In late February 2021, the Pedersen & Partners Private Equity Practice Team had the pleasure of welcoming via video session Stefan H. Gödel, Operating Partner at Fidelium GmbH in Munich.
Mr. Gödel has 20+ years of experience as a Managing Director in consulting, M&A and private equity functions. Moreover, he has broad knowledge and expertise in restructuring corporate clients and value creation for Private Equity investors.
The team enjoyed a lively and inspiring discussion, and discussed several topics at length, including Mr. Gödel’s insights on Private Equity trends, with an emphasis on distressed investing in the DACH region; the role of the Operating Partner within a PE firm; the crucial actions to be undertaken within the first 100 days post-acquisition, and investor expectations.
We share a summary of the findings below, while expressing our sincere gratitude to Mr. Gödel for his valuable insights.
Distressed investing in the DACH region
We do not see a lot of distressed cases right now. The main reason for this is, that governments have put a moratorium on existing insolvency and bankruptcy regulations. Meaning that many companies which would need to file for insolvency or bankruptcy under normal circumstances, do not currently need to file. Once the pandemic has been overcome and the crisis is over, the regulations that are currently on hold will be set in operation again, and the number of defaults can be expected to rise.
Role of an Operating Partner within a Private Equity firm
There are two models of Operating Partners in the industry. In one model, the Operating Partner is employed by the fund to take a top-down perspective on the portfolio companies, but the Operating Partner does not usually take over positions within the portfolio companies. In the other model, Operating Partners can be employed directly by portfolio companies on behalf of the fund, and then take on positions as Managing Director, Supervisory Board Member or Management Board Member within the portfolio company. An Operating Partner can be called a “linking pin” between the fund and the shareholders on one hand, and the local management team on the other. When we look into distressed acquisitions in particular, there can be a lot of insecurity on the part of the local management, so this function also acts as a cultural bridge.
First 100 days post-acquisition
The first thing to do is to create transparency, to understand the company’s actual situation, and even to challenge the plan and the assumptions that the Deal team made when acquiring it. The second priority is to implement a KPI reporting: predominantly P&L, cash position, and cashflow. The third step is to identify the important, success-critical human resources – these are usually about 5 to 10 people (this does not depend that much on the size of the portfolio company), and to either develop a retention plan for them, or hire new staff via networking or with the support of an Executive Search consultant. Last but not least, a strategic plan for the portfolio company must be developed, covering at least 3-5 years ahead.
Expectations of a Distressed Investor
The key metrics are EBITDA, cash position, cashflow, and equity value. The imminent goal, especially in distressed situations, is to very quickly ensure that the company can “stand alone” so there is a need to put external financing in place, make use of all internal sources of cash, and stop the “bleeding” where there are losses, because further capital injections after the transaction should generally be avoided. It is very difficult to do, and sometimes there are misunderstandings in this respect between operational management, the shareholders and the deal team.
The impact of the low interest rate environment on valuations
Interest rates have been at an historic low for more than 10 years. This has had an indirect but potent impact on valuations. Many investors are looking for investment opportunities as traditional bonds and fixed-income vehicles are less valuable alternatives in a low interest rate environment. This lead to a strong inflow of capital into Private Equity funds. As a consequence, there is a lot of cash on the table when it comes to the acquisition of companies. Strong competition between PE funds and strategic buyers for a limited number of assets can in fact cause valuations to increase.
Characteristics of a CEO for a PE portfolio firm
These firms need someone who is able to drive the company forward, to take it one step further – this is not only a question of industry knowledge, but also of experience and strategic thinking. There are funds that acquire healthy businesses, using them as a platform, and then over the course of time, acquire three to five add-on companies in order to form something different and bigger. Their leverage is more than the EBITDA improvement; what comes out of this buy-and-build strategy is much more valuable in terms of positioning, and might actually attract a larger follow-on audience for a follow-on acquisition than the asset itself, leading to higher multiples. That strategy is also known as “multiple arbitrage”.