Colin Brown of Morgan Grenfell discusses the thinking behind the group’s latest
European fund
Morgan Grenfell Private Equity (MGPE) has just announced the closing of its new European fund Deutsche European Partners IV LP, with total commitments of some E1.5bn.
The new fund is of pan-European nature, making equity and equity-related investments in a broad range of companies. The investments for the new fund will be sourced and managed from our three offices in London, Frankfurt and Milan.
MGPE’s strategy is to continue to create a high quality investment portfolio which will benefit from diversification across the main economies of Europe and across a number of industrial sectors. MGPE will concentrate particularly on sectors where it has considerable expertise and which it considers may provide opportunities for rapid capital expansion including media, telecommunications, leisure, chemicals, paper and packaging. MGPE will focus on transactions which it originates where Deutsche European Partners IV will be the lead investor. In taking direct control of the deal process, it ensures that due diligence, price negotiation and documentation are all carried out to the highest standards.
We have now moved towards a pan-European vehicle. Historically, the company operated on a country-specific basis. However, experience has demonstrated that markets differ in the timing of offering attractive opportunities. For example, our French fund did not see as attractive opportunities as appeared elsewhere in Europe over the past three years or so. We have not turned our back on the French market, however. French deals are likely to be sourced from the UK or Italy in accordance with our European strategy. When the market is “hot” we will spend a lot of time there but when it is cold and there are limited opportunities, we will find other markets where the returns will be better.
The company will operate its new fund on a ‘hub and spoke’ basis with teams working out of its offices in London, Frankfurt and Milan. All continental European markets will be covered by MGPE who benefit from the reach of its parent, Deutsche Bank. The principal focus of the fund, however, will be the German speaking countries, the United Kingdom and Italy.
Why Europe? Buy-out activity within the principal target markets of Europe has increased dramatically since 1996 and our belief is that developing capital markets, increased levels of M&A activity and more cross-border transactions will lead to more opportunities throughout Europe, specifically the German speaking countries and Italy. In addition, we believe that European conglomerates will continue to refocus on core activities, leading to the ongoing divestiture of non-core businesses, which should continue to be a principal source of investment opportunities.
The risk/return trade-off for private equity investment, however, is backing the right private equity team. Potential investors should not be led by a macro-economic view, they should select the best. Careful due diligence should reveal which managers are the best at what they do. A long-term portfolio view must be taken – is their track record based on effective strategy, a consistent investment performance, or by a limited number of lucky hits that can disguise other portfolio weaknesses? Is the team solely ‘IRR driven’ or by a combination of ‘IRR and multiples of cash’? There must be an alignment of interests and investors which should endeavour to establish a long-term partnerships.
Our team has been involved in the entire private equity investment cycle including sourcing investment opportunities, developing strategic business and financial plans, structuring and negotiating transactions, working with portfolio company management teams and exiting transactions.
Can past performance be an indication of the future? Generally, funds managed in the early 1990s achieved their return in favourable market conditions by investing during a recession and exiting in an active M&A market, combined with favourable stock market conditions. In Europe today, investments are taking place in a market with low inflation, stable interest rates, a surfeit of both debt and equity funding. However, the private equity market is changing. In the early 1990s private equity managers typically backed incumbent management teams to purchase their companies. Management teams provided the catalyst for the deal. Today, private equity managers purchase businesses and provide incentives to management. The catalyst for a deal today is the desire of the private equity manager to own a particular asset.
MGPE has a proven track record in its original markets and already has demonstrated its success in its new European markets. Early in June 1999, only five months after investing in @Entertainment, the leading provider of pay television services in Poland, the business was sold, generating a return in excess of 300% for the investors. Vianova Resins was bought in January 1999 in a DM900m (e460m)transaction and was sold just 10 months later, generating a 120% IRR.
Colin M Brown is a director at Morgan Grenfell Private Equity Limited ( MGPE operates from London, Frankfurt and Milan. MGPE is regulated by IMRO