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BARRIERS TO AND OPPORTUNITIES FOR INVESTMENT IN EUROPE. John Arney – Managing Partner. Born out of a distressed situation. MBO. 2011. Today. 1980 - 2011. Innovative 4 + 4 model. GP owned and led by a meld of Investment and Industrial Partners. INVESTMENT Partners. Javier Abad. - PowerPoint PPT Presentation
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BARRIERS TO AND OPPORTUNITIES FOR INVESTMENT IN EUROPE
John Arney – Managing Partner
BORN OUT OF A DISTRESSED SITUATION
2
2011
MBO
Today1980 - 2011
INVESTMENT PARTNERS
INDUSTRIAL PARTNERS
INNOVATIVE 4 + 4 MODELGP owned and led by a meld of Investment and Industrial Partners
Sir George Buckley Dr Fredrik Arp Dr Peter Goode Anders Pettersson
3
John Arney Mark Dickinson Nils StoesserJavier Abad
BUILDING COMPANIES ACROSS THE ENR SUPPLY CHAIN
4
Mid market, control LBOs of businesses with or capable of having international operations
5
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
6
PAST BUYOUTS EMANATING FROM DISTRESS
LSE 6.9x63% IRR
Upstream Oil & Gas
4.1x97% IRR
2.3x58% IRR
5.7x472% IRR
7
OPPORTUNITY IN EUROPEThe sovereign backdrop
European governments have become heavily over-levered in the past six years
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
20
40
60
80
100
120
140
160
180
Germany Ireland Greece Spain FranceItaly Netherlands Portugal United Kingdom
Gove
rnm
ent d
ebt a
s a p
ropo
rtion
of G
DP (%
)
Maastricht requirement of total debt – less than 60%
Source: Eurostat
8
INVESTORS FLOWING TO DISTRESSED FUNDSEuropean-based firms have raised €75bn for investment in distressed situations
No shortage of firepower
Investing through equity Investing through debt
Trend
Source: Prequin, €75 billion raised over 10 years
9
SOURCES OF SUPPLYBut barriers to a strong flow of investment opportunities
Banks
Private Equity Funds
Corporates
Governments
Prone to ‘kick the can down the road’
Slow deleveraging process, banks aided by ECB’s liquidity measures
Some selected disposals on structured asset sales
High cash balances, low borrowing costs and ease of
refinancing have reduced the need to sell non-core assets
Reluctance to sell assets in ‘fire-sale’ for short-term liquidity
Selective sales at local and central level, e.g. Afandou sale in Greece, Civil Service properties for sale in
UK
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
10
BANKS – THE PRIME OBSTACLE TO FLOWBanks 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
Euro area 1.2%
United States 2.5%
Source: OECD
11
SO WILL THE FLOW PICK UP?
Sources: Deloitte, Financial Times, PwC
Deloitte’s European Bank Survey, 2012De-leveraging timeframe for European banking sector
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”
Banks remain the most significant potential source but also obstacle
12
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