The UK venture capital market has shifted focus during the past three years as a result of a dramatic increase in the value of management buy-ins (MBIs) compared to management buy-outs (MBOs). This rise started in 1996, as the value of buy-ins exceeded that of buy-outs and the value of the buyout market (MBOs and MBIs) for the first time represented more than 50% of all UK M&A activity.
This trend continued into 1997, when MBIs with a value of GBP6 billion (ecu 8.5 billion) accounted for the significantly greater proportion of the buyout market. The value of MBIs relative to MBOs increased further in 1998, when the total value of buy-ins for the opening nine months of the year was GBP7.8 billion (154 deals) compared to GBP3.5 billion (175 deals) in the same period of 1997.
The rise in value of MBIs has enhanced the market’s comprehension of the risks, rewards and complexities of such transactions.
Current Nature of MBI Transactions
Many venture capitalists historically have considered that there was more risk involved with investing in MBIs than MBOs, and MBIs carried out in the late 1980s and early 1990s provided much evidence to support this view. Now, however, the market has a better understanding of the characteristics of MBIs and, in particular, recognises the following aspects of such transactions.
*Most MBIs now incorporate some buy-out element. This benefits the investors by having some of the incumbent management signing up to the investment agreement, investing cash and providing warranties. There is clearly great value in obtaining some level of inside track and being shown “where the bodies are buried”.
*MBIs suit larger transactions, because a larger business has the benefit of a greater degree of natural momentum. This will allow the MBI a longer timescale to “bed down”.
*MBI candidates often acquire businesses that are smaller and less complex than the businesses they ran in corporate life. Such candidates should therefore be very strong in their new roles.
*MBIs allow venture capitalists to make more informed bids in the now common auction process.
This development of understanding can be likened to a coming of age for MBIs. Having reached this stage, MBIs can now spread their wings and look forward to an increased penetration in the European markets.
However, MBIs within the rest of Europe have yet to become commonplace. Appetite, opportunity and resource are needed for the market to develop.
Appetite – “the money”
The current level of capital raised by UK private equity houses is unprecedented. Furthermore, much of these funds remain unspent.
With surplus funds, many institutions are looking to Continental Europe. A number of the larger UK- based institutions, such as Apax Partners and CVC Capital Partners, have raised funds and either established local offices or employed dedicated teams in mainland Europe to help penetrate this market.
Northern Europe, in particular Germany with its strong industrial base, has been the primary focus. Germany ranks third in Europe, behind the UK and France, in terms of absolute value and number of deals, but still remains relatively undeveloped as a buy-in market, providing an attractive opportunity for investment. The French buy-out market remained fairly static until 1997 when both the number of deals and the total value trebled, with the main source of increase being buy-outs of family/privately owned businesses.
An analysis of recent deals in France and Germany shows that Paribas Affaires Industrielles and Allianz Capital Partners have been particularly active undertaking transactions such as Gerflor and Tank und Rast.
Opportunity – “the deals”
The French and German markets, for example, have a high proportion of owner-managed businesses (OMBs), which were the biggest single source for both buy-out markets in 1997. These businesses are often of much greater scale than their UK counterparts, and it is not uncommon for French and German OMBs to have a turnover of DM250m (ecu 127 million) or more. One of the largest deals in France in 1997 (c. FFr 1.6 billion/ecu 243 million) involved a buy-out of a privately owned firm, Alain Affelou, led by Alpha Associes, Alpinvest Holding, Marine-Wendel and Quilvest.
Deloitte & Touche Corporate Finance is seeing good MBI opportunities, particularly in Germany, where substantial businesses are still managed by first- or second-generation family entrepreneurs. Often, however, these managers dominate their businesses, a situation that presents a substantial challenge for an incoming MBI candidate.
Resource – “the MBI candidates”
There is currently a shortage of good quality MBI candidates with a European focus to capitalise on available opportunities. For a mainland European business, a successful MBI candidate will need all the attributes we normally look for in a UK candidate as described in our “A BIG HITTER” acronym. Specifically, these are:
*AAmbitious – wants to run a substantial company (GBP10m+), and not just looking for a job.
*BBelievable/credible – to financiers and vendor alike.
*IIntelligent (a first class degree or an MBA is not mandatory; experience counts for a lot – see E below).
*GGreedy – i.e. very “hungry” to make substantial capital gains.
*HHonest and “clean” – no skeletons in the cupboard, please!
*IIndustry focused – this increases the potential for he/she to add value.
*TTime – prepared to commit substantial time to work with us on searching for acquisitions.
*TTeam builder – MBI candidates cannot do it on their own.
*EExperienced – more important than educational qualifications.
*RRisk taker (but calculated risks!).
Additionally, MBI candidates for deals within the rest of Europe need to display a number of further key skills. In particular they need:
*Experience of the business culture and operations within the European country.
*Understanding of where their industry fits on the European stage, in particular an understanding of the target’s competitors across other European markets.
*Language skills. While fluency may not be a requirement, some knowledge of the appropriate language is helpful.
*Credibility and presence to take over the helm of a business that has previously been managed by a citizen of the relevant country.
*Mobility. Clearly any successful candidate will need to be able to locate wherever the target business operates.
These candidates are likely to be divisional managers of major cross-border European businesses. Candidates are very likely to have spent a number of years working in Continental Europe (i.e., permanently based outside the UK) rather than working “into” Europe from a UK base and so will have hands-on experience in the industry and market in which the target operates.
Our conclusion is that mainland Europe will present venture capitalists with many opportunities to invest, but that a limiting factor will be the current shortage of suitable buy-in managers. The search has started to identify those individuals and include them on our buy-in database, as they may well be the key to unlocking the potential of these markets.
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