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Christian Marriott, Equistone

Equistone helps portfolio companies make bolt-on acquisitions to expand internationally

Equistone Partners Europe Limited (Equistone), one of Europe’s leading mid-market private equity investors, sees a strong pipeline of robust mid-market companies in France, Germany, Switzerland and the UK in need of capital to support their growth.

In a market environment with over USD1 trillion in dry powder, seeking out attractively valued companies whose book prices have not been overinflated by market sentiment, is a tall order. But Europe’s middle market remains vibrant, with PE managers like Equistone scanning the universe to pick out potential star investments. 

And it appears as though investors have full confidence in the asset class. Just last month, Equistone announced the successful final closing of Equistone Partners Europe Fund VI (EPEF VI) at its hard cap with total capital commitments of EUR2.8 billion. 

Equistone completed the fundraising within four months of its launch in early November 2017. The Equistone team will also make a commitment to EPEF VI alongside the institutional investors.

“The size of EPEF VI, at EUR2.8 billion, directly reflects this positive assessment of the attractive opportunity for deploying capital in European mid-market buyouts,” says Christian Marriott (pictured), Partner and Head of Investor Relations, Equistone Partners Europe. “One noteworthy aspect of this is the enhanced opportunity for our portfolio companies to expand internationally and consolidate market share by making bolt-on acquisitions, which we have been supporting on an increasingly regular basis in recent years.”

Consistent with Equistone’s established strategy, EPEF VI will invest in European buyouts valued between EUR50 million and EUR500 million, targeting well-positioned businesses in Western Europe with high-calibre management teams and strong growth potential. 

The fund attracted commitments from an enhanced base of 56 major institutional investors across Western Europe and the Nordic region (accounting for 56 per cent of capital raised), North America (28 per cent), and the rest of the world (16 per cent), including pension funds, funds of funds, sovereign wealth funds, and insurance companies. 

With existing investors in prior Equistone funds providing around 75 per cent of the capital and the total number of investors growing almost 30 per cent on its previous fund, Equistone has accommodated heightened demand while maintaining its long-standing commitment to rightsizing its funds relative to the market opportunity.

Commenting on the investor uptake in EPEF VI, Marriott says that investors in private equity are increasingly keen to concentrate a smaller number of larger bets with managers they know and trust. 

“We were very proud to be counted among these by our existing investor base, based on the high levels of demand we encountered,” he says. “However, it was important that we balanced existing investors’ appetite for increasing their allocations with the need to both right-size our fund and manage our risk by diversifying our investor base. 

“The increase in the number of investors to 56 represents a material improvement in the latter respect – particularly as it includes investors from new geographies, such as the Nordic region, where Equistone hasn’t previously had a meaningful presence.”

Guillaume Jacqueau, Managing Partner of Equistone Partners Europe, says: “We’re extremely pleased to have successfully completed the fundraising process for our sixth fund from a combination of new and existing institutional investors. This represents a further validation of Equistone’s track record of generating attractive returns and our highly experienced team’s proven ability to identify and partner with strong mid-market businesses across France, Germany, Switzerland, and the UK.”

With an impending trade war erupting between the US and China, and ongoing political uncertainty surrounding Brexit, PE managers have plenty of background noise to take into consideration when screening potential companies. Making careful assessments of the geopolitical risks in the markets it invests in has always been a top priority for Equistone.

Marriott explains that by operating without a prescriptive top-down allocation of the amount of capital it invests in each market, “We afford ourselves the flexibility to respond to developments by deploying more or less money in any given geography. 

“Clearly Brexit is currently the most pertinent topic given our track record in the UK, and ultimately we may or may not choose to deploy a smaller proportion of the fund in the UK than we have previously, but this doesn’t represent any material difference from how we navigated making investments in the French market from Fund IV around 2012, for example.”

Rob Myers, Senior Partner and UK Head at Equistone, says: “The teams in our London, Birmingham, and Manchester offices have been highly effective in originating new investment opportunities, reinforcing our UK franchise, which is a key component of Equistone’s ability to deploy capital in a competitive environment. We continue to find growing UK companies with robust market positions led by high-calibre management teams. We will draw on our track record and local knowledge to back the most compelling propositions, in order to support their long-term growth potential.”

Equistone has consistently deployed capital from its previous fund, Equistone Partners Europe Fund V, and continued to realise value from its portfolio during and prior to the fundraising process for EPEF VI, announcing nine investments and eight exits since January 2017. These included:

New Investments

• The acquisition of Inspired Thinking Group, a UK-based technology-led provider of outsourced multichannel marketing services, from Bridgepoint Development Capital (October 2017);
• The acquisition of Bruneau, a leading, Paris-headquartered online retailer of office supplies and equipment, from Weinberg Capital Partners (October 2017);
• The acquisition of DefShop, a leading German multichannel retailer of streetwear and hip-hop clothing, from the company’s founder and his family (September 2017).

Recent Exits

• The sale of Concept Life Sciences, a Manchester-headquartered provider of integrated drug discovery, development, analytical testing, and environmental consulting services to Spectris PLC at an enterprise value of GBP163 million, generating a money multiple of 2.7X and an IRR of 36 per cent (January 2018);
• The sale of EuroAvionics, a global manufacturer of civil avionics systems based in Baden-Württemberg, Germany, to HENSOLDT, a spin-off of Airbus Group’s Defence Electronics business (August 2017);
• The sale of Meilleurtaux, a leading French retail financial services broker, to Goldman Sachs, generating an exit multiple of 8.2X and a gross IRR of over c.70 per cent (February 2017).

Marriott says that they always have at least one member of the Equistone team involved in a non-executive capacity with each company in which it invests in order to enhance the value in each portfolio company and drive higher earnings multiples over the investment lifecycle, “but we wouldn’t typically install a full-time operating partner”. 

He says that Equistone’s investment thesis is to back Western European businesses with talented, high-calibre management teams and strong growth potential. 

“While we can lend our extensive experience in specific areas such as add-on acquisitions, international expansion, and building out the executive team, we would only invest in a company in the first place where we believe management are the best people to deliver growth through the day-to-day running of the business,” confirms Marriott. 

Marriott further adds that the aim will be to make somewhere between 25 to 30 portfolio investments in EPEF VI, in line with the investment objectives of previous funds. “By the same token, our objectives remain the same: supporting the long-term growth of the companies in which we invest and generating attractive returns for our investors through exposure to a diversified portfolio of high-quality mid-market European companies.”

In today’s environment, sourcing deals that the investment team are confident will deliver higher earnings multiples in four, five years’ time, is a highly skilled exercise. Private equity investing has moved on from financial engineering, where companies are bought, management teams are replaced and then sold to the highest bidder. Now it is a much more collaborative approach, as Equistone’s Marriott alludes to above, where a company’s incumbent management team is given the support it needs to lock in future growth.

The risk of growing competition inflating prices and eroding return multiples is one with which all private equity investors have to reckon. 

“Our view is that this most heavily impacts those groups focused exclusively on vanilla ‘trophy’ assets. 

“We are prepared to work on a combination of more conventional auction processes and those transactions involving a greater degree of complexity. With these more complex deals, an inflated valuation is less of an issue and it instead becomes a question of how we can help the company navigate certain obstacles to its long-term growth. 

“We’ve had some very positive results with this approach, realising an exit multiple of 8.2X through the sale of Meilleurtaux, a French retail financial services broker, last year, following a four-year hold period,” concludes Marriott. 

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