“I’ve seen things you people wouldn’t believe.” Allow the poetic license to start this rationale with the well-known phrase of the replicant Roy Batty in the famous Ridley Scott dystopian movie. The hyperbole comes from some of the deals in which we have had the opportunity to participate recently, where the flexibility, wit and creativity of the investors led to successful completions.
Thinking about the once more rigid structures in corporate transactions, I wondered if what we have experienced in recent months were isolated cases caused by the attractiveness of the assets, or if we were facing a new approach by many investors. Time and future deals will allow us to confirm these changes; but, for the time being, several factors already point out to this new reality.
Features such as the maturity of the industry, the larger range of options or the increasing competition in the sector are leading to formulas more tailored to the companies. This is resulting in a growing commitment of entrepreneurs towards private equity to cover their financing needs. But it is not only the sharpening of their wits that is driving fund managers as a catalyst for business projects. In my opinion, other aspects of a more intangible nature have also helped.
Although some places the beginning of the private equity activity in 1901 when Henry Phipps created an investment vehicle from the capital gains generated after the sale of Carnegie Steel Co. to J.P. Morgan, it was the 25 billion dollars paid by KKR to acquire the tobacco company JR Nabisco, the deal that rings the bell among all of us dedicated to M&A. That transaction, shockingly fictionized in the book Barbarians at the Gate, was the paradigm of “greed is good”.
Such examples, have been installing in our collective consciousness an archetype of investor closer to the caricature of that Henry Kravis willing to do whatever was necessary to win the battle for the company run by Ross Johnson (amazing performances by Jonathan Pryce and James Garner!), than to those qualified and serious professionals who seek, through the development of a company and all its stakeholders, a legitimate personal benefit. The natural inclination to drama and exaggeration of many content and opinion creators (together with some real industry errors) has contributed to spreading that image of the unscrupulous financier, usually portrayed with an excess of hair gel, moved exclusively by Laissez Faire.
For many years, the option of a financial partner was seen by many business owners and management teams as an excessively aggressive alternative due to this narrow-minded portrait of the professionals in the sector.
Fortunately, things are changing. The growing weight of private equity managers in our economy is due not only to the necessary diversification in terms of sources of financing, which, as was made evident during the 2008 crisis, is essential for companies to be able to properly face more adverse economic periods. It is also the result of a progressive change in the image of investors, further removed from the cliché that has dominated the popular imagination for years, and overcoming the stigma of leveraged deals.
Today, private equity investors are more associated with the idea of a partner helping to professionalize, scale or address inorganic growth in businesses where the owner, aware of its limitations, demands from a third party not only for financing, but also adding previous experience and grey matter for the achievement of its projects. The numerous success stories have spread the benefits of the fund managers, who increasingly have internal operational resources to help their portfolio companies, they know the advisors to turn to depending on the needs of the projects, etc. All this makes their added value unquestionable. Considering our previous experiences, there is a greater belief on the part of investors in their ability to add value, and this allows them to make their funding structures more flexible.
This evolution is evident when we analyse more developed markets such as the American. In 2000, only 4% of American companies were owned by a private equity firm. In 2021, this figure was already 20%. And although some critical voices, which surely agree with those who continue associating the sector with the bogeyman, insist on warning about the risks of this dynamic, my conclusion is that the markets seem to have found in this source of financing the most valid option to execute their business projects.
Therefore, today more than ever, it is essential to continue educating about the achievements benefits of this resource for many business projects. Also to fight demagogy and unfounded attacks on an industry that in our country generates employment above the national average.
With all this, and opposite to what Roy the replicant concluded, I am convinced that all this will NOT “be lost in time, like tears in the rain”
Luis Molowny – Parner NORGESTION, Madrid office
Published in Capital & Corporate – November 2024
