Digital transformation has spread like wildfire in recent years, with the internet and social media platforms redefining how businesses interact with their customers. As capital D, a London-based pan-European private equity manager, points out on its website, a 2016 Microsoft survey of 1,000 business leaders found that nearly half of business leaders believe their business model will no longer exist in five years.
That underscores both the pace of change but also the size of the challenge for all industries, as companies look to employ positive disruption to break free from the pack.
With that in mind, capital D’s mission is simple: to identify companies with the ability to become disruptors in several key sectors. Capital D’s initial focus has been on businesses that employ social media influencer-led marketing and product development to grow their brand.
The first of its acquisitions has just been announced: Invincible Brands, the Berlin-based company which delivers most of its marketing campaigns through social media such as Snapchat. The company sells its products from Germany into continental European markets and serves a customer base of 500,000 millennials. Only founded in November 2015, Invincible has achieved more than EUR30 million in revenues as it taps in to millennials, who are now the largest addressable consumer group in the world.
By targeting customers’ preferences on social media and aligning marketing programmes with short new product development cycles, Invincible Brands has achieved a 100 per cent success rate on more than 40 product launches to date.
In short, this is just the type of company that capital D is looking to invest in, deploying EUR20-60 million of equity per deal.
Stephan Lobmeyr (pictured), co-founder of capital D, tells Private Equity Wire: “The world is changing rapidly, businesses are changing rapidly. The telephone took 75 years to reach 50 million users, the internet took three or four years, Angry Birds took 35 days and Pokemon Go took nine days.
“You either adapt to the speed of change or you die.”
That mindset has been applied to the way capital D operates. This is, in some respects, a new breed of PE manager, combining complementary skillsets that go beyond the usual composition of a traditional PE team.
As a former partner at Change Capital Partners, Lobmeyr successfully invested for 12 years in retail and consumer goods companies across Europe. Last year, Lobmeyr got together with Jean-Marc Jabre, the head of Morgan Stanley Private Equity in Europe, a USD1.5 billion fund focused on growth and buyout investing.
“We got together and thought, ‘Why don’t we create a new private equity manager who focuses on identifying and investing in disruptive companies?’ Our hypothesis is that we can generate a better risk/return by investing in disruptive companies if we know what the disruption trend is and who is winning it,” says Lobmeyr.
The pair realized that to make the investment hypothesis, they would need a range of skills that went beyond pure PE investing experience.
To bring classical company building skills to the table, Laurent Nordin joined Lobmeyr and Jabre having spent 22 years at McKinsey transforming a wide range of businesses. Digital transformation skills were achieved by adding Sophie Albizua as a strategic partner. Albizua is the co-founder of high-end innovation and digital transformation consultancy Re_Set and previously worked with Lobmeyr at Change Capital Partners.
The final piece of the puzzle was to bring ‘intelligence’ to the collective skillset at capital D. This was achieved by bringing James Bidwell on board, also as a strategic partner. Bidwell is the CEO and owner of innovation portal Springwise, a crowdsourced database.
“Springwise offers an amazing look into the future. It allows us to understand what disruptions are going on when doing our analysis of industry sub-sectors and where we should be focusing our attention,” explains Lobmeyr.
Lobmeyr discusses how there have been different stages of private equity investing. When he first started in the industry it was all about financial engineering and using leverage and financial arbitrage methods.
“Then, after the financial crisis,” says Lobmeyr, “people decided it was also necessary to add operational skills and this led to PE groups using operating partners – that was our model at Change Capital Partners as well as at Morgan Stanley.
“We believe that today, it’s not enough just to have an operating model. Everyone is doing this, which makes it difficult to generate super returns. That’s where this new model, which focuses on disruption, comes in; we combine a range of complementary skills to try to improve businesses rather than simply relying on the standard industry PE model.”
Commenting on the Invincible acquisition, Jabre said: “The timing for this investment is apposite. This January sees the emergence of the first native 21st Century adults and the current financial reporting season shines an unforgiving light on many legacy consumer business models.
“Effective social marketing is now a fundamental part of the arsenal of any consumer-focused brand as the impact of traditional advertising on millennials wanes.”
Companies like Amazon have been a massive catalyst of change in consumer behaviour, with internet sales becoming a necessary cornerstone of any ambitious retailer. Opening shops across the globe and paying extortionate ground rents over multiple years, as many legacy brands continue to do, eats into gross revenue margins. With millennials buying everything online, who needs vast shop fronts?
“That can cause shops to reduce their overall gross margins and turn something that was highly profitable into something that loses money,” says Lobmeyr, who adds:
“If you don’t respond and adapt to these changes and focus on the things that are working in the business model it becomes very challenging (to grow profits) – so in that sense it requires a new approach to PE investing; one which takes into account digital disruption whilst at the same time applying many of the skills and disciplines of classical PE investing.”
Although Invincible is a young company, it has a proven, profitable business model. Capital D is not, therefore, straying into venture capital territory.
“In looking at digital native brands, we identified Invincible Brands whose social media and marketing model is very interesting, it’s very sustainable. They have cracked the model in how to profitably invest and grow with a first mover advantage. It is a proven and highly profitable business model so it was absolutely our target. It was not ‘ventureland’ in that sense,” comments Lobmeyr.
Aside from digital native brands, capital D’s target groups also include companies that use subscription models as a basis for growth.
Much of what informs the team’s decision-making is based on a number of megatrends that are impacting the world. One, as mentioned above, is that millennials are now the biggest consumer group in the world. Other megatrends include climate change, the rising Chinese middle class and aging populations.
Lobmeyr says these megatrends have the potential to create chaos but also opportunity.
“Out of these megatrends we identified interesting market sub-sectors to invest in disruptive companies like Invincible Brands. These are: retail services (i.e. those using RFID technology); niche online retailers or digital native brands; business outsourcing, healthcare services companies; financial services; tourism (Citizen M is a good example of a disrupter in the hotel market); and testing inspection and certification (TIC) companies.
By focusing on companies that are well placed to benefit from these megatrends, capital D believes it can create great risk/return opportunities. “However, in order to do this you need not only private equity skills but also digital skills, innovation skills and classic company transformation skills. We’ve put all of those together under one roof at capital D,” concludes Lobmeyr.
