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Deploying Europe’s biggest buyout fund

“We are seen as French in France, German in Germany, Italian in Italy and as European everywhere,” says Michel Guillet, one of the ten managing partners of BC Partners, a firm that is surely one of the strongest contenders for the title of Europe’s foremost independent private equity house.

Although BC Partners could fairly be described as publicity-shy in comparison with certain of its counterparts, the firm has made headlines several times in recent months. First came the announcement of its agreement to acquire the automotive and industrial components group Mark IV Industries for some $2 billion, a deal ranking as the largest US LBO by a European private equity house to date. This was followed in July by the news that the firm’s seventh LP had raised more than e3.5 billion, a record for a European buyout fund. And, at the beginning of September, BC Partners unveiled the GBP1.3 billion acquisition of General Healthcare Group from Cinven. As well as being possibly the largest acquisition by a private equity house from another financial sponsor yet seen in the UK, General Healthcare was a deal with a history in that, five years ago, Cinven had pipped BC Partners to the post in the auction for Generale de Sante, the UK component of which formed the core of what is now General Healthcare Group.

BC Partners expects to complete between ten and 20 deals over the next three to four years through its new fund, which theoretically gives the firm the firepower to undertake a e4 billion acquisition, so plenty more headlines are in prospect as the firm builds on its leading position throughout Western Europe’s private equity markets.

Reflecting both the increase in funds under management and a steadily growing portfolio, BC Partners is currently in the process of expanding its pan-European team. But, very understandably in view of the success it has enjoyed to date, the firm is determined to make no fundamental changes to the structure and modus operandi that have served it so well up to now.

BC Partners’ development throughout has been characterised by gradual organic development, with only one major change event in its 14-year history (that, of course, was the firm’s transition from semi-captive to independent status in 1995, a move that was forced by external circumstance rather than any internal strategic impetus).

But a high degree of continuity is only one of several factors that differentiate BC Partners from other players in the European buyout arena.

Foremost among these is the integrated approach that BC Partners has adopted since inception, operating as a single executive team with a single set of funds across its target region hence Michel Guillet’s opening observation. BC Partners, which comprises ten managing partners and a further 20 investment professionals, currently operates out of offices in Paris, Milan, Hamburg and London.

John Burgess, a managing partner in the London office, emphasises that the firm has been unique since its inception in 1986 as a joint venture between Baring Brothers and individual members of the team.

In 1984, Barings had entered the venture capital arena via Baring Brothers Hambrecht & Quist, which has since evolved into Baring Venture Partners, in partnership with the late Dick Onians. The bank, John Burgess says, felt it would also be a good idea to establish a presence in the buyout market. Otto van der Wyck, who had previously established a European business for Citicorp Venture Capital, was recruited to set up and run a buyout operation for Barings. John Burgess joined him from Candover, the US and UK buyout house, a month later.

The pair, Burgess says, shared a common vision: that building a European, rather than UK-centric, business from the outset was the best course to take. And, although Barings had initially envisaged tackling the UK buyout market before looking further afield, it eventually proved happy to go along with their original idea and pursue a strategy that was unique in the then nascent European private equity arena. While other groups most notably Citicorp, van der Wyck’s former employer had continental European ambitions, they operated a head office with satellite operations, with teams incentivised locally. BC Partners Baring Capital Investors as it then was from the outset was conceived on a model of a single company with a single partnership operating throughout Europe and incentivised on a cross-firm basis.

Burgess and van der Wyck spent the period between October 1986 and August 1987 fund raising, amassing an ECU61 million vehicle. Towards the end of that process, they added Michel Guillet, who previously headed the commercial refrigeration division of Thomson SA, plus a German partner who is no longer with the group. The small core team then in place was augmented when Patrice Hoppenot, formerly CEO of food distribution group Geladour, joined in early 1988 and again in 1989 when Baring Capital Investors added an Italian team in the shape of Alberto Tazartes and Francesco Loredan, both Boston Consulting Group alumni. 1988 and 1989 also saw the closing of the group’s second and third LPs, totalling ECU102 million. (It is indicative of BC Partners’ pan-European perspective that its funds have all been denominated first in ECUs and now in euros).

