Connections matter. Neil Sneddon

Transcription

1 CM18008 UK Connections matter For professional investors only Neil Sneddon BMO Global Asset Management (EMEA) Private Equity Establishing and utilising strong connections for our clients benefit

2 Investment risks The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. 2

3 Agenda Section I Section II Section III Section IV Section V Section VI Private equity a brief intro Private equity where to focus? Why connections matter in private equity investment Summary Q&A Disclaimer and contacts 3

4 Private equity a brief intro 4

5 Rising scale of private equity Assets under management (USD billion) ,000 2,500 2,000 1,500 1, Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Source: Preqin Global Private Equity & Venture Capital Report

6 Average target allocation to private equity By investor type (as a proportion of AUM) 2013 vs Family Office Sovereign Wealth Fund Endowment Plan Foundation Public Pension Fund Private Sector Pension Fund Superannuation Scheme Insurance Company Source: Preqin Global Private Equity & Venture Capital Report AUM = Assets Under Management. 6

7 Private equity investment routes and levels of risk Private equity offers a spectrum of investment choices Increasing risk Fund of Funds Value added Fund of Funds Portfolio of Co-Investments sourced through Fund of Funds Portfolio of Co-Investments sourced through Primary Fund Primary Fund Single Co- Investment sourced through Fund of Funds Single Co- Investment sourced through Primary Fund Direct Investment in Trading Company Buyouts Growth Capital Venture Capital 7

8 Why private equity? What distinguishes private equity from other investment asset classes Close alignment of interests between investors and management Ability of investors to add value to the investee companies Time private equity is a long term asset class The investors are frequently in control Private equity benefits from market inefficiencies 8

9 European private equity vs the stock market Buyout performance relative to the PME IRR (%) year 5 years 10 years 20 years European Buyouts MSCI Europe Past performance is not an indication of future performance. Source: 1 Bain & Company Global Private Equity Report 2018 (as of June 2017, released February 2018), Cambridge Associates, Europe. PME is MSCI Europe. IRR = Internal Rate of Return, PME = Public Market Equivalent. Private equity shown to consistently outperform public markets over short, medium and long-term 9

10 Private equity where to focus? 10

11 Numerous funds, so many choices Number of PE funds in market and how much capital they are seeking* 3,729 private equity funds SEEKING > USD 831bn Source: Preqin Private Equity & Venture Capital Spotlight, September *As at August PE = Private Equity. 11

12 Possible routes to private equity investment Value added fund of funds Secondaries fund > Primary fund > > Climate change themed fund of funds > Private equity > Segregated mandate > > Listed private equity fund > Coinvestment fund Fund of listed private equity 12

13 The different types of private equity investment PE investment types Primary funds Secondaries Co-investments Investments in underlying private equity partnerships and their portfolio companies Provides exposure to often difficultto-access funds Allows for tactical construction of diversified exposure to private markets Challenges: significant capital, manager selection capabilities required for portfolio construction Buying and selling of existing private equity fund investments Allows for the acquisition of established funds and underlying assets, often at a discount to current value Mitigates blind pool risk Provides more rapid deployment/return of capital Route to lower all-in fee Challenges: significant deal sourcing and underwriting capabilities required Direct investments into private equitybacked portfolio companies More control over selection of investments and potential for enhanced returns Route to lower all-in fee Challenges: access to quality deal flow requires strong relationships with underlying managers plus a proven ability to execute deals in a timely and professional fashion 13

14 Target returns Different types of PE investment will deliver different types of returns Indicative investment return levels 10% IRR 15% 20% 25%+ IRR Primary Funds Buyout Venture/Growth Capital Secondaries Co-investments 10% IRR 15% 20% 25%+ IRR Source: BMO Global Asset Management Asset Management. For illustrative purposes only. PE = Private Equity. IRR = Internal Rate of Return. 14

15 ESG The new norm BMO PE aims to proactively fulfil its duties* by: Engaging with private equity managers Encouraging managers to implement formal ESG policies Spreading best practice Increasing focus on transparency Producing an annual ESG Engagement and Disclosure Report *BMO Global Asset Management is a UNPRI founder signatory Source: BMO Global Asset Management Asset Management (EMEA) ESG Engagement and Disclosure Report UNPRI = United Nations-backed Principles for Responsible Investment. PE = Private Equity. ESG = Environmental, Social and Governance. 15

16 Why connections matter in private equity investment 16

17 Established investment process (Primaries & Co-investments) Primaries due diligence Research Evaluation Decision Implementation Portfolio Monitoring Number of Funds 200+ Proactive origination Market mapping Manager meetings Country visits Track records Teams Investee Co s Replicability Exit Experience Process ESG Focus key issues Resolve issues Go/no Go Size? Legals Structure Terms Commitment Funds drawn down Investments made Number of Investments Pre-Selection & Diligence by GPs Co-investment Sector/subsector SWOT Valuation Structure Exit strategy Due diligence Review Resolve issues Co-Investment Due Diligence Management meeting Site visit Legals Investment made ESG = Environmental, Social and Governance. GPs = General Partners. SWOT = Strengths Weaknesses Opportunities Threats analysis. 17

18 Prime managers emphasis Capability + motivation = reward Defined as experienced and motivated private equity managers raising first, second or third fund Many investors will not back first time funds but BMO PE is undeterred by additional diligence requirements and applies investment judgement and experience rather than box ticking Highly motivated to succeed Good source of co-investment deal flow Privileged relationship and access to future funds and co-investment opportunities The majority of BMO PE team investments are with prime managers PE = Private Equity. Focus on/invest with managers at this point in their career 18

