Deputy head of Standard Life Capital, Roger Pim is in the business of transforming companies. Here, he reveals the characteristics he looks for in his ‘agents for change’.
These are busy times for dealmakers in Europe where, in the second quarter of 2017 alone, buyout activity increased from €22 billion to €35 billion.
There is always some degree of cyclicality in the private equity market owing to the fact that deals are finished at year-end. However, what makes this recent uptick stand out is that it has been felt across different-sized segments, industries and geographies, as more investors increase their exposure to the asset class. Such broad-based growth gives Roger Pim ample reason for optimism.
“Many investors are now searching for other sources of value. Private equity, with its traditional focus on investing in companies and providing operational improvement and hands-on management, has been a strong source of returns. In my view, it goes back to basics: the appeal of actively managing investee companies is all about generating value by actually changing them”, asserts Pim.
As a prime example, he points to one of Europe’s largest ever software buyouts. Visma is an Oslo-based provider of accounting software and other administrative services to companies and governments in the Nordic region. In June 2017, it was sold by US buyout giant KKR to a consortium for $1.8 billion.
While there is a lot of capital chasing deals, Pim argues there is relatively less competition in the mid-sized market. Here, his particular focus is on technology-enabled and business services sectors.
The Standard Life Private Equity Trust (SLPET) that Pim manages has an overweight position in private equity groups in Scandinavia, a region where small domestic markets have nurtured many market-leading companies with an export focus. This has been fertile ground for private equity opportunities, especially for firms with strong historical relationships with leading managers like Altor and Nordic Capital – to both of which SLPET has exposure.
“Altor and Nordic Capital have done extremely well for us in the past and we believe they are very well-positioned going forward”, says Pim.
By identifying structural or trend shifts within specific industries, private equity can go some way to diluting the impact of macro events and offsetting some of the negative effects of the prevailing economic cycle. Private equity firms look to add value directly from growth and margin expansion at the companies held in their portfolios.
One such area of structural growth is payment processing. In the past, these systems were not prioritised by banks and were sold off. Subsequently, new owners have taken advantage of the shift towards cashless payments. Advances in technology have allowed new providers to proliferate as they move to consolidate this sub-sector.
In this area, one of SLPET’s selected managers, Nordic Capital, recently sold Swedish financial services payment solution company Bambora to Ingenico, a global leader in seamless payments. The price paid was €1.5 billion. By the time the deal closed, Bambora, which focuses on lesser-penetrated small and medium-sized enterprises, had acquired and integrated thirteen payment companies.
Nordic Capital invested significantly in technology and operational improvement to make this happen. In turn, this allowed Bambora to expand into new markets including Norway, Denmark, Finland, the US, Switzerland and Australia.
In Europe in 2017 (year to September), buyout firms have secured 37 deals in financial services, worth €6.9 billion. These account for approximately 15% of all deal activity in the sector, according to international law firm White & Case. This is substantially higher than the average over previous years.
However, Pim emphasises the need to temper enthusiasm with a laser focus on valuations.
“We’re watching this increase in dry powder (the funds private equity funds have available to invest) very carefully. It certainly has the potential to push up prices,” he says, pointing to the fact that in Europe average pricing has increased to approximately 9.5x EBITDA (earnings before interest, tax, depreciation and amortisation). At this point, it’s all the more important to be very clear about your strategy and to invest in those businesses where there’s a well-defined strategic rationale. Much of our focus in SLPET is ensuring we find those opportunities.”
The opinions expressed are those of SL Capital as of October 2017 and are subject to change at any time due to changes in market or economic conditions. This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. The value of an investment can fall as well as rise and is not guaranteed – an investor may get back less than he/she put in. Past performance is not a guide to future performance.
This article is issued and approved by Standard Life Investments Limited. Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority. www.standardlifeinvestments.com © 2017 Standard Life Aberdeen, images reproduced under licence.
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