During its first couple of years of full operation, Baring Capital Investors began to establish a reputation for landmark’ deals: its 1987 acquisition of Allevard was the largest industrial LBO seen in France up to that time, while its Bricom buyout, in the following year, was the UK’s second largest LBO to date. Such deals were early indications of a pattern that has persisted to the present day: 1992’s buyout of Neopost was the largest continental LBO of the year; two years later, Nutreco ranked as 1994’s largest European buyout; and Elis, which completed in 1997, headed the list of continental buyouts for that year. Over the years, numerous other BC Partners-led transactions, including Brembo, Interpump, Techem, Cantrell & Cochrane and Friedrich Grohe, have had the distinction of being, at the time, either the largest deals of the year or the largest deals to date in their respective national markets.

Despite its original joint-venture status, Baring Capital Investors enjoyed complete autonomy: Barings was not involved in investment decisions in any way, although the private equity group nurtured a close relationship with the bank. “The bank’s name was extremely valuable to us and of course we kept them well informed, not least because we respected the fact that they let us do what we needed to build the business,” recalls John Burgess.

Having always functioned as if it were an independent, the operational impact of BC Partners’ move to genuinely independent status after Nick Leeson’s unusual trading methods brought about the collapse of Baring Brothers, was minimal. Interestingly, given the trend for formerly captive or semi-captive private equity operations to go independent, had the Leeson debacle not happened, BC Partners might well still be within the Barings fold, according to John Burgess, who says: “We would not necessarily have taken the initiative to separate off”. As things were, however, going fully independent was the only way for the firm to ensure that its prized autonomy would be preserved. As one man, however, the firm’s managing partners stress that their decision to split from the bank in no way reflects negatively on ING, Barings’ eventual acquiror, having been taken when there was still considerable uncertainty as to who the bank’s new owner might be.

BC Partners raised ECU144 million for its fourth fund in 1991. Its fifth vehicle, three years later, represented a step change, weighing in ECU450 million, more than three times the size of its predecessor. The 1997-vintage BCEC VI, which topped the ECU1 billion mark, has also been surpassed by a factor of three by BC Partners’ most recent fund. This dramatic growth in funds raised reflects both the accelerating pace of industrial restructuring throughout continental Europe and BC Partners’ historic performance. The firm declines to specify the returns it has generated but its latest fund-raising exercise speaks for itself: around 65 per cent of BCEC VII was raised from participants in previous funds, with 95 per cent of investors in the sixth fund, in value terms, recommitting to the successor vehicle. BCEC VII took just six months to raise and was heavily oversubscribed.

Since inception, BC Partners has notched up a tally of deals in the high forties with an aggregate transaction value in excess of e16 billion, typically completing three or four transactions per annum across the group a smaller spread, therefore, than certain other large European buyout businesses. Aside from the essentials of a good competitive position, potential for growth and good defensive characteristics, the BC Partners portfolio is strongly diverse, covering a wide range of industry sectors. The firm invariably invests in support of incumbent management, and has backed divestments, family succession deals, privatisations, public-to-privates and consolidation plays. It is perhaps indicative of BC

Partners’ attitude towards the management teams it backs deals are very much seen as joint ventures with management that the managing partners are unwilling to single out any individual transactions as being typical of the firm’s approach. “Each is different, and by definition, the firm believes each to be excellent”, observes Michel Guillet, adding that BC Partners is in the enviable position of having no failures within its current portfolio. Guillet is slightly more forthcoming regarding exited transactions, pointing to SEAT, Techem Interpump, Elior and Neopost as investments that have been exited at particularly satisfactory multiples, and also mentioning Hall du Papier Peint, an earlier deal that he describes as small, but highly profitable’.

Alberto Tazartes emphasises the degree to which BC Partners aligns its interests with those of management, and the importance of a shared vision: “We also align our philosophies sometimes it’s hard to tell where the board stops and management starts. We never forget that value really comes from the work of the management teams over the years”.

BC Partners has succeeded in acquiring some very substantial business from family vendors, such as Friedrich Grohe in Germany, Elis in France and Interpump in Italy, Michel Guillet suggests that the firm’s track record in this area is partly attributable to the fact that its executives are seen as nationals in the various markets. “It is also an advantage,” says Guillet, “to be local when dealing with complex situations”.

“In dealing with vendors, particularly family ones, BC Partners’ strength is to know what is high on the list in terms of issues,” explains Alberto Tazartes. “Companies are not commodities not a number, a price or a multiple but special and unique, and there are also emotional issues that have to be addressed. It is never a 100 per cent rational process, especially when one is dealing with the entrepreneurial mindset. So, when we package a solution, it’s not just a number either, but something that takes all of those issues into account. And, while no entrepreneur would let a company go cheaply on that account, once a certain price level has been reached, then these less tangible factors come into play”. This is borne out by BC Partners’ success with Grohe, where it was not the highest bidder, and Michel Guillet says the firm has had similar experiences with a number of French deals.

