Nearly five years on from the start of the financial crisis still engulfing Europe, today’s companies require stronger support from investors than ever before. To an even greater extent than in periods of growth, manufacturers and service firms alike are in need of assistance, points of reference, and experienced guidance to open up new horizons. Genuine opportunities to develop business, expand market share, and embark on new frontiers often arise during periods of recession.
It is no longer enough for companies to excel on a national level alone, whether they are British, French or German. In spite of what some commentators have argued, the European economy still exists and will not disappear. The current brutal and enduring crisis calls for all European companies to enter a new phase of consolidation. Today’s French industrialists have every reason to take control of their Italian, Spanish, and even German, competitors. British and German companies will clearly want to do the same. Any firm that hesitates runs the risk of being swallowed up by one of its national competitors or a foreign, American or Asian player interested in notching up a high-value technological or strategic advantage.
It is about being stronger in the European market so as to be better equipped to seize growth opportunities in more distant markets. And this is the ambition that private equity funds must support, through capital financing but also by way of debt instruments. At a time when non-resident investors have less confidence in Europe, when national banks are burdened by extreme, not to say extremist, regulations (Basel III, Solvency II), European manufacturers and service firms need new resources to spread their wings. Listed companies have access to bond markets under excellent conditions. But what about the others? The resulting market imbalance is a clarion call for action. Private equity funds like Idinvest must fulfill this role as knowledgeable investors.
Senior loans are an excellent tool to support companies’ external growth strategies, and this type of instrument is perfectly suited to the current economic climate. The conditions for investment in the secondary market are exceptionally favorable. Despite the crisis, businesses supported by private equity funds are less indebted now than in the heyday of 2007 and are managed by high-quality teams. At the same time, local investors, including insurers and pension funds, vicariously linked to their local SME markets, have their own role to play. Lastly, there is an incredibly rich pool of innovative and well-managed companies, supported by professional shareholders. It is vital to provide these companies with adequate resources, whether debt or capital financing, to pursue growth.
This is especially the case as unlisted debt instruments offer attractive yields, better than those offered by listed debt securities, and in a well-controlled risk environment. The last fifteen years have shown the exceptional performance of companies backed by private equity, compared with their listed counterparts. The ten years to come will serve to demonstrate the exceptional performance of unlisted debt securities.
Christophe Bavière is chief executive of Idinvest Partners.