European Capital builds a brand

American Capital may have launched its European affiliate, European Capital, on the back of its one-stop buyout shop approach, but the firm aspires to be more than a one-trick pony. By Robert Venes.

Much has been made of European Capital’s one-stop buyout shop approach since it set up operations last summer, not least by the firm itself. Unlike most private equity firms, European Capital can invest equity, senior debt and mezzanine out of a single pool of capital in transactions between €20 million and €150 million.

Simon Henderson, managing director of the London office of European Capital, says that the one-stop approach reduces execution risk and time to closing. He also says it streamlines due diligence.

As we don’t have closed-end funds, we can ask management teams if they would prefer to partner with a firm that needs to sell in three years time as they need to raise more funds, or go with us.

Simon Henderson, managing director, European Capital

Having set up shop as the European arm of Washington, DC-headquartered American Capital last August, with offices in London and Paris, the firm’s first European deals have come in France. Last November saw the group invest €29 million in debt and equity to acquire French sushi maker Marco Polo Foods, followed in February of this year by the purchase of French biking gear business Action Sport.

Henderson says that his UK team expects to make its first acquisition in the second or third quarter of this year. In the meantime, he is building his team, which currently comprises six investment professionals, including himself, and finance director Juan Carlos Morales Cortes, who moved over from the operations team at parent firm American Capital last year.

The one-stop buyout approach isn’t European Capital’s only differentiator, though, as Henderson is keen to emphasize. Through its mezzanine team, headed up by Nathalie Faure Beaulieu, formerly managing director at Mezzanine Management, the firm is able to arrange mezzanine financing for third parties in larger buyouts.

“We have a cut-off point of €150 million for buyouts,” says Henderson, “but Nathalie’s team solely deal with mezzanine investments in deals above €150 million.” Henderson adds that the mezzanine team will ultimately look to get into the business of arranging financing before deals complete.

So far, Faure Beaulieu’s team has provided €19 million in financing for CVC Capital Partners’ €355 million recapitalisation of lighting fixtures company Partners in Lighting International; and €24 million for Exponent Private Equity’s £235 million acquisition of TSL Education, a provider of classified advertising for job vacancies in UK schools, colleges and universities.

The Paris team has completed mezzanine financings for Electra Partners Europe’s acquisition of retail fuel supplier Tokheim and Apax Partners’ buyout of France’s Alma Consulting Group. It has also participated in Permira’s and Kohlberg Kravis Roberts’ acquisition of Luxembourg-based television and radio broadcaster SBS Broadcasting, amongst other deals.

European Capital also has a differentiated approach to fundraising, having already closed its inaugural vehicle with €750 million of equity commitments last October. The publicly-traded American Capital contributed €500 million, with third party institutional investors filling in the balance.

Since then, European Capital has obtained commitments from Wachovia Bank and Harris Nesbitt for a €400 million multi-currency revolving credit facility. To date, European Capital has borrowed €111 million under the facility to repay intercompany debts to American Capital associated with opening its London and Paris arms.

The credit facility gives the firm capital resources of €1.15 billion, although Henderson says that European Capital plans to leverage the fund to at least one to one in order to give firepower of around €1.5 billion.

Henderson: providing liquidity for investors

For management teams, says Henderson, this provides an incentive to work with the firm. “As we don’t have closed-end funds, we can ask management teams if they would prefer to partner with a firm that needs to sell in three years time as they need to raise more funds, or go with us,” he says.

The structure of the business also provides a comfort level for investors, says Henderson. American Capital’s listing on NASDAQ, with a market cap of around $3.5 billion, provides investors with liquidity typical private equity firms don’t have, he says. “Investors can sell shares rather than be locked into a ten-year time horizon as with traditional buyout firms. It also draws down the returns expected by investors because of that liquidity.”

Henderson, who spent three years at PricewaterhouseCoopers before a ten year stint at Barclays Capital, where he was a director, says he has no regrets about joining a brand new business. “Would dealflow be a problem without a recognisable name above the door?” he asks. “We’re seeing good dealflow, so there hasn’t been one single issue so far.”

Indeed, given European Capital’s current pace of investment, having injected a total of approximately €301 million in 15 companies since last August, the issue of recognition does not appear to be a problem.