Simon Tilley is a managing director at Stephens Europe and leads the European Financial Sponsors Group. He acts as a focal point for the firm’s interactions with European private equity firms and the wider financial sponsors community.
Simon Tilley (pictured) is a managing director at Stephens Europe and leads the European Financial Sponsors Group. He acts as a focal point for the firm’s interactions with European private equity firms and the wider financial sponsors community.
In what ways have you noticed the effects of the pandemic in your role?
In the immediate weeks post-lockdown, investors were working with portfolio companies to address operational issues and secure liquidity. Attention then quickly turned to how investors could get on the front foot in terms of deal-making that, for many, means seeking add-on acquisitions for portfolio companies, mergers – where the discussion is about relative value rather than absolute value – and minority investment opportunities.
Is it possible to do due diligence remotely?
The market has adapted rapidly to a new way of working, utilising technology to conduct management meetings and undertake due diligence. This has proven a lot can be done remotely. The challenge of working remotely is on the softer side – for example, creating a personal connection with management teams and ensuring there is alignment in terms of cultural fit and the value creation strategy.
Many PE groups are holding back on underwriting deals for the time being, how long do you think that will last for?
We are working on a number of opportunities with PE firms where there is a positive appetite to deploy capital. While this is particularly the case for add-on acquisitions for portfolio companies and minority equity investments, we are also starting to see control deals getting signed in Europe.
Many investors are talking about the next 12-18 months as being a strong period to deploy capital, but the key factors determining activity will be investor confidence in current trading and forecasts, alignment between buyers and sellers on valuation and the availability of liquidity in the credit markets.
If there’s a slump in fundraising, some smaller funds could close, paving the way for megafunds to continue their growth. What’s your take on that?
There was a lot of discussion around this point ten years ago, as the effects of the GFC impacted the world of private equity. While a number of private equity firms reinvented themselves and their investing model over this period, very few actually went out of business – proving it is very hard to break a private equity firm. In addition, the sheer volume of capital raised by large-cap players means it is quite difficult for these groups to target middle-market deals – as it does not move the needle enough.
A continuation of the rebound in the public equity markets, like we have seen over the last month or so, should mean the allocations made by large investors to the alternatives space will not need to be reassessed. Conversely, a slump in the public equity markets over the summer might cause some to rethink allocations. It will be an important period.
How do you think this crisis will affect private equity going forward, and the wider financial sector?
The private equity sector will learn much from the crisis. There will be continuation of the shift away from generalist investing towards sector-specific investing, as well as a renewed focus on understanding the resilience in business models and an appreciation of the importance of supply chain due diligence.
You cannot plan for something like the coronavirus crisis, which has presented an existential threat for vast swathes of the hospitality, leisure and travel sectors – particularly for leveraged businesses in private equity portfolios. However, the firms that pivoted in recent years towards investing in B2B services businesses with recurring revenues, and away from B2C businesses underpinned by discretionary consumer spend, will no doubt emerge in better shape.
What are some of the trends and themes that you have noticed in the PE space recently?
There is a strong appetite for add-on acquisitions for portfolio companies and for minority investment opportunities into privately held companies, particularly where the new money is to fund growth. Some funds have pivoted short term deal origination almost entirely away from control buyouts towards minority equity and structured equity opportunities.
In addition, there was a growing appetite prior to the coronavirus crisis for internationalisation. This is continuing, particularly on both sides of the Atlantic, with European sector leaders looking to acquire in the US and vice-versa.
