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BARRIERS TO AND OPPORTUNITIES FOR INVESTMENT IN EUROPE John Arney – Managing Partner BORN OUT OF A DISTRESSED SITUATION MBO 2011 1980 - 2011 Today 2 INNOVATIVE 4 + 4 MODEL GP owned and led by a meld of Investment and Industrial Partners INVESTMENT PARTNERS John Arney Javier Abad Mark Dickinson Nils Stoesser INDUSTRIAL PARTNERS Sir George Buckley Dr Fredrik Arp Dr Peter Goode Anders Pettersson 3 BUILDING COMPANIES ACROSS THE ENR SUPPLY CHAIN Mid market, control LBOs of businesses with or capable of having international operations 4 ARLE’S DEFINITION OF ‘DISTRESS’ Does not = turnaround of loss making businesses with ‘also-ran’ market position Does = • Neglected, under capitalised businesses that could be better run and better invested • Businesses owned by a parent (individual, corporate, fund, bank or government) experiencing operational and/or financial difficulties Commonly find a need for: > Refreshed strategy > Strong leadership > Heightened operational focus > Increased capital investment i.e. a good company with a bad balance sheet or a troubled parent 5 PAST BUYOUTS EMANATING FROM DISTRESS 5.7x 472% IRR LSE Upstream Oil & Gas 6.9x 63% IRR 4.1x 97% IRR 2.3x 58% IRR 6 OPPORTUNITY IN EUROPE The sovereign backdrop Government debt as a proportion of GDP (%) 180 160 140 120 100 80 60 40 20 0 1999 2000 Germany 2001 Ireland 2002 Greece 2003 2004 Spain 2005 France 2006 Italy 2007 2008 Netherlands 2009 Portugal 2010 2011 2012 United Kingdom Maastricht requirement of total debt – less than 60% European governments have become heavily over-levered in the past six years Source: Eurostat 7 INVESTORS FLOWING TO DISTRESSED FUNDS European-based firms have raised €75bn for investment in distressed situations Investing through debt Investing through equity Trend No shortage of firepower Source: Prequin, €75 billion raised over 10 years 8 SOURCES OF SUPPLY But barriers to a strong flow of investment opportunities Prone to ‘kick the can down the road’ High cash balances, low borrowing costs and ease of refinancing have reduced the need to sell non-core assets Slow deleveraging process, banks aided by ECB’s liquidity measures Some selected disposals on structured asset sales Corporates Private Equity Funds Raft of failed exits shows firms are looking to realise at full value 70% of private equity’s AuM – (highest ever) tied up in portfolio assets Source: Pitchbook Banks Governments Reluctance to sell assets in ‘firesale’ for short-term liquidity Selective sales at local and central level, e.g. Afandou sale in Greece, Civil Service properties for sale in UK 9 BANKS – THE PRIME OBSTACLE TO FLOW Banks have adjusted slowly to the need for constructive financing Causes • • • • Spread and severity of ‘08 crisis necessitated triage Regulatory and political pressure Long-term benign interest rate environment Europe heavily ‘over-banked’ with ‘Continental drift’ vs. the more regionalised US banking sector Effects • • • • • Problems on balance sheet larger than US counterparts Sub-optimal refinancings (‘zombies’) Bond market rapidly filling the lending void Down cycle prolonged by not taking pain early Overall drag on economic growth Real GDP Growth 2012-2017 Source: OECD Euro area 1.2% United States 2.5% 10 SO WILL THE FLOW PICK UP? Banks remain the most significant potential source but also obstacle Financial Times, March 2013 “European banks will need to shed as much as another €3.4tn from their balance sheets over the coming years by reducing lending and selling assets” Deloitte’s European Bank Survey, 2012 De-leveraging timeframe for European banking sector Sources: Deloitte, Financial Times, PwC 11 IN CONCLUSION • Macro suggests high potential in Europe • Plenty of hot money to fund investment • But actual supply strangled by constraints • Flow of opportunity should increase … but do not hold your breath 12