Several of the larger European buyout players are active proponents of the buy and build’ model. By contrast, BC Partners does not pitch platform strategies, as Alberto Tazartes explains. “It’s not something we make a standard feature because of the element of integration risk, but it is something that might develop after the initial acquisition has been done. When investments have lived up to expectations, opportunities have arisen to generate value and growth through making acquisitions, but we have never done platform deals to grow from one to five in terms of size they have been more like a move from five to seven”.

A number of buyout players have recently launched technology-focused funds. BC Partners has no intention of following the herd in this respect. However, the firm is an active and successful participant in the new economy’ through old economy’ investees that have responded successfully to the challenges of e-commerce. Michel Guillet points to SEAT, which has developed a huge e-business element’ and Autotrader, which ranks as the ninth most frequently visited net site in the UK.

Because BC Partners operates as a single team, the entire firm has always been involved in investment decisions, something that has been a significant factor in differentiating the firm from its competitors. The managing partner group at BC Partners have worked together for an average of ten years, and the firm’s four country teams have long experience bases and are, John Burgess stresses, fully-fledged offices, not satellites, capable of sourcing, making and managing transactions. “There are very few firms with the same depth of experience in Germany, France, and Italy,” says Burgess, “and with a comparable track record in larger investments. Most other firms have done smaller deals in these markets and their leadership tends to be vested in London”.

“Everyone talks about being European,” Michel Guillet observes: “All our colleagues in the buyout business claim to be, because they may have opened a couple of offices on the other side of the channel but those offices invariably report to individuals in London or the US, which is a fundamentally different structure from ours. Some may now be moving to our way of thinking, but it may be hard for them to make the full transition to this model if they are not used to working as a single team”.

The advantages, particularly in the case of multi-jurisdictional deals, of bringing different angles and perspectives to bear rather than approaching the transaction from a single cultural viewpoint, are self-evident. Michel Guillet cites the fact that BC Partners often works in multi-office teams as one of the attractions of working with the firm for instance, the Mark IV transaction, which completed in mid-September, involved executives from the Milan, Paris and London offices.

Although Mark IV was a deal struck with a US vendor, it would be misleading to view it as a US deal, since some 60 per cent of the business is based in Europe. Says Michel Guillet: “Mark IV was simply the first deal where the acquisition happened to be in the US. There will be others, but they won’t be pure US businesses”.

And BC Partners is adamant that it has no current intention of broadening its focus beyond Europe, in part because, according to Michel Guillet, the integration of a US team would present challenges to the structure and spirit of the organisation. The firm has no active deal sourcing presence in the US although it does have an investor relations presence in New York and has no plans to create one.

So, the huge recent boost in funds under management does not mark any transition outside BC Partners’ historic target markets in Western Europe.

The firm is, however, expanding its executive team across all its offices. Managing partner Andre Francois-Poncet joined the Paris office from Morgan Stanley Dean Witter this summer and five more executives has been added at the Hamburg, Milan and London offices so far this year, while the recruitment of a further seven is in progress. The new hires will include Benelux and Scandinavian nationals to enhance the group’s capabilities in those markets. BC Partners will also be adding individuals with experience of the telecoms sector, one arena where the firm is aiming to increase its presence.

Given the strong core that exists in each of its country offices, there is little danger as yet that BC Partners will grow too large to operate as a single entity. “Each office and the group itself remains a cohesive and manageable unit”, says John Burgess. However, to cope with its increasing size, BC Partners has slightly modified its decision-making process. Now, instead of involving the entire firm, investment decisions are now made by a committee comprising the ten managing partners plus all the individuals working on a given transaction.

Discussing the firm’s growth, Alberto Tazartes points out: “We are a small firm and are making a conscious effort to grow in closely ordinated steps. We are taking on more local expertise to address the Benelux and Scandinavian markets within our existing framework. That doesn’t mean we won’t add offices at a later date if the opportunity warrants it. The markets are always evolving and in all the markets where we look at transactions, the underlying trend is one of an increasing demand for capital”.

Capital is something with which BC Partners is well supplied at present and that capital will be deployed, as previous funds have been, in businesses in Europe.

“BC Partners”, says Michel Guillet, “is of global size, but it is nevertheless a European business. This will not prevent us buying companies in different parts of the world but they will always be companies with a European core business”.