We recently attended ACG’s International Event at the Hungarian Consulate. Here are five of our top takeaways from the event, which focused on add-ons and investments in Europe.
Prepared by TresVista Financial Services
5 Things You Missed Last Week –
- Europe as a Platform for Investments: Because Euope consists of multiple nations with cultural and political diversity, it is both challenging and full of opportunity. According to Béla Szigethy, Co-CEO of The Riverside Company, “Every country and every person’s greatest strength is their greatest weakness, and their greatest weakness can be their greatest strength,” and he believes that the investment opportunity in Europe lies in this fact. Although the diversity can make it more difficult for businesses to create value, companies become more valuable thanks to that diversity. Taking this challenge from a positive perspective, Riverside, a middle-market company, operates across borders in Europe by acquiring and growing smaller companies with generally less than €25 million in EBIDTA and making them Pan-European.
- Cross-border Challenges Faced in Europe and Strategies Adopted to Tackle Them: As per James Rosener, Partner at Pepper Hamilton LLP, Europeans fear acquisitions by U.S. PE firms, as their general sentiment is that U.S firms will take their jobs, patents, and technology. In addition, other issues involved in cross-border investments include cultural barriers, currency risk, red tape, and other fraudulent matters. Addressing these concerns, Mr. Szigethy states that Riverside is a growth investor and they strive to expand the acquired platforms and scale up job opportunities. In each country that Riverside operates in, their workforce is made up of local employees, which helps overcome the cultural barriers. The currency risk is tackled by hedging their investments through entering into forward contracts based on expected values. France, as the second-largest economy in Europe, has topped the list of IRR and cash-on-cash returns when compared with other West European countries. This outweighs their regulatory climate. Other challenges in the European market and elsewhere around the world include fraudulent/hairy deals. Riverside encounters such deals 5% of the time. Such deals can be avoided through rigorous diligence, such as performing one-on-one interviews with management, down two to three levels in the target company. This strategy helps ensure that the stories match up across the various levels of management.
- Add-on Investments in Europe: Mr. Szigethy believes that the add-ons concept has changed over the past ten years and the number of add-ons has grown more than the platform companies, which for Riverside is an average of two add-ons per platform. He further states that “Doing multiple add-ons is the single most reliable way to get the purchase multiple down to a reasonable level.” Mr. Rosener mentioned that the purchase multiples in the U.S. were around 11.3x EBITDA, and as per Mr. Szigethy, multiples in Northern Europe for healthy growth businesses are similar. Typically, European industries that are profitable for middle-market PE firms include manufacturing, distribution, software, tech-enabled services, healthcare and education & training.
- Central Europe, an Attractive Target Market: Mr. Szigethy believes that Central Europe offers exciting investment opportunities. The strengths of this region include the benefits of emerging markets coupled with growing GDPs, catching up with neighboring wealthier regions over time. In addition to this, Central Europe offers a highly educated and talented workforce, especially in the software industry. The quality of management in Central Europe has significantly improved over the last 25 years, which is a prerequisite for a healthy growing business.
- Approaches Towards Deals and Outsourcing: Globally Riverside has a team of 18 people who bring in over 4,000 deals a year, which includes over 1,000 deals based in Europe. About 20% of these deals are then analyzed and scrutinized. Out of these, they visit around 7%-10% of the transactions and invest in about 1.0%- 1.5% of the deals in a year. Riverside employs or retains a workforce of about 250 employees to handle the process of vetting the deals and growing the portfolio. Also, Mr. Szigethy mentions that they have started outsourcing some of their analytics and research work to TresVista, who attended the conference.