European banks are suffering at the hands of the eurozone debt crisis. Given your focus on the financial services sector, are you finding this turmoil is presenting deal opportunities?
The headline is that a number of banks – and we expect this to filter down to insurance companies in time – will exit businesses that are draining a lot of cash and regulatory capital. At the same time, the problem is that what the banks want to sell is precisely what nobody else wants to buy. Our take is that this will evolve very quickly, and soon banks will start divesting assets that are easier to sell and that fall under the scope of what investors like us buy.
We do not invest in balance sheet businesses. Any kind of balance sheet business carries a tremendous risk of liquidity and financing drying up, and that is precisely what is happening at the moment. So we are very cautious about investing in these types of businesses. We avoid it altogether. What we look at is the service side of the financial services industry. This is where we feel the banks will have to sell some of their businesses. For example, Société Générale has put up a list of assets they want to sell. Dexia is very much in the news and will be selling. You have Natixis Group and Credit Agricole. Most of the banks in France have made very clear statements saying that they need to divest assets. Many of them are too large for us but there are also a number of smaller business divisions that will be spun off – this will be a major focus for us.
What kinds of assets are you expecting to come to market that fit your remit?
Large processing or back-office operations. One example is that Société Générale is selling its securities servicing business, and this type of asset would suit us.
We’re speaking to the banks directly to pitch for their smaller assets. Selling those assets won’t solve their liquidity or balance sheet problems, but at the same time even selling smaller businesses gives them the opportunity to show the market that they are disciplined and selling non-core assets. It shows they are taking action. At this stage these institutions have a real need to start selling and redefining their business models. You had the same thing in 2008, but 2009 and 2010 were good years, so they got away lightly. This time around things are going to start happening in a much more dramatic way in Europe.
If the banks don’t want these assets any more, who’s going to buy them off you when you’re ready to sell?
We hope that in four or five years down the road the industry will have reshaped itself. What we see is banks moving away from universal models to more specialised ones. The new aim will be for large players to consolidate across Europe. The next step will be to gain scale in each of the business lines and this will be done through European consolidation.
There will also be a number of large independent asset managers, payment processing firms and business outsourcing companies emerging. This will be driven by US and Asian players that are keen to buy European equivalents. These will likely be large independents and not the incumbent banks.
Given that you don’t invest in banks or other balance sheet businesses, are you able to leverage your investments?
We barely use any leverage. Marginally we look at putting in a maximum of ten to 20 per cent of debt into deals, but essentially we don’t use a leveraged model. Market conditions are not favourable for using debt but, more fundamentally, we are looking at growth companies and so are keen for them to have the flexibility to invest their profits in growth. This is more difficult when you have a loan to pay back.
Fifty per cent of the LPs in your fund are banks and insurance firms. Was your sector focus something they could relate to given that they’re inside the industry themselves?
Yes. These aren’t the big banks, but medium-sized banks and insurance companies. It’s interesting for both them and us to discuss market trends. We give them insight and they frequently give us access to deals. At the same time, raising the fund took a lot of hard work because these types of investors have been extremely capital-constrained.
You closed your fund on €220m in July, but had targeted €300m. How did you find the process?
We started in the middle of 2009 and held a first close of €60m in December that year. The target we marketed is actually €250m – €300m was a target we had in mind early in 2009 when we first set the firm up. We were just short of the target. We tend to set ourselves very ambitious targets. The key point for us is that raising €220m with a first-time fund in this environment says a lot about our investment strategy and team. We are very proud of the amount we raised and it allows us to follow our strategy.
How far drawn is the fund now?
We’re at about 20 per cent, so we have all of the firepower we need to take advantage of the current conditions.
Given that the conditions in this sector are ripe for making investments, do you have any deals in the pipeline?
We have add-ons for our current holdings Kepler and Owliance. Achieving growth is very much on our agenda, so we’re working on a number of build-ups. In terms of new deals in the pipeline, we’re looking at several situations now – three are in the online insurance space and two are more in the processing, back-office and outsourcing space.