Extract from RBS Friday Flyer
Generating
value from
secondaries
Tim Syder
Deputy Managing Partner at
Electra Partners LLP
8 October 2010
Electra Partners LLP
Paternoster House
65 St Paul’s Churchyard
London EC4M 8AB
t +44 (0)20 7214 4200
f +44 (0)20 7214 4201
w electrapartners.com
Authorised and regulated by the
Financial Services Authority
Electra Partners LLP is a limited
liability partnership registered in
England with registration No OC320352
Printed on FSC accredited paper
Important Information
This communication has been prepared for the sole use of professional clients by Electra Partners LLP.
The information in this communication does not constitute or form part of any offer to sell or an invitation
to purchase or subscribe for any shares or other securities of any kind, nor may it or any part of it form the
basis of, or be relied upon in connection with any contract relating thereto. The information in this
communication is provided for general information, is not comprehensive, is not intended to constitute any
recommendation to acquire or dispose of any securities or apply for or use any investment related service
or product and does not constitute investment, legal, tax or other advice. You should seek individual advice
from an appropriate independent financial and/or other professional adviser before making any investment
or financial decision or applying for or using any such investment related service or product.
Information regarding the past performance of an investment is not necessarily indicative of the future
performance of that investment. The value of investments may fall or rise.
Equity | Investment Funds | Research
Marketing communication produced by: The Royal Bank of Scotland N.V.
08 October 2010
This document has not been produced in accordance with legal requirements
designed to promote the independence of research
Friday Flyer
Extract: “Generating value from
secondaries” – a case study from
Electra Partners
This case study is an extract from the RBS Investment Fund Team’s Friday
Flyer, published on 8 October 2010.
Analysts
Louisa Symington-Mills
United Kingdom
+44 20 7678 1670
louisa.symington-mills@rbs.com
Mark James
United Kingdom
+44 20 7678 7433
mark.e.james@rbs.com
250 Bishopsgate, London, EC2M 4AA,
United Kingdom
http://research.rbsm.com
This document must be treated as a marketing communication for the purposes of Directive 2004/39/EC as it
has not been prepared in accordance with legal requirements designed to promote the independence of
research; and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Important disclosures can be found in the Disclosures Appendix.
In brief
Every week in the ‘In brief’ section of this publication, we include a feature such as an interview, a
detailed fund profile, or comment or analysis on a particular topic. Below, we include a case study
from Electra Partners reviewing recent realisation activity in the portfolio of Electra Private
Equity plc (‘Electra’).
As we have said before, we expect increasing portfolio exit activity to be a key factor in the
ongoing re-rating of listed private equity share prices, encouraging investor confidence in portfolio
company valuations, facilitating the reduction of borrowing levels across the listed private equity
sector and providing firepower for new investment activity.
In spite of the slow pace of recovery from the credit crisis and this year’s difficult equity market
conditions, we have seen a number of successful exits across our peer group of listed private
equity direct funds. Electra Partners has recorded two successful look-through portfolio company
exits over recent months: Thermocoax and MPS. Electra acquired its interest in both companies
through separate transactions in the private equity secondaries market, which we believe is a
good example of Electra Partners’ opportunistic approach to investing in private equity
opportunities in the European mid-market. In this case study, Tim Syder, deputy managing partner
at Electra Partners, reviews the story behind both realisations.
Case study
Electra Partners: generating value from
secondaries
Introductory note
Electra Partners LLP’s flexible investment mandate allows it to consider direct investment, fund
investment and secondaries. Whilst the majority of the investments for our major client Electra
Private Equity PLC (“Electra”) are direct, secondaries accounted for 9% of the total portfolio at 31
March 2010. Secondaries have allowed Electra Partners to access specific European markets and,
during the last few years, have offered an improved risk/reward profile compared to buy-outs.
About the author
Tim Syder is deputy managing partner for Electra Partners, which he joined in 1989. Previously he
worked in private equity for five years at County Bank, where he was a founder member of NatWest
Ventures, which subsequently became Bridgepoint. Tim is a chartered accountant, having qualified
with KPMG. He is also a member of the Investment Committee and represents Electra Partners on
the boards of a number of investee companies, including Nuaire and Premier Asset Management.
About Electra Partners
Electra Partners is an independent private equity fund manager with over 25 years’ experience in the
mid market. The firm is owned entirely by its senior staff and, as of 31 March 2010, had funds under
management and available investment capacity of over £900m. Electra Partners targets companies
with an enterprise value of between £60m and £200m and looks to invest in the region of £20m to
£75m. Although it is UK-centric, the company invests throughout Western Europe through a network
of four independent local fund managers in each of France, Germany, Italy and Spain.
