Written on 08 April 2013.
EDHEC FE Event
The third FE Event in Nice focused on the European LBO market. The aim of the talk was to introduce a large audience of EDHEC students to LBO operations in equity markets and provide an investor’s perspective of current market scenarios. Professor Pierre Mella-Barral, the moderator, kick-started the event by introducing keynote speaker Denis Villafranca, senior partner at BC Partners, one of the largest European private equity (PE) funds. Mr Villafranca, holder of an MBA from Harvard Business School, moved from Bain & Company to BC Partners in 1999.
Mr Villafranca opened the conference with an introduction to BC Partners, its clients and the markets they operate in. He stated that the main focus of BC Partners is on asset selection, not of public companies but rather of private companies.
He went on to expand on BC Partners’ mission, which is ‘to acquire industry leaders with defensive growth characteristics across Europe and the US’. He mentioned that the industry is highly cyclical, with the North American market being more volatile than the European. ‘LBOs,’ he noted, ‘generate long-term leveraged returns from small portfolios of handpicked assets and in this industry, you are paid to produce consistent leveraged returns through proper asset selection and proper asset management.’
Mr Villafranca then illustrated what investors were thinking after the Lehman crisis, noting that when the market crashed investors realised that they were over-allocated and over-committed to a number of funds, that they were spread too thin with too many unproven funds and that that they were not exercising governance. The liquidity squeeze in ’07-’08 prompted the realisation that there were too many overvalued/overleveraged deals sitting in LBO funds’ portfolios. And since the same LBO funds were still loaded with cash, there was no reason for the limited partners to act with urgency.
Now, on the contrary, limited partners are taking back power with benchmarking, team assessment, succession planning, and so on, and by setting tougher economic terms on funds. Changes in the relationships between limited and general partners are also underway. In addition, there are fewer funds of funds and more sovereign wealth funds. ‘Liquidity is not abundant anymore,’ Mr Villafranca said, summing up the major changes; ‘Investors have fought back and taken the market.’
Finally, Mr Villafranca stressed that the high-yield bondmarket has not yet emerged as a consistent financing alternative in Europe. In closing, however, he noted two examples of dynamic refinancing by BC Partners: Picard Surgelés and Amadeus.