Permira Interview

The Struggle to Find Good Deals

Permira Bostelmann
Permira chief executive Kurt Björklund in his first interview since years.
  • Why it matters

    Why it matters

    Permira’s co-head says financial technology firms will face a wave of consolidation. Many will not survive.

  • Facts

    Facts

    • Permira has invested in more than 200 firms in its 30 years in the private equity business.
    • Kurt Björklund became Permira’s co-managing director in 2008.
    • German politician Franz Müntefering once famously described private equity firms as “locusts.”
  • Audio

    Audio

  • Pdf

Kurt Bjöklund doesn’t do too many media interviews, but he’s a little more open these days with something to celebrate. Permira, the global investment and private equity firm that he co-leads, is marking its 30th birthday this year.

Starting as Schroder Ventures back in 1985, it was rebranded Permira in 2001. Over the past 30 years, it has invested in or acquired more than 200 firms on the market, and currently has about €25 billion in committed capital.  Its funds have on average achieved a return of 23 percent for their investors, according to its own figures. Among its largest investments are shoe brand Dr. Martens and Magento Commmerce, a former e-commerce division of eBay. In Germany, its investments include fashion brand Hugo Boss and television station Pro Sieben Sat 1.

Mr. Björklund, a 46-year-old Finnish citizen, is one of the company’s most experienced leaders. He joined the London-based firm in 1996, became a partner in 2001 and has been co-managing partner since 2008. Before switching to private equity, he was a worked as an advisor at Boston Consulting Group in Stockholm.

Private equity doesn’t exactly have the best of reputations in Germany, a typically financially-conservative country. Franz Müntefering, a former leader of the center-left Social Democrats, once famously likened the industry to “locusts” back in 2005, unleashing a wave of national debate about the benefits and pitfalls of private equity firms swooping in to provide loss-making companies a makeover. The “locust debate” remains a term for the merits of private equity firms in Germany today.

Speaking to Handelsblatt during a visit to the firm’s Frankfurt headquarters, Mr. Björklund defended the industry as a job-creator rather than destroyer. He also said he expects a wave of mergers in coming years in the global financial-technology industry, the so-called “fintech” start-up firms that have been sprouting across the globe and offering new digital financial services in competition with traditional banks.

Mr. Björklund, it’s been 10 years since Franz Münterfering described private equity firms as “locusts” that engulf companies, plunder them and move on. What has changed since then?

I think we are looking at an almost completely different business today. Today we are financial entrepreneurs who look for growth opportunities around the world. Investing strategy starts from identifying interesting long-term growth themes. We look to back market leaders. In this way we are creating employment, economic growth, entrepreneurial role models and aspiration.

Was the “locust debate” justified at the time?

I think that the performance of those investments that were often criticized at that time have actually proven to have been pretty good.  So during the financial crisis there were lots of people that in 2007 and 2008 expected deals to collapse. But that did not happen. The industry proved that with the right ingredients the industry can cook a dish that is perfectly fine. So financially I think the industry delivered perfectly fine, much better than the stock markets.

What about the image of the industry today?

As an industry suddenly we became associated with companies that were flagship companies in many countries where we operated. That has convinced many of the critics. We at Permira do not maybe have the most prominent companies in our portfolio. We are again looking more for the uncut diamonds.

You started under the brand Schroder Ventures 30 years ago. Today you are again doing many smaller deals and many technology deals. Is Permira or the industry going back to its roots?

I wouldn’t say that. I think 30 years ago we were dealing with a very immature industry. We were one of the few people doing it in Europe. You could create fast returns. We did everything from root building, venture capital, carve outs. As long as we did it with discipline and with the right talent, we did well and that produced good results. Today the industry is vastly more competitive, mature and nuanced. We have to pick the spots where we believe we have a competitive edge.

 

217 Permira-WTB 2014 resume

 

Are start-ups from the finance branch an interesting market for you, since you have done many tech deals?

We like fintechs a lot. We have looked at some of these newcomers.

Will we see a quick consolidation and merger wave within the Fintechs branch?

You will see a rapid consolidation amongst the more incumbent platforms coming out. The economies of scale are tremendous. If you look at the markets in the U.S. it is incredibly consolidated. You don’t need 17 companies for comparing loans. You need to have enough to have effective competition.

How many of them will fail?

It’s too early to say, but we know from the software industry that just one or tops three players remained. If you are not backing the market leader you will be in a tough spot. In tech you don’t want to back the guy who came third. At some point you will be acquired from a point of defense or you may be competed out of the market.

Are your valuations too high in fintechs? Or why else have you not invested heavily in FinTechs so far?

Part of it is that valuations are too high and part of the reason we haven’t invested is, sometimes, there are some opportunities that we have not converted.

But that seems to apply to the whole branch. Prices are too high because there is so much money in private equity funds.

Yes, and this will get worse. Let’s be clear on that. You have a confluence of cheap debt money, strong or well-funded private equity players…and to a degree the number of competitors is going up. Twenty years ago people said the competition was so intense that it would ease. But the opposite has happened. The competition in our industry won’t change for the next 20 years. It just is a competitive industry with a lot of ambitious, smart talent.

That will also make things more difficult for Permira…

Our job is not to buy the market and buy the average, which is expensive. It is to be very clear where we should compete and pick the one opportunity out of 100 which is a great fit. .We won’t buy in the cheap because that doesn’t exist in the world today. Our funds will buy at a fair price which clears the market and try to achieve significantly additional value with our ideas.

Are we back at 2007 levels in terms of valuations?

Yes, I think so. Not in terms of leverage. But the prices for high-quality businesses are really very high. And in Germany the valuations are even higher than those in Europe.

What are the biggest risks currently for the private equity sector?

I see three big risks for private equity. The first would be too much capital coming into the industry. That is not yet the case. The available capital of financial investors currently is enough to last for 2.9 years. In 2009 it was 9.2 years. The second risk is a major macro industry dislocation. I don’t think it is very hard to come to the conclusion that the largest single place to look at what could go wrong with the world economy at the moment is in China, simply because of how important China has become for European-based exporters, how important China is as a global consumer and exporter and investor into capital equipment today. And the third risk is that the industry needs to remain humble. We need to remain humble, and we just need to remain focused, disciplined, never ever get carried away and think we can walk on water.

 

Daniel Schäfer, Handelsblatt’s finance section chief, and Peter Köhler, who covers private equity, conducted the interview. To contact the authors: d.schaefer@handelsblatt.com and koehler@handelsblatt.com 

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