The secondaries market
Over the last few years, momentum in the secondaries market has been driven by two factors: LPs
reducing their exposure to future fund commitments and banks either selling off portfolios or spinning
out in-house private equity units. The last year has seen Citigroup, Bank of America Merrill Lynch
and Natixis, amongst others, sell their private equity fund and direct investment assets to other
private equity firms. For example, Lloyds Banking Group sold 70% of its Bank of Scotland Integrated
Finance (BOSIF) portfolio to Coller Capital.
Friday Flyer | In brief | 08 October 2010
2
This increase in secondary market transactions has benefited the private equity industry by providing
liquidity to LPs, thereby increasing the attractiveness of the asset class.
Electra Partners and the secondaries market
Electra Partners’ flexible investment strategy allows it to pursue a wide range of investment
opportunities including direct investment, fund investment and secondary purchases of assets and
portfolios. In addition, we are not sector-specific so this flexibility yields substantial and varying
deal flow which provides increased diversification in Electra’s portfolio. It means we can access
European deals in almost every sector and react quickly to opportunities at all stages of the
economic cycle. For example, in 2006/07 asset prices were high and steadily increasing. Having
had the experience of buying successful secondary positions in the early 1990s, our attention was
directed towards looking for similar opportunities in the secondary market that might offer
attractive pricing.
At the same time, we were looking to accelerate our investment strategy of developing new
relationships with private equity firms in Continental Europe who could act as our investment
partner in key territories to gain access to a wider geographic spread of assets. In 2006/07,
Electra Partners was therefore actively seeking opportunities with European private equity firms
for both secondary investments and also potential long term partnering arrangements. Our
relationships in France with TCR Capital and in Germany with Steadfast Capital are detailed
below.
1. TCR Capital and Thermocoax (France)
In June 2006, Electra Partners identified TCR Capital, a French country-specific private equity
house, as a possible investment partner in France. TCR Capital was founded in 1989 as the
Paris-based direct investment arm of Quilvest – the wealth manager of the Bemberg family.
Having backed TCR’s first and second funds, Quilvest was looking to sell its 58% stake in the
second fund, TCR Capital II. TCR Capital II was raised in 2003 and at 2006 had invested in five
deals, of which one had exited. The remaining four companies in the portfolio were as follows:
•
Thermocoax – a leading manufacturer of customised thermal solutions and temperature
measurement systems headquartered in France
•
Entrepose – a market leader in scaffolding rental in France
•
CH-Pharma – a contract manufacturer operating in the French pharmaceutical industry
•
Générale de Protection – France’s fourth largest provider of electronic security and CCTV
monitoring to corporate customers
Investment rationale
Electra Partners considered the key rationale for taking Quilvest’s position in TCR Capital II to be
as follows:
1. In 2006, the shareholders of Electra Private Equity PLC had recently voted to move back to
a full investment strategy. Electra Partners was therefore looking to deploy capital, particularly in
European assets, and secondaries represented an excellent way of gaining immediate access to
a portfolio of assets. Our introduction to TCR Capital was timely as they offered four attractive and
mature businesses operating in the French market.
2.
The due diligence showed the assets to be reasonably priced and very stable businesses
that had the potential to generate strong investment returns.
In October 2006, Electra Partners invested €28m to acquire Quilvest’s position in the fund. The
investment provided Electra with increased exposure to the French market and an investment
partner in TCR Capital. Electra Partners subsequently became the cornerstone investor in TCR
Capital III. Since Electra’s investment there have been three exits: Entrepose, Générale de
Protection and, most recently, Thermocoax.
Friday Flyer | In brief | 08 October 2010
3
Thermocoax
TCR originally acquired Thermocoax via a management-led buy-out in November 2005. As a
provider of bespoke designed components for heating and temperature measurement,
Thermocoax’s products are based on mineral insulated cable technology.
The products serve a large number of sectors including nuclear energy, civil and defence aviation,
solar energy, electronics and semi conductors, medical and scientific instrumentation, industrial
and petrochemical. The company is headquartered in France but 75% of its sales are outside the
country through its presence in the US, China, Germany, the UK and the Netherlands.
Over TCR Capital and Electra’s ownership, the company had significant revenue and EBIT growth
success. Revenues grew from €21m to €35m and EBIT from around €4.4m to around €10m
(2005-10E CAGR 11% and 18% respectively). This growth has been achieved by:
i)
moving into system sales where Thermocoax integrates its component into a wider system
for clients, thereby increasing the size of each individual sale
ii)
continued investment in international markets, particularly the US and China including
adding manufacturing capability in the US to be closer to customers
iii) developing a broad sector approach including growth markets such as nuclear and
renewable energy.
