Back to the future

In a sparse deal landscape, a return to growth equity is on the cards

At a time when GPs and LPs alike are looking at the private equity business model and wondering where returns will come from, the answer could well be found in a return to private equity's grass roots, argues a recent paper from London-based placement agent Acanthus Advisors and French growth equity firm Nextstage.

“Despite the billions poured into European banking systems, banks have yet to fully open their doors to smaller companies looking for financing,” says the paper, adding that the liquidity squeeze has opened a door of opportunity for growth equity players.

As growth equity tends to be accompanied by little or no leverage, it has shown resilience to the challenges offered up by the credit crunch, says the report: “Today the buyout segment is experiencing its own limits, whereas growth equity is re-emerging as the attractive alternative.”

Looking at growth equity in France in particular, the study points to respectable performance figures even during the buyout heyday. During the ten-year period to 2007, the growth equity segment delivered a net internal rate of return of 18.5 percent. This compares to 20.8 percent in the buyout segment, according to data attributed to the French Venture Capital Association (AFIC).

Businesses such as UK clothing retailer Fat Face, British organic food delivery company Abel & Cole, Spanish hygiene product company Jofel and Swedish clothing brand Gant have all been the recipients of growth equity investment.

Acanthus and Nextstage argue that while growth equity is set for a revival, “it never left the private equity scene, but rather veered off the radar in the height of the ‘mega’ leveraged financing era of 2003 to 2007 – when valuations of 8x EBITDA or higher were common”.

Small companies, argues the paper, historically lead the charge during times of economic recovery, citing as an example the years following the bear market of the mid-1970s and the period following the 1930s Great Depression.

There is a case to be made for growth equity, but it's by no means a sure bet. Smaller companies can often show rapid growth. They can also disappear.

Italian growth investor Abacus Partners is preparing to raise up to €100 million for its second fund, as it seeks to take advantage of increased investor appetite for smaller, growth-orientated funds. The fund will make between seven and 10 investments in Italian businesses of between €3 million and €7 million equity each.

Plastal, a European supplier of plastic interiors to the automotive sector, has filed for bankruptcy after what the company describes as an “unprecedented downturn” in the automotive industry. The company, which has been owned by Nordic Capital's fifth buyout fund since February 2005, reported “a sharp decline in volumes during the fourth quarter 2008, followed by a further 40 percent drop in the first two months of 2009”.

SVG Capital, the London-listed investor in buyout firm Permira's funds, has valued its stakes in three Permira portfolio companies as worthless. German television operator ProsiebenSat.1, UK gaming business Gala Coral and Hungarian chemical producer BorsodChem are all being held at zero under mark-to-market accounting practices. The portfolio companies' valuations have been affected by a combination of falling comparable public multiples and softening earnings, said Lynn Fordham, SVG finance director, in an interview.

UK firm Octopus Investments has moved into providing finance for small- and medium-sized businesses (SMEs), alongside its traditional venture capital operations. Since the onset of the credit crisis, SMEs have found it increasingly difficult to access credit from their normal providers, many of whom have scaled back their lending or disappeared altogether.

Private equity firm Warburg Pincus has paid £64 million (€70 million; $89 million) for a 10.3 percent stake in publicly traded UK food conglomerate Premier Foods to acquire nearly 246 million of the 1.5 billion shares being offered in a rights issue. Premier, which hoped to raise approximately £404 million in proceeds from the sale of shares, has been struggling under a reported £1.7 billion debt mound used to take over Campbell's Soup for £450 million and RHM for £1.2 billion in 2006.

A consortium of private investors led by Apax Partners and Barclays Capital has completed the £1.6 billion (€1.8 billion; $2.2 billion) sale of supermarket giant Somerfield six months after its acquisition by the supermarket chain Co-operative Group was first announced. “The Somerfield sale process was delayed during the last six months due to the difficulties faced by the retail sector. This is because the parties involved in the process had their own problems to deal with,” a source familiar with the situation said. Somerfield, the sixth-largest grocery retailer in the UK, was acquired by Apax, Barclays, the Tchenguiz Family Trust, Kaupthing Bank and management for £1.8 billion in 2005.