Transcript TMA Europe Conference will be held at the Landmark Hotel

BARRIERS TO AND OPPORTUNITIES FOR
INVESTMENT IN EUROPE
John Arney – Managing Partner
BORN OUT OF A DISTRESSED SITUATION
MBO
2011
1980 - 2011
Today
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INNOVATIVE 4 + 4 MODEL
GP owned and led by a meld of Investment and Industrial Partners
INVESTMENT PARTNERS
John Arney
Javier Abad
Mark Dickinson
Nils Stoesser
INDUSTRIAL PARTNERS
Sir George Buckley
Dr Fredrik Arp
Dr Peter Goode
Anders Pettersson
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BUILDING COMPANIES ACROSS THE ENR SUPPLY CHAIN
Mid market, control LBOs of businesses with or capable of having international operations
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ARLE’S DEFINITION OF ‘DISTRESS’
Does not = turnaround of loss making businesses with ‘also-ran’ market position
Does =
• Neglected, under capitalised businesses that could be better run and better
invested
• Businesses owned by a parent (individual, corporate, fund, bank or government)
experiencing operational and/or financial difficulties
Commonly find a need for:
> Refreshed strategy
> Strong leadership
> Heightened operational focus
> Increased capital investment
i.e. a good company with a bad balance sheet or a troubled parent
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PAST BUYOUTS EMANATING FROM DISTRESS
5.7x
472% IRR
LSE
Upstream
Oil & Gas
6.9x
63% IRR
4.1x
97% IRR
2.3x
58% IRR
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OPPORTUNITY IN EUROPE
The sovereign backdrop
Government debt as a proportion of GDP (%)
180
160
140
120
100
80
60
40
20
0
1999
2000
Germany
2001
Ireland
2002
Greece
2003
2004
Spain
2005
France
2006
Italy
2007
2008
Netherlands
2009
Portugal
2010
2011
2012
United Kingdom
Maastricht requirement of total debt – less than 60%
European governments have become heavily over-levered in the past six years
Source: Eurostat
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INVESTORS FLOWING TO DISTRESSED FUNDS
European-based firms have raised €75bn for investment in distressed situations
Investing through debt
Investing through equity
Trend
No shortage of firepower
Source: Prequin, €75 billion raised over 10 years
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SOURCES OF SUPPLY
But barriers to a strong flow of investment opportunities
Prone to ‘kick the can down the
road’
High cash balances, low
borrowing costs and ease of
refinancing have reduced the
need to sell non-core assets
Slow deleveraging process, banks
aided by ECB’s liquidity measures
Some selected disposals on
structured asset sales
Corporates
Private Equity
Funds
Raft of failed exits shows firms
are looking to realise at full value
70% of private equity’s AuM –
(highest ever) tied up in portfolio
assets
Source: Pitchbook
Banks
Governments
Reluctance to sell assets in ‘firesale’ for short-term liquidity
Selective sales at local and
central level, e.g. Afandou sale in
Greece, Civil Service properties
for sale in UK
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BANKS – THE PRIME OBSTACLE TO FLOW
Banks have adjusted slowly to the need for constructive financing
Causes
•
•
•
•
Spread and severity of ‘08 crisis necessitated triage
Regulatory and political pressure
Long-term benign interest rate environment
Europe heavily ‘over-banked’ with ‘Continental drift’ vs. the more regionalised US banking
sector
Effects
•
•
•
•
•
Problems on balance sheet larger than US counterparts
Sub-optimal refinancings (‘zombies’)
Bond market rapidly filling the lending void
Down cycle prolonged by not taking pain early
Overall drag on economic growth
Real GDP Growth 2012-2017
Source: OECD
Euro area
1.2%
United States
2.5%
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SO WILL THE FLOW PICK UP?
Banks remain the most significant potential source but also obstacle
Financial Times, March 2013
“European banks will need to shed as much as another €3.4tn from
their balance sheets over the coming years by reducing lending and
selling assets”
Deloitte’s European Bank Survey, 2012
De-leveraging timeframe for European banking sector
Sources: Deloitte, Financial Times, PwC
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IN CONCLUSION
• Macro suggests high potential in Europe
• Plenty of hot money to fund investment
• But actual supply strangled by constraints
• Flow of opportunity should increase
… but do not hold your breath
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