Chart 1 : Thermocoax sales/revenue growth, 2005-10
40
€'millions
30
20
10
0
2005
2006
2007
Revenue
2008
2009
2010 E
EBIT
Source: Electra Partners
In June 2010, after five years of successful ownership with yoy growth, Thermocoax was sold to a
consortium of investors led by Chequers Capital. Electra received proceeds of £12.3m from its
interest in Thermocoax, generating a return of 2.8x original cost on its investment in just under
four years.
To date, Electra has received proceeds of €38m from its secondary position in TCR Capital II.
With one remaining asset in this secondary portfolio, CH Pharma, Electra’s total return is likely to
be 2x the original cost on its investment.
2. Steadfast Capital Fund 1 and MPS (Germany)
In April 2008, we identified the opportunity of acquiring AXA’s interest in Steadfast Capital Fund 1
GmbH Co. KG (“the Fund”). Steadfast Capital is a mid-market private equity house based in
Frankfurt that invests in Germany and neighbouring countries. The Fund was created in February
2006, when AXA, alongside other investors, facilitated the acquisition of various private equity
assets within ING bank in a secondary transaction.
Friday Flyer | In brief | 08 October 2010
4
In April 2008, the Fund consisted of five portfolio companies. The largest of which, at
approximately 50% of the value of the portfolio, was Meat Processing Systems (“MPS”), the global
leader in the development, production and installation of abattoir equipment.
The investee companies in the Fund had performed strongly and AXA was sitting on a paper gain.
Combined with the credit crunch starting to deepen, AXA was considering realising value by
exiting via a secondary transaction.
Electra Partners was attracted to the Fund because MPS, the dominant asset, was an attractive
business operating in agriculture – a sought-after sector due to its non-cyclical nature and global
characteristics. Furthermore, we have enjoyed a long history of investment success in agriculture
through investments such as Allflex, our animal identification and tagging business.
Investment rationale
After meetings with Steadfast Capital, company management and site visits, Electra Partners
considered the key benefits of the investment to be as follows:
1.
The investee companies had demonstrated a strong track record of cash generation and deleveraging since acquisition and the due diligence showed the assets to be reasonably priced.
The investment therefore offered the potential for significant equity returns
2.
With relatively modest leverage (MPS had sub 2.5x debt/EBITDA), the assets were well
placed to weather a downturn and represented a lower-than-average risk profile for Electra
Partners
In November 2008, Electra invested €36m in the acquisition of a 51% limited partnership interest
in the Fund and through this transaction Electra invested €20m in MPS. The fund investment
provided Electra with further portfolio and geographic risk diversification and, in Steadfast Capital,
offered a potential investment partner to provide additional exposure to Germany and
neighbouring countries in the future.
MPS
MPS, as the global leader in the development, production and installation of abattoir equipment,
employs 500 people worldwide and is based in the Netherlands. Having previously identified
opportunities to broaden its product portfolio and grow MPS’s international presence, Electra
Partners supported Steadfast Capital to develop the business on a strategic level, reviewing
acquisition targets globally. In January 2010, MPS acquired Butina, a world leader in pig stunning
systems, to extend MPS’s product portfolio.
During Electra’s ownership, profits grew by over 35% on the back of continued geographic
expansion into emerging economies, increased food safety concerns and the global
industrialisation of agriculture. During 2009, M&A private equity markets started to come back to
life with high valuations being achieved for the very best assets.
On the back of MPS’s continued strong trading, Steadfast Capital and Electra Partners decided to
launch a worldwide sales process in early 2010. There was significant interest from the private
equity community who were attracted to its strong performance throughout the recession, global
market position and history of profitability.
In August 2010, MPS was sold to Barclays Private Equity and Electra received proceeds of £34m
for its interest in the company, generating a 48% IRR. This represented a return of 2.0x original
cost in under two years and a significant uplift from the value of Electra’s holding in MPS at 31
March 2010.
Through this one transaction, Electra’s purchase price of the fund has been returned and we
continue to monitor the remaining investments in the Fund, which are expected to provide further
realisations over the next 24 months.
Friday Flyer | In brief | 08 October 2010
5
Debt secondaries
It is not just equity secondaries in which Electra invests. There have been a number of occasions
where we have identified significant investment opportunities in acquiring portfolios of senior and
mezzanine debt. An example of this is Credit Opportunities, a fund launched by Electra Partners
in October 2009 as a special purpose vehicle to take advantage of discounted pricing in the debt
market. With a number of stressed funds needing to generate cash, there were a large number of
sellers of senior debt positions resulting in huge discounts in pricing.
