In September last year
The HIG European team consists of approximately 40 investment professionals in our London, Hamburg and Paris offices, which has made one investment since the fund closing, buying a stake in Europa Facility Holdings, a UK facilities management company, in a £25m deal.
EVCJ talks to Paul Canning, a managing director of the UK team, about why the firm has decided to cross the Atlantic, how it plans to build a European presence, and just how worried it is about the credit crunch and other firms competing in the smaller end of the mid-market.
Why has H.I.G. Capital come to Europe?
We believe there are a significant number of small to medium cap companies in Europe looking for an experienced partner to tackle the challenges they face, be they operational or financial, or to fully capitalise on opportunities available to them. We believe this experience is currently lacking in the European lower middle market. By opening offices in London, Paris and Hamburg, we can now access these companies directly.
A number of our most successful investments to date have been in Europe or have had a significant European component and we felt confident to make a more permanent move into the market. We currently have a European investment team of 40 people.
What is H.I.G.’s investment strategy in Europe?
We believe in building relationships with companies over a long period of time, allowing us to identify opportunities where we can make a difference and often developing value adding strategies ahead of any investment being completed. We also employ introductory techniques such as cold calling. We focus on providing in house operating skills to meaningfully add value to our portfolio companies where required. Our investment team in Europe now stands at 40 professionals with a broad skill set from operations, consulting and financial backgrounds.
Successful European investments to date include Diam Europe, a leading French manufacturer of high end display fixtures which was acquired from its parent company in March 2007. Most recently, in February 2008, we announced our acquisition of an ownership stake in Europa Facility Holdings, a fast growing facilities management company, which marked our first investment in the UK market since H.I.G. Europe closed its dedicated €600m fund in July 2007.
Last year H.I.G. closed a €600m fund – considering it was your first European fund, what were the challenges you faced in raising it?
We were extremely pleased with the interest and response shown by investors in the fund and that confidence demonstrated by them enabled us to raise the fund in a relatively straightforward manner. Although this was the first official European fund that we had closed, H.I.G. has completed a number of successful investments which have had a significant European component to them through subsidiary businesses etc. Many investors in the European fund genuinely recognised the value-add proposition that H.I.G. can offer through the breadth of our expertise at a lower and mid-market level. Our proven track record established during the past fifteen years brought both existing and new European investors to the table who have put their faith in our ability to replicate H.I.G.’s flexible, value add model.
One of the greater challenges was to give investors a feel for the quality of ‘local’ executives leading the investment team in Europe. A number of us including myself and Matthias Allgaier (UK), Patrick Caron (France) and Wolfgang Biedermann (Germany) had joined H.I.G. prior to the fund being raised which helped to give traction. Sami Mnaymneh (co -founding partner of H.I.G.) had also committed to permanently relocate to Europe to help establish the H.I.G. European operation and this gave the investors (as well as ourselves, the new recruits) great confidence in the commitment to making
What do you look for in a potential portfolio company? And how many investments have you made so far?
Since its founding in 1993, H.I.G. has completed more than 100 transactions and currently manages a portfolio of more than 50 companies with combined revenues in excess of US$7bn.
There are a number of features that we look for in a potential portfolio company. These include:
• Small and medium-sized companies with high-quality, value-added products and services, and attractive growth potential
• Wide range of investment opportunities, from growth / development capital for minority stakes to control buyouts
• We are equally likely to invest in profitable market leaders as underperforming / turnaround businesses
• Proven and committed management teams, who take substantial equity positions in their companies, to help build businesses
• We are particularly interested in transactions with a Pan-European profile, where we can utilise our cross-border experience, both within Europe and between Europe and the US
What do you think will be the main consequences of the credit crunch on European private equity?
As we have seen in the US, we believe that the current credit conditions will lead to fewer mainstream opportunities. However, we believe that there will still be many opportunities for those institutions with a flexible funding model. In anticipation of more activity in the distressed/stressed situations, we have recently closed an additional global distressed fund. This will allow us, if required, to invest larger pools of capital into these situations.
How will your firm be affected by the economic downturn?
We believe that our firm can cater for investing in an economic downturn (being able to invest in underperforming/ stressed as well as high growth businesses). We have the ability to move very quickly, and can structure creative solutions to meet a wide range of needs which should be very appealing to companies facing financial challenges in the current market.
There’s a school of thought that believes mid-market private equity houses won’t be as affected by the credit crunch as the bigger LBO players. Do you believe this? Why?
Lack of liquidity is an issue that we have also seen affecting the lower and mid market during the past 12 months. Less available (and more expensive) traditional forms of capital to mid cap businesses has, and will continue, to have an impact on their ability to fund growth.
Mainstream forms of capital should still be available for the very best businesses but it will be increasingly difficult for less “polished” businesses to attract funding. Our job at H.I.G. is to identify these businesses and to help them develop and professionalise (where required using our own in-house operational skills). We will still look to commit capital when we believe that the business can develop into a “best in class” in its sector.
Are you concerned about the large LBO firms coming down into your space, or VCs coming up, such as Index Ventures who recently raised a growth fund?
Some players in the market may well be concerned about this but we aren’t. Much depends on how you differentiate yourself from the competition and having the appropriate ‘toolkit’ in the current market to help smaller businesses deal with many of the growth issues they face.
Bringing it back to basics, we are in effect trying to help these businesses professionalise as they mature which can be a rocky road. Having a flexible and nimble funding model that allows you to pick up on both growth opportunities and help distressed companies, through genuinely adding value, immediately opens up the deal flow pool.
Integral to this is possessing a broad skill base (operational, strategic and financial) within the investor team as well as genuine “in house” cross border experience enabling us to deal with the complex issues that arise as well as helping a company look outside the UK and move into new markets.
What is your focus for the year ahead?
We will continue to work hard at getting across our key messages to the lower and mid-cap market place in Europe (i.e., flexible approach to investment/ability to deliver capital in a range of situations/in-house value-add operational experience). With a current European investment team of 40 professionals we now have the right resource to move quickly as and when opportunities arise. The recently raised Bayside global fund will allow H.I.G. in Europe to extend its investment approach to larger, distressed situations when required. We will deploy the fund on a global basis and will target distressed opportunities as well as those which may be facing a liquidity crunch.
H.I.G. Capital is one of the most active investors in management-led buyouts of lower middle market companies in the United States and Europe. It specialises in providing capital to small and medium-sized companies (with an enterprise value of below €150m or £100m) with high-quality, value-added products and services, and attractive growth potential.
It is an affiliate of H.I.G. Capital, which claims to be the largest and most active private equity firm focused exclusively on the small to medium cap segment of the market with over 150 investment professionals worldwide. Since its founding in 1993, H.I.G. has completed more than 100 transactions and currently manages a portfolio of more than 50 companies with combined revenues in excess of US$7bn.
It has offices in the US (Miami, Atlanta, Boston and San Francisco), and Europe (London, Paris and Hamburg). It works closely with portfolio companies and provides capital, operating and strategic expertise, and a network of strategic industry contacts to help them become industry leaders.
The firm is an active investor in private equity/LBO’s, venture capital through its H.I.G. Ventures affiliate, and publicly traded equities through its Brightpoint Capital affiliate.
Paul Canning is a managing director in the UK office. Prior to H.I.G. he was a partner at Gresham Private Equity, the UK small cap buyout where he led a number of successful investments across a number of industries since joining the firm in 1997.
Prior to that, he worked closely with UK small cap companies whilst in the specialised leverage team at Royal Bank of Scotland and previously with KPMG in Scotland.