A perspective devoted to Private Equity firms: to be successful they should adopt an innovative business model and control the richest parts of the value chain
- 1. perspective JULY 2013private equity firms need to seek out
successful business models, not just st andalone financial
projections Alberto Calvo, Alberto Oteri
2. Private equity. Firms need to seek out successful business
models, not just stand-alone financial projections Published by
Value Partners Management Consulting via Vespri Siciliani 9 20146
Milan, Italy July 2013 Written and edited by: Alberto Calvo,
Alberto Oteri If you would like an electronic copy please write to:
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3. CONTENTSPE firms need to seek successful business models, not
just stand-alone financial projections5 Considering the general
robustness of the business model7case 1 / food & beverage:
Focusing on customer preferences11case 2 / industrial goods:
mastering technology to mitigate risks14case 3 / auto components:
intelligent outsourcing of selected activities15conclusions 18
authorsperspective private equity19 4. Adopting an innovative
business model and controlling the richest parts of the value chain
are key to successfully navigate and ultimately succeed in
turbulent markets.45 5. PE firms need to seek successful business
models, not just stand-alone financial projections As the current
economic downturn is set to endure, Private Equity (PE) firms
should focus on the rare gems of the market, which have been
capable of developing unconventional, yet successfully proven,
operating models. The three business cases we present throughout
this perspective are of different sizes and belong to different
industries, but have built their core strengths around three main
pillars: technological innovation, a consumer focus and a savvy
understanding of when to buy and when to make. These three pillars
have enabled these different businesses to successfully navigate,
and ultimately succeed, in their respective and occasionally
turbulent markets.perspective private equityHowever, these have not
been the sole reasons for their success; their competitive
advantage has also been driven by an ability to position themselves
well within their respective value chains. 6. Exhibit 1 Billion
USD, US Buyout deal
value1980-891990-992000-07CAGR2008-12600400+40%200 -6%+59%+18%0 83
84 8586Source: Dealogic.8788 89 90919293 94 95 969798 99 000102 03
04 05 06 07 08 09 101112 7. considering the general robustness of
the business model It has been four years since the peak of the
financial crisis in 2009 and stock markets, especially those in
Europe, are only now beginning to return to their pre-crisis
levels. In comparison, the Private Equity industry has proven to be
a cyclical industry capable of recovering quickly (sometimes at a
compound annual growth rate as high as 20-60%) after stages of
significant economic downturn (e.g. in the early 90s and
2000-2001). (See Exhibit 1) However, the pace with which the PE
industry will be able to grow over the next cycle is still unclear.
Indeed, despite the encouraging signs from non-European stock
markets (e.g. USA, China and Japan), such a turn-around is yet to
fully emerge. While Private Equity grew significantly in North
America from 2011-2012 (23%), it remained steady in the
Asia-Pacific region (-3%) and decreased both in Europe (-19%) and
in the Rest of the World (-33%) over the same period, maintaining a
consistent level of investment (excluding 2009) since 2008. (See
Exhibit 2)perspective private equityWithin this challenging and
uncertain economic context, Europe seems to be suffering the most;
in 2012, the level of investment of PE firms in buyouts and
growth-development-capital (approx. 32 billion) was equivalent to
the value in 2004 yet was almost half the value of 2007 (approx. 62
billion).Furthermore, despite a 50% reduction in the level of
transactions from 2007-2012, the number of firms involved in PE
deals increased from 1,650 to 1,900, demonstrating both the overall
scarcity of resources available as well as the overall potential of
the industry. (See Exhibit 3) In a market characterized by a
growing number of deals and a scarcity of debt financing, the PE
industry is focusing more on growth transactions and start-ups
rather than turnaround and secondary buyouts. This is driven by the
growing complexity and risk of traditional operations of the
latter, such as the damaging effects that refinancing may have. In
fact, LBO specialists understand that in the coming years yield
could be increasingly driven by profitability improvements and
organic growth rather than through financial engineering. 8.
Exhibit 2 Billion USD, Buyout deal value0% +5%-5%
-3%-9%-19%+10%186182+2%-5%188186+23%7320082009RoWAsia-Pacific2010
Europe2011 2012North AmericaCAGR (08-12)CAGR (11-12)Exhibit 3
Europe, 2012 Investments Billion Euro (Buyout and Growth
investments only) 62Companies financed # of companies1.4001299
11611.200 45994 1.00040 36 3277580088187820112012783593 600 181047
932615400348200200720082009Source: Dealogic, EVCA.2010201120120
2007 2008 Growth2009 Buyout2010 9. Previously, the availability of
low rateliquidity from 2004-2007 enabled many funds to engage in
significant LBO activities. However, this level of risk would no
longer be sustainable today, given the economic stagnation within
Europe and the difficulties emerging as a result of high capital
market rates. Typically, growth operations and startups occur in
industries with fewer comparable benchmarks and less available
market information (though specific company analysis remains
crucial), whereas turnaround and buyout opportunities are typically
associated with more open market sectors. For this reason, when
assessing the attractiveness of a potential deal, PE firms should
primarily consider the general robustness of the business model in
question and the firms positioning within the value chain, rather
than stand-alone economic projections that might not reflect the
true potential of a firm. Based on our experience as industrial
advisors for the major PE funds, when evaluating the potential of a
number of target firms, it has emerged that if properly explored,
some industries have succeeded in developing innovative business
models, which have strengthened the whole business case even in
those markets characterised by a high level of competition and an
uncertain outlook.perspective private equityIn this perspective, we
will discuss three different cases in which, by leaveraging their
business models as a source of competitive advantage, companies
have been able to excel in their respective, albeit different,
markets. More specifically, these firms have built their
competitive advantage through: Centrality of the end customer
capturing preferences and trends by having direct control over the
last part of the value chain and leaving the burden of investing in
assets for production to firms operating at the top of the value
chain Technological exclusivity offering products and solutions
that are technologically unique and hard to substitute Outsourcing
opportunities evaluation of potential advantages through a prudent
analysis of the make-orbuy business decision 10. Exhibit 4 Wine,
Consumption, 2011 # of countriesStable* / in contraction (122
MLH)market share9cagr 2006-2011top countries (MLH)-1,5%24,9 24,7
21,1 14,0 10,2Argentina Japan Portugal S. Africa5,3%China** USA
Russia Australia Canada Brazil38,7 27,3 11,6 5,3 4,8 4,4
Netherlands4,2 Belgium 3,1 Switzerland3,0 Sweden 1,9 Norway
0,8n.a.50%Italy France Germany UK Spain9,7 8,6 4,9 3,6Chile Mexico
India Thailand Turkey ...RELEVANT (227 MLH) growing markets (105
MLH)WORLD 244 MLHMARGINAL (17 MLH)1143%~1757%* Countries with a
yearly growth