Electra Partners committed €22m, purchasing senior debt securities at a significant discount to
par value in companies including Orangina, Amadeus and United Biscuits. The investment
enabled Electra to generate an equity return whilst only taking senior debt risk in large, robust
businesses. The market rapidly improved in 2009/10, which allowed the positions to be realised
as prices rebalanced to par. As at 30 June 2010, all but two of the positions had been realised,
generating an unleveraged 20% IRR.
Conclusion
The success of investments in Thermocoax, MPS and Credit Opportunities underlines the
importance of identifying the right transactions to undertake at each point of the economic cycle in
order to maximise returns for shareholders. At Electra Partners, we are fortunate to have a strong
contact network bringing us good deal flow, and our flexible investment strategy allows us to
invest in the widest range of private equity transactions and sectors. In secondaries, timing is
everything as the window for buying opportunities tends to open and close quickly. Our short
decision-making processes allow us to capture the opportunities available as market conditions
clearly favour buyers who are able to move quickly and have the necessary firepower.
Please note that the views and opinions expressed here are those of the author and may differ from those of RBS or an
affiliate thereof.
Friday Flyer | In brief | 08 October 2010
6
Global disclaimer
© Copyright 2010 The Royal Bank of Scotland N.V. and affiliated companies ("RBS"). All rights reserved.
This material was prepared by the legal entity named on the cover or inside cover page. It is provided for informational purposes only and does not constitute an offer to sell or a
solicitation to buy any security or other financial instrument. While based on information believed to be reliable, no guarantee is given that it is accurate or complete. While we endeavour
to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. The opinions,
forecasts, assumptions, estimates, derived valuations and target price(s) contained in this material are as of the date indicated and are subject to change at any time without prior notice.
The investments referred to may not be suitable for the specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for
the exercise of independent judgement. The stated price of any securities mentioned herein is as of the date indicated and is not a representation that any transaction can be effected at
this price. Neither RBS nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way
from the information contained in this material. This material is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part
for any purpose without RBS's prior express consent. In any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the
distributor does not currently have, this document is intended solely for distribution to professional and institutional investors.
Australia: Any report referring to equity securities is distributed in Australia by RBS Equities (Australia) Limited (ABN 84 002 768 701, AFS Licence 240530), a participant of the ASX
Group. Any report referring to fixed income securities is distributed in Australia by The Royal Bank of Scotland NV (Australia Branch) (ABN 84 079 478 612, AFS Licence 238266).
Australian investors should note that this document was prepared for wholesale investors only.
Canada: The securities mentioned in this material are available only in accordance with applicable securities laws and many not be eligible for sale in all jurisdictions. Persons in Canada
requiring further information should contact their own advisors.
EEA: This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of
the matters contained in the material. Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. In
the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice.
Denmark: Royal Bank of Scotland N.V. is authorised and regulated in the Netherlands by De Netherlandsche Bank. In addition, Royal Bank of Scotland N.V. Danish branch is subject to
local supervision by Finanstilsynet, The Danish Financial Supervisory Authority.
Hong Kong: This document is being distributed in Hong Kong by, and is attributable to, RBS Asia Limited which is regulated by the Securities and Futures Commission of Hong Kong.
India: Shares traded on stock exchanges within the Republic of India may only be purchased by different categories of resident Indian investors, Foreign Institutional Investors registered
with The Securities and Exchange Board of India ("SEBI") or individuals of Indian national origin resident outside India called Non Resident Indians ("NRIs"). Any recipient of this
document wanting additional information or to effect any transaction in Indian securities or financial instrument mentioned herein must do so by contacting a representative of RBS
Equities (India) Limited. RBS Equities (India) Limited is a subsidiary of The Royal Bank of Scotland N.V..
Italy: Persons in Italy requiring further information should contact The Royal Bank of Scotland N.V. Milan Branch.
Japan: This report is being distributed in Japan by RBS Securities Japan Limited to institutional investors only.
Malaysia: RBS research, except for economics and FX research, is not for distribution or transmission into Malaysia.
Netherlands: the Authority for the Financial Markets ("AFM") is the competent supervisor.