19 Supporting data for prime manager emphasis Private equity median net IRRs by vintage year Past performance is not an indication of future performance. Source: Preqin Global Private Equity & Venture Capital Report IRR = Internal Rate of Return. 19

20 Sensible leverage levels and value creation are evident in lower mid-market Debt/EBITDA (x) at entry 1, US Private Equity European Private Equity 2.7 BMO PE Coinvestments Value creation drivers 3 EBITDA Growth 3 100% 50% 0% 55% EBITDA growth 30% Multiple Expansion 12% 3% Leverage Effect Running Yield 100% Total 66% 13% 21% Lower mid-market deals historically use less debt, and while debt is readily available, debt usage by buyout funds in this space remains controlled The criticism that private equity firms are highly dependent on financial engineering and market timing to deliver success generally does not apply to the lower mid-market Partnering with managers who take a conservative approach to leverage may reduce portfolio volatility and lower risk levels, delivering smoother long-term returns The above return attribution analysis shows that lower mid-market private equity firms rely, to a large extent, on EBITDA growth to generate returns versus leverage and complex debt structures, which we believe makes it an attractive segment of the market Margin improvement Acquisition led growth Organic revenue growth The strong-performing managers in the lower mid-market are greatly skilled at creating value through the elimination of operating inefficiencies, introducing strategic relationships, professionalising management teams and by adding additional revenue streams throughout their holding period Past performance is not an indication of future performance. Earnings growth Operational improvement Value creation Source: 1 Duff & Phelps Capital Markets Industry Insights, Spring 2018 (middle market total leverage as at Q1 2018) 2 Weighted average net debt/ebitda at entry for all co-investments as at 30 June 2018, 3 F&C Private Equity Trust plc as at 31 December BMO PE Co-investments = All co-investments made by BMO PE on behalf of clients since 2003 as at 30 June EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortisation. PE = Private Equity. 20

21 Co-investments Target 25% Net IRR delivered 27.8% Well known and respected co-investor over 60 co-investments by the BMO PE since 2003 Significant equity stakes taken (typically >5% ownership by BMO PE managed investment vehicles and control by underlying GP) Corporate governance on deal by deal basis (board seat, observer or management information rights) Diversified portfolio of co-investments by GP, sector and geography Strong quality deal flow, reflecting funding constraints Enhancing the potential to make improved returns through Highly selective co-investments made already pre-selected by GPs from hundreds / thousands of opportunities Preferential economics no or reduced management fees and carry Virtuous circle co-investment alongside GPs provides in-depth knowledge of their strengths and weaknesses, while facilitating formation of strong relationships and further access to deals IRR delivered figure is aggregate portfolio level performance in GBP since inception (25.3% (EUR), 32.4% (USD), 30.4% (CAD), 22.3% (CHF). IRR = Internal Rate of Return. PE= Private Equity. GP = General Partner. Source: BMO Global Asset Management Asset Management (EMEA) as at 30 June 2018, unless otherwise stated. 21

22 Case study services Lead manager, Agilitas, well known to BMO PE Dec 2014 commitment, with sale in Jul 2016 Sold to larger Pan-European PE group, Ardian Net return 2.8x cost and 90% IRR (GBP 2.9x/97%) Acquired well, entry price low for sector Investment strategy: organic growth; management strengthened; loss-making (China) operations mothballed; numerous add-on acquisitions assessed (several at advanced stages) Attracted early trade interest, which broadened into significant financial buyer interest too EBITDA growth (December 2014 July 2016) m Ionisos is 3rd largest Pan-European provider of cold sterilisation Entry EBITDA Revenue Growth Margin Improvement Exit EBITDA* Past performance is not an indication of future performance. Source: Agilitas as at 31 December *Pro forma run-rate. EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortisation. PE = Private Equity. IRR = Internal Rate of Return. This does not constitute a recommendation to buy or sell any particular security. 22

23 Summary 23

24 In conclusion Private Equity is an asset class that: Is an important and growing asset class Offers the potential for strong returns over the long term Has inherent risks, to varying degrees depending on how it is accessed Relies on connections to facilitate informed access Should be considered seriously by all types of investors 24

25 Questions & Answers 25

26 Disclaimer & Contacts 26

27 Disclaimer Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time. F&C Group Companies may from time to time deal in investments mentioned herein on behalf of their clients. The source of information in all graphs is F&C unless otherwise stated. F&C Management Limited is a member of the F&C Group. The F&C Group is wholly owned by BMO Global Asset Management (Europe) Limited, which is itself a wholly owned subsidiary of the Bank of Montreal BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited and F&C Investment Business Limited, which are authorised and regulated by the Financial Conduct Authority. BMO (M-bar roundel symbol) is a registered trademark of Bank of Montreal, used under licence. All data as at 30 June 2018, unless otherwise stated.

28 Your contacts Hamish Mair Managing Director and Head of Private Equity Tel: +44 (0) Stuart Hastie Director, Private Equity Tel: +44 (0) Neil Sneddon Director, Private Equity Tel: +44 (0) equity 28

29 Contact us BMO Global Asset Management (EMEA) Head Office Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) BMO Global Asset Management Edinburgh 6th Floor, Quartermile4, 7a Nightingale Way, Edinburgh EH3 9EG Tel: +46 (0) Calls may be recorded bmogam.com Extensive worldwide investment capabilities Total focus on clients Comprehensive range of products and solutions Defined expertise including a suite of specialist investment boutiques 2018 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority.