31.05.2016

Having recently returned from the Iberian Private Equity Conference in Madrid, I cannot help thinking that private equity investment managers are lazy people. The market in Spain, and in Europe in general, is wide open and everyone knows there is virtually no competition in private equity investments below USD 100m in deal size. The only excuse is that there is too much work in doing four deals worth USD 100m than one USD 400m deal. Well, then there was also the excuse that there is no M&A firms offering their services to the market below USD 100m.

It is not that there is no competition in the market, and with the news that Saudi Arabia is coming out with the world’s largest sovereign wealth fund with a target of USD 2t in assets, it is not like liquidity is going to be tight. The fund is large enough to buy all of Apple, Google, Microsoft and Berkshire Hathaway - the world’s four largest public companies! Getting access to the good deals for the big players is going to be a fierce battle.

THE BEST DEALS ARE IN SME

However, the fact is that about 97% of European deals are below USD 100m. The solution would be simple to most people: Build your own M&A team and hire some staff to handle the workload of more cases. So why do they not do that, you might ask? One reason could be pure laziness, but other reasons, which are probably more likely, are that the smaller the deal size, the more founder-driven the companies are. That means that the investor needs to be able to connect with the founder of the company to be on the same page – in other words: To actually be more likeable. That is something investment managers are usually very bad at. They simply do not connect with the entrepreneur. The entrepreneur is interested in his clients, the market, creating a difference and running a company that is his baby, while the investor is interested in EBITDA, Lean management, mergers, financing, controlling, price/earnings, KPI’s, earn outs and big Excel spread sheets. Bigger deals usually have a bigger management team that are not founder-run, which make them speak the same language, and they are all interested in building and exiting, like a long one-night stand.

This scenario is a shame, as the smaller deals make a much higher percentage yield, since optimising the business is easier by implementing normal optimisations and adaptations to running the business and grow. Sometimes it is just a matter of logistics, marketing, network or staffing. Try doubling the profits of Nike, and see if that is just as easy as doubling the profits of the new brand down the block with a USD 2m EBITDA.

In other words, doing five deals instead of one creates a much bigger yield, and it also spreads the portfolio risk. All it takes is willingness to do the work. And well - being able to do it.

SPAIN IS OPEN FOR BUSINESS

Looking at the Spanish market, we are seeing some of the biggest opportunities in Europe. It is not more than a year or two ago that Spain was the laughing stock of their fellow friends in the EU, when telling the world how great opportunities lie in front of the willing investor if he focus on Spain. Remember that some of the greatest companies were created during a recession - just look at Disney, General Motors, Microsoft, Revlon Cosmetics, CNN and FedEx.
The fact is that Spain is responsible for 15% of the European GDP, and the country has higher leveraged deals, cheaper financing, lower acquisition multiple and very low competition in the SME private equity market, as there has hardly been any private equity funds raised for the last five years. Furthermore, Spain is in front in regards to the legal framework when restructuring is needed to turn the country’s companies around.

PRIVATE EQUITY IS STILL THE HIGHEST YIELDING INVESTMENT AREA

Except from not choosing the right market size, the investors seem to be smart in relation to where they seek the highest yield among traditional investment areas. A recent survey of 142 professionals conducted by ACG New York, the largest association of middle market deal making professionals in New York, found that 83% of the professionals expect private equity investments to outperform the S&P 500 in 2016.

Our experience in the private equity investment area is that as an investor, especially in the SME segment, you need to provide more than just financing to balance the interference in daily operations and controlling. Today, the market offers many different ways of offering financing like peer-to-peer, crowd funding thanks to the SEC’s Title III adjustments and project funding like Kickstarter.com. So simply providing financing is no longer enough.

BRINGING MORE THAN JUST FINANCING

At OMNIA, we have focused on being “the co-founder who showed up late to the party” – being on the same side as the entrepreneur, and focusing on what the company and the entrepreneur need to succeed and less on trying to be smarter than the founders. Furthermore, with our OMNIA Entertainment Endorsement and Product Placement Platform as well as content marketing, we help consumer-based companies grow much faster than what they were able to on their own. By taking the companies public at an early stage, we are able to hedge our risk earlier than traditional private equity funds. When hedging our risk earlier, we do not need to be so possessive and controlling, something that the entrepreneurs usually are not too happy about. Just look at what happened to Tinder, when the founder and investor do not get along too well. Being transparent and open towards the entrepreneurs and not being tied to the normal rules of a private equity fund, we seem to be closing over 80% of all OMNIA approved transactions.
It seems that our approach to providing more than just financing is something that the market have discovered as well.

In an interview with Forbes, David Hellier, Board Member at ACG New York and Partner at Bertram Capital, said that “Middle market private equity firms are increasingly focused on value creation strategies to improve business performance in their investments, as opposed to the more traditional leveraged buyout approach. In spite of a frothy M&A market and significant dry powder, this transition is allowing private equity firms to build more meaningful businesses sought after by both strategic and financial buyers. The shift from financial engineering to value creation is enabling private equity to continue to deliver superior returns to the S&P 500”.

At the same time, 62% of those surveyed believe that family offices will have a greater impact on transaction activity in 2016. Family offices have been very effective middle-market investors and are keenly interested in private equity.

“In the current market environment, the supply of capital continues to exceed the supply of quality deals. Therefore, funds and families are now finding that they need to market themselves more aggressively and look at companies that may need operational, financial, marketing, and channel development,” Martin Okner, Chairman of ACG New York and Managing Director of the Merchant Banking and Advisory firm SHM Corporate Navigators, said to Forbes.

DEALS ARE NO LONGER OFFERED, THEY ARE CREATED

Traditionally, “a deal” is presented by an M&A house when the company has decided to look for investors and partners for whatever reason. The sales process is usually long with more than enough chefs pitching their 50 cents worth. The smarter ones create the deals themselves by operationally being in the market offering something that the companies actually want and not only need. Building relationships and developing business by synergy create a natural fit of partnerships – one that does not require an army of lawyers and consultants, mainly because it is no longer “a deal”, but a future partnership between two passionate creative minds who see that together something amazing can be created, not merely a higher EBITDA.

Do investments with passion, people. Deals are not offered, they are created.

Daniel Hansen, Founder & CEO, OMNIA Global



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