Russia: This Material is distributed in the Russian Federation by RBS and "The Royal Bank of Scotland" ZAO (general banking license No. 2594 issued by the Central Bank of the
Russian Federation, registered address: building 1, 17 Bolshaya Nikitskaya str., Moscow 125009, the Russian Federation), an affiliate of RBS, for information purposes only and is not an
offer to buy or subscribe or otherwise to deal in securities or other financial instruments, or to enter into any legal relations, nor as investment advice or a recommendation with respect to
such securities or other financial instruments. This Material does not have regard to the specific investment purposes, financial situation and the particular business needs of any particular
recipient. The investments and services contained herein may not be available to persons other than 'qualified investors" as this term is defined in the Federal Law "On the Securities
Market".
Singapore: Any material in connection with equity securities is distributed in Singapore by The Royal Bank of Scotland Asia Securities (Singapore) Pte Limited ("RBS Asia Securities")
(RCB Regn No. 198703346M).Without prejudice to any of the foregoing disclaimers, this material and the securities, investments or other financial instruments referred to herein are not in
any way intended for, and will not be available to, investors in Singapore unless they are institutional investors (as defined in Section 4A(1) of the Securities and Futures Act (Cap. 289) of
Singapore ("SFA") or relevant persons falling within Section 275 of the SFA and in accordance with the conditions specified therein or otherwise fall within the circumstances under
Section 275 of the SFA. Further, without prejudice to any of the foregoing disclaimers, where this material is distributed to accredited investors or expert investors as defined in Regulation
2 of the Financial Advisers Regulations ("FAR") of the Financial Advisers Act (Cap. 110) of Singapore ("FAA"), RBS Asia Securities is exempted by Regulation 35 of the FAR from the
requirements in Section 36 of the FAA mandating disclosure of any interest in securities referred to in this material, or in their acquisition or disposal. Recipients who do not fall within the
description of persons under Regulation 49 of the Securities and Futures (Licensing and Conduct of Business) Regulations or Regulations 34 and 35 of the Financial Advisers Regulations
should seek the advice of their independent financial advisor prior to taking any investment decision based on this document or for any necessary explanation of its contents.
Thailand: Pursuant to an agreement with Asia Plus Securities Public Company Limited (APS), reports on Thai securities published out of Thailand are prepared by APS but distributed
outside Thailand by RBS Bank NV and affiliated companies. Responsibility for the views and accuracy expressed in such documents belongs to APS.
Turkey: The Royal Bank of Scotland N.V. is regulated by Banking Regulation and Supervision Authority (BRSA).
UAE and Qatar: This report is produced by The Royal Bank of Scotland N.V and is being distributed to professional and institutional investors only in the United Arab Emirates and Qatar
in accordance with the regulatory requirements governing the distribution of investment research in these jurisdictions.
Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed at "Professional Clients" as defined by the Dubai Financial
Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the
requirements of a "Professional Client". This Document has not been reviewed or approved by the DFSA.
Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not "Retail Customer" as defined by the Qatar
Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a
"Business Customer" or "Market Counterparty".
United States of America: This document is intended for distribution only to "major institutional investors" as defined in Rule 15a-6 under the U.S. Exchange Act of 1934 as amended (the
"Exchange Act"), and may not be furnished to any other person in the United States. Each U.S. major institutional investor that receives these materials by its acceptance hereof
represents and agrees that it shall not distribute or provide these materials to any other person. Any U.S. recipient of these materials that wishes further information regarding, or to effect
any transaction in, any of the securities discussed in this document, should contact and place orders solely through a registered representative of RBS Securities Inc., 600 Washington
Boulevard, Stamford, CT, USA. Telephone: +1 203 897 2700. RBS Securities Inc. is an affiliated broker-dealer registered with the U.S. Securities and Exchange Commission under the
Exchange Act, and a member of the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).
- Material means all research information contained in any form including but not limited to hard copy, electronic form, presentations, e-mail, SMS or WAP.
____________________________________________________________________________________________________________________________________________________
The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research
report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or
will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the
performance appraisals of analysts.
____________________________________________________________________________________________________________________________________________________
For a discussion of the valuation methodologies used to derive our price targets and the risks that could impede their achievement, please refer to our latest published research on those
stocks at research.rbsm.com. Disclosures regarding companies covered by us can be found on our research website at research.rbsm.com. Our policy on managing research conflicts of
interest can be found at https://research.rbsm.com/Disclosure/Disclosure.AspX?MI=2.
Should you require additional information please contact the relevant research team or the author(s) of this report.
Friday Flyer | Disclosures Appendix | 08 October 2010
14
Electra Partners LLP
Paternoster House
65 St Paul’s Churchyard
London EC4M 8AB
t +44 (0)20 7214 4200
f +44 (0)20 7214 4201
w electrapartners.com
Authorised and regulated by the
Financial Services Authority
Electra Partners LLP is a limited
liability partnership registered in
England with registration No OC320352
Printed on FSC accredited paper