Dwight Poler, managing director with Bain Capital in Europe, on the openings created by economic volatility in the euro zone and supporting portfolio companies that seek expansion in Asia
Q: To what extent has economic volatility in Europe created an opportunity for PE?
A: Right now owners of assets are re-adjusting to low growth in the long term, which means they are increasingly ready to sell. When it was at the bottom, they didn't want to sell. When there were no debt markets, they didn't want to sell to private equity because private equity wasn't in the best shape to buy. But now you have solid debt markets and equity markets, so valuations are reasonable. Sellers can have more confidence to offer assets. The most important thing for us is being able to see lots of things from which to pick. If you can source a lot of interesting things then you have a greater opportunity to find something within that pool you want to buy.
Q: Which markets - national or sub-regional - are the most attractive in Europe?
A: When you look beyond just growth, to the price required to buy growth, that attractiveness is very dynamic. The value of being a pan-European fund is huge, as it gives flexibility to seek value for growth as that equation changes. A lot of LPs were seduced by single country funds but many now realize that, particularly among managers in North European markets, much of the positive gains were just market tailwinds. In fact, you might have gotten more portfolio alpha out of a great PE manager in Italy or Spain than a weak manager in the Nordics. So there is not just one single "best geography" because, as an investor, you have to get that balance of price and growth. It's identical to Asia in that sense. Japan is the lowest growth market in Asia but it has been one of the most interesting markets for us. Most people look at Japan and say, ‘Low growth, very difficult to do business, very expensive place to operate - do I really want to house a full team there?' We have 15 professionals in Japan and the ability to do transformational change, creating huge equity gains as we did with Domino's. Very few people have that capability so it makes Japan a great place for us to invest.
Q: The euro zone has been described as a "bad marriage." Is this accurate?
A: I personally believe the euro zone will hold together. The fact it held together under immense pressure 3-4 years ago is a testament to the true will to stay together - a commitment beyond economics and politics - as well as the true inflexibility of unwinding the euro. That said, from a fund perspective we are not just tied to the future of the euro. We invest across Europe with a disproportionate focus on Europe-based companies that have a global presence, because one of our great comparative advantages is that we are global. We are attractive to companies that have a strong European core but maybe want to tap the US market for growth or move their cost base to Asia to be globally competitive.
Q: How many European portfolio companies are increasing their exposure to Asia?
A: It was the late 1990s when focus turned to tapping higher demographic-growth markets and leveraging the cost advantage Asia has versus Europe. But the challenge is not to be underestimated. Companies find it hard to identify the right partners and create relationships where you commit enough to each other that you actually make progress. Each of our retailers wants to do sourcing from Asia; our product companies seek production there. We can get CEOs and purchasing people together to learn from each other or source together. One of the best examples of dramatic transformation would be FCI, which we bought from Areva. It was based in France, served very cyclical end markets in automotive and technology, and the financing markets didn't like it all. We worked with each division, sold two of them to trade buyers and one to a sponsor, and the fourth, supplying components to the automotive industry, we have transformed to an Asian company serving its key customers. The headquarters recently move to Singapore and the business will likely be listed or sold in Asia.
Q: To what extent is that now part of the deal pitch?
A: For Bain Capital in Europe, our global reach is core to our proposition. This summer we bought FTE Automotive, a Germany-based automotive clutch actuation systems manufacturer, which had been supported by a French owner. Yet much of their growth opportunity is in the developing world. Our portfolio team working on it included the former CEO at Skoda China, a German with a long history at Volkswagen, who has been incredibly impactful getting them into developing markets.
Q: Chinese companies are increasingly interested in buying assets in Europe. How much activity do you see?
A: We have seen more looking, but not yet as much buying. I lived in Tokyo in 1988-1990 and it was a similar situation: you had some very strong Japanese potential buyers and it took quite a while before they were comfortable buying in the US and Europe. Once they got more understanding of how to operate in these markets the acquisition pace picked up. We haven't seen that yet from China, but I do believe it will happen. We have on many occasions worked in partnership with Chinese buyers to look at US and European assets.
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There is a feeling that now is a shrewd time to invest in Japan and take advantage of the favourable conditions for private equity. Valuations are low compared with the rest of Asia and strategic buyers and the IPO market are providing an attractive route for exits. There are also signs that corporate Japan is slowly coming around to engaging PE as a potential buyer for non-core assets and recent developments at the GPIF suggest that PE will be under strong consideration for allocations from pension funds in the near future as well as regional banks committing to the asset class right now.
The macro concerns that have been present for many years still remain in terms of low growth and currency depreciation but these are encouraging times for fund managers looking to both raise capital from Japanese LPs and make investments.
245-26 June 2015, Conrad Hotel, Tokyo