INSEAD Leadership Summit - Private Equity Track

Friday, 14 May 2010 | Student Reports

The Wall Street Journal Europe Future Leadership Institute invited INSEAD MBA students Alcina West and Jennifer Smith to write down their experiences at the INSEAD Leadership Summit 2010.

Blogs by students Alcina West and Jennifer Smith

Blog Entry 1 - Kickoff

The private equity track of the 50^th Anniversary Leadership summit got right to the thick of things with a kickoff by Lars Förberg , Founding Partner at Cevian Capita. Cevian is the largest dedicated activist investor in Europe, with around €3.5bn in assets under management. To open the afternoon's discussion, Förberg gave an overview of the private equity business, stressing long-term horizons and the importance of an active role in management. Förberg highlighted a few key areas in which private equity principles could inform investors in the public market.

Shareholder Engagement

Shareholders have an obligation to be engaged in the direction of the company, not just a right.
Shareholders should be active in the election of the Board of Directors.
Board reorganization can help public companies define clear goals and strategy.

Long-Term Focus on Value

Where the public market sees underperformance, the private equity market sees potential.
Bottom up analysis can reveal companies that are underperforming their peers.
Focus not on where the stock price will be in half a year, but where it will be in five years.

At Cevian, Förberg practices what he preaches. The firm takes board seats in its portfolio companies and often implements change at the board level to effect operational improvements and strategic reorientation. To wit, Cevian has produced average annual net returns of well above 25% since its inception in 2002.

Blog Entry 2 - Growth Equity

INSEAD's own professor Patrick Turner, Affiliate Professor of Entrepreneurship and Family Enterprise, broke from grilling students to focus on grilling a star-studded cast of panelists, including Charles Diehl, Founding Partner of Activa Capital, Karsten Langer, Partner at The Riverside Company, and Alasdair Maclay, Director of Infrastructure investing at Actis. Despite a shift in focus from value to growth investing, many of the core insights rung true to Förberg's earlier commentary. A few of the key takeaways are reproduced below - straight from the horses' mouths.

Private equity can bring equity to fuel growth, but it can also help change a company's strategic positioning within its market.
Value creation is driven by top line growth. On 50 exits at The Riverside Company, Langer found that 55% of value was derived from top line growth, 44% to multiple expansion, which is often strongly driven by growth in earnings, and only 1% due to deleverage.
The cornerstone to generating this top line growth in a developed market is control of the firm, preferably by majority stake. Firms active in developed markets cannot rely on macroeconomic trends to produce growth or expand multiples. Luckily, even in France one can find fantastic entrepreneurs!
In emerging markets, however, macroeconomic growth can be a key success factor. For each 1% of GDP growth, the number of people entering middle class status can double or triple, dramatically changing market dynamics.
Following a period of ‘growth sustenance' (cost optimization) during the recent downturn, firms are now returning to the top line growth story. Langer, for example, mentioned bringing companies in his market portfolio online and retraining their work forces.
The role of leverage was downplayed, and none too subtly. "We are not in the world of Big Finance," asserted Diehl. One message was clear: private equity is closer to companies and further from banks than ever before.
There is a lot of value in bringing corporate-style execution to small companies. Entrepreneurial leaders can be great in their own universe, but can often benefit from more cross-fertilization with other companies.
Legislation requiring greater disclosure is a substantial risk in a world where 80% of private equity is raised by about 15% of firms worldwide. Over sweeping regulation driven by poor public sentiment could make private equity a less attractive source of capital than other private options.
Talking to management and the board before investing is crucial in growth equity. The discussion should be constructive and fact-based.
Private equity is the most efficient form of corporate government.

Blog Entry 3 - Capital Structure

Without a doubt, the heady days of mega deals and double digit leverage are behind us. This message was clear across all panels. So what is next? In order to dig deeper into financing trends of the present and future, Private Equity Correspondent Martin Arnold from the Financial Times hosted Robin Doumar, Managing Partner at Park Square Capital, and Andrew Géczy , CEO of Wholesale Markets and Co-Head of Corporate Markets at Lloyds Banking Group, for a chat on capital structure. While stopping short of cheerful, the resulting insights were cautiously optimistic.

The basics of private equity have not changed dramatically in twenty years. The scale of capital is larger, but the same principles apply.
Acknowledging that private equity is becoming a large business, no one should expect it to remain in the shadows. There are regulatory and tax headwinds in the industry that could easily lead to increasingly stringent regulations.
Fundamental credit investing was hot during the downturn, but now banks have been merged and sidelined. Government has gotten involved in bank ownership, and banks' appetite for risk has been restricted by regulation.
Deal volume is at record lows, but there seem to be some signs of recovery over the most recent six months.
In the private equity community, there is a focus on capital deployment - a use it or lose it mentality. To control capital overhang due to slow deal flow, alignment of incentives will be imperative.
"Simple is the new sexy." Complexity will come back, but not in individual deals, rather in the fund's portfolio as a whole.
The key lies in finding the right debt package for the dry powder waiting to be deployed. High yield may be a crucial part of the solution as loan financing is expected to remain constrained.
Europe is a "bank-driven market." A leveraged buyout loan in Europe has roughly a 75% chance of being held by a bank. In the US, bank involvement is much lower, roughly 30 - 40%.
Debt-to-equity ratios are more sensible now. As a result, banks are starting to lend to private equity again.
But, the industry is still seeing fallout from the last round of mega-buyouts (above €10bn). Deals in the €1 to 2 billion range are much more likely in Europe in the medium term, as markets recover.

The panel ends on an optimistic note, with a spotlight on each firm's successes in maintaining value and keeping companies alive during the downturn. From a statistical standpoint, the panelists remind us, PE firms have done a much better job of this than their non-PE competitors. Indeed, it is a message that deserves to be repeated.

The Bloggers

Jennifer Smith

Jennifer is an American whose Wanderlust has led her to live and study in the US, Europe, and Asia. In 2008 she paused her career in banking to work at a new media start up for PC gamers. Jennifer studied Finance, Accounting, and English Literature as an undergraduate and will earn her MBA from INSEAD in July 2010. You can follow her thoughts on finance, technology and media on Twitter @smithjenniferl.

Alcina West

Alcina is a 27 year old Brit, graduating INSEAD in July. Prior to INSEAD, she graduated from Cambridge in Philosophy, worked in management consulting at Booz & co and strategy for the Royal Bank of Scotland. When not tweeting, Alcina is generally found outdoors: dodging wild boar in the forest; playing ‘non contact' women's touch rugby; or constructing elaborate contraptions to help her see her laptop screen in sunlight. After INSEAD, she plans to work for a start-up.