a PE firm so decision making often works in a different way and the senior management do not appreciate having their time wasted on low probability M&A.
Q.: A large number of private equity firms are expected to raise new funds in 2011. Yet LPs have remained fickle in making commitments to European buyout funds. In your opinion, what is driving such a lukewarm response?
Mr. MacDougall: I suspect amongst some investors there is a feeling that Europe is a low growth economic area and that investment returns will consequently be lower. I have also spoken to LPs who think, in my view correctly, that the risks are significantly higher in the four BRIC countries not least because of the vast amounts of money that has been raised to be invested in each of them. The best time to invest in any asset class is always when the crowds are off chasing growth somewhere else. Do you remember during the tech bubble what happened to valuations of attractive but low-tech businesses?
Q.: What lessons are worth remembering from the tech bubble era?
Mr. MacDougall: I specifically remember about 10 large old economy firms (e.g. Wolseley) dropping out of the FTSE100 index in early 2000 to make way for tech companies, several of which no longer exist. As a consequence tracker funds reduced their holdings in these traditional businesses and their stock prices fell. Anybody buying those stocks then did very well when the market rediscovered an appetite for cash flow and dividends.
Q.: What is the secret to Silverfleet Capital's successful track record, specifically since its independence from Prudential plc?
Mr. MacDougall: We were successful as part of the Prudential too. As for the secret of a successful track record, the old formula of 95% perspiration and 5% inspiration is probably it. As a consequence we have produced consistently good returns for our investors for over two decades. That is probably not unique but it certainly stands out.
Q.: On a personal note, what book are you currently reading?
Mr. MacDougall: I have just finished reading The Big Short (Michael Lewis) and Too Big to Fail (Andrew Ross Sorkin), and following a visit to Peru last year I am now reading Royal Commentaries of the Incas and the General History of Peru by Garcilaso de la Vega el Inca. The contrast between Wall Street shorting synthetic structures distantly linked to the US sub-prime market and a society which did not have any money and where all trading was in physical goods or services is stark.
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