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SJ BERWIN European Private Equity Seminar

The French LBO Market. Before 1945: merchant banking1945-1980 : cottage industry for cottage industries1980-90: first golden age1990-95: standstill - low European GDP GrowthSince 1995: Private Equity is booming: targets top and increasingly large companies, raises top and ever cheaper finance, attracts top talents2000-2002 only a blip, affecting VCs first2005: Exuberance in sight. No limits the mantra.2006: the (3) Big Merges in Sight. Private/Public blurring quite fast..

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SJ BERWIN European Private Equity Seminar

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    1. SJ BERWIN European Private Equity Seminar

    3. z World Money Supply has increased by 13% p.a. over the last ten years World GDP Growth not of the same magnitude Asset management culture spreading All asset classes inflate France no haven

    4. Much capital at hand Capital churn increase Greater awareness and acceptance of LBOs Secondary/Tertiary LBOs an accepted standard Going to and fro public markets welcome Management packages enticing Scope of interest increasing to very large groups Consortia culture spreading Fast-spreading secondary market for minority interests Positive Fundamentals

    5. Class-Beating French Market

    6. Liquidity Hurricane in France

    7. White-Hot LBO Sponsors

    8. Bullish Banking Support Tranches B, C, D : “Redemption in Inferno” PIK, dubbed “Pay If You Can” Syndication obsession Brokerage mindset Secondary LBOs the Holy Grail for quick refinancing fees Banks often price and CPs setters Liquidity Hurricane in France (cont’d)

    9. Liquidity Hurricane in France (cont’d)

    10. Competition/auctions leads to higher assets prices Higher investment risk Broader investment spectrum (sectors) Low-hanging fruits already priced in Selectivity more difficult Higher leverage risks with debt-driven buyers Management packages gnaw at investors’ yield Likely downwards returns/yields (on a like-for-like multiples basis) Equity now a quasi-commodity Accepted Decline of Returns and Increase of Risks

    11. Fewer Safety Nets for Secondary LBOs Shortened time R&Ws and CPs not in most dictionaries Price adjustment mechanism seldom Management commitments lighter (‘Welcome Bonus’ entering the mid-market) Audits more sell-side, more limited

    12. Less time (‘72-hour answer’) Short exclusivity period if any Execution time shortened (’24-hour’) ‘Head-turning’ pre-emptive bids spawning

    14. “Hot Potato” ? Yet doomsayers have often been wrong “Bubble” ? Yet fundamentals drivers look here to stay Sentiment hugely weighted to the buy side Few want to sit and wait for a correction that may not come Financial innovation in the offing (e.g. derivatives)

    15. Public equity pervading private equity fast Distinction between asset classes blurring Distinction between traditional financial partners dimmer PE funds start doing mezzanine Mezzanine doing equity (‘Sponsorless’) Debt doing integral finance (‘Warrantless’) Private equity no more on its own Innovation will be the key differentiator The 3 Big Merges

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