The titans of Private Equity go back to basics

Day 2 of SuperReturn Middle East saw a gathering of a particularly august panel of private equity leaders.  Joining Josh Lerner, Harvard Business School was Steven Costabile, Pineridge Investments; Hisham El-Khazindar, Citadel Capital; Steve Pagliuca, Bain Capital and Daniel H Mudd, Fortress Investment Group to debate the trend to “back to basics”.

First up was Steve Pagliuca to review issues in portfolios and how GPs are resolving the problems.  Steve said the difference between the issues of the ‘80s and ‘90s and now is that the debt is structured in a more patient way.   In the ‘90s if you defaulted, the banks would move in straight away.

This patience has allowed companies like Bain Capital to send in specialists to work with the portfolio companies on working capital and cost reduction programmes, to great positive effect.  Now the companies are running lean and well.  The big fear is a double dip recession and how would the companies cope.

Hisham commented that the MENA region was relatively insulated from the crisis with the exception of Dubai but that operationally there are lessons to be learned.  A shift from minority holdings to significant or majority holding in PE companies shows an increased understanding of the importance of control and involvement.

He argued that not all operational improvements are about cost cutting and downsizing but about making sure you get financing to bolt on businesses that can expand and improve your portfolio.

Additionally, local GPs firms are learning the importance of management experience that extends beyond the financial expertise to do deals to the ability to develop and grow the portfolio businesses.  The acquisition of talented managers with backgrounds in engineering and management consultancy should be fast tracked.

Josh then turned to Daniel Mudd and asked what private equity has learned from the crisis. For Daniel, the bulk of the “selling at gunpoint” deleveraging has past so now its time for corporations to look at their portfolios and decide what business they are in, what business they want to be in and start to restructure their portfolios accordingly, which may often involve sales to private equity firms.  Another positive outcome of the crisis is that banks are better able to look at private equity companies, assess them and re-term the loans constructively.

Steven Costabile took up the discussion on whether we could expect an extended period of smaller deals.  He believes that most institutional investors now understand that just because you can do a deal, doesn’t mean you should.  While many institutional investors say they are looking for absolute returns, what they are really looking for is relative returns, relative to the public markets.  And there the bar has been lowered.  It will be 3-4 years before we get back the old levels.  This is the perfect time for platform acquisition and there are lots of opportunities.

So to summarise in the words of Josh Lerner, the immediate future for private equity is “not small is beautiful but focus is beautiful”

October 19, 2020 Post Under: Middle East

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