PE Ecosystem - PAI Partners [PDF]

Zitiervorschau

Leopold Tikvic HEC Paris MIF

PAI Partners (“PAI”) is a leading French general partner (“GP”) managing European-focused funds with assets under management of €12bn as of April 2018. PAI’s funds specialize in investing in company buyouts in the upper mid-market segment in five core sectors in Western Europe.

Key data, as of April 2018 AuM Capital invested since inception Employees

€12 bn Capital raised since inception €12 bn Funds raised since inception 60 CEO: Michel Paris

€16 bn 6

Long heritage and positon as a pioneer in the European private equity market PAI Partners came about in 2001 through a spin-out and management buyout of the principal investing arm of former Paribas bank. Its long private equity investing heritage can be traced down to the early 1990s when PAI was a Paribas principal investing division, making equity investments for the bank’s own account and One of the oldest and most managing its equity portfolio. PAI later became one of the experienced private equity pioneers of the buyout market in Europe, raising its first thirdinvestors in Europe. party fund in 1998, when the European buyout market was still in its infancy.

Focused investment strategy For the last 20 years, PAI has been consistently following only one, single investment strategy. It is investing in controlling stakes in leveraged buyouts of European upper middle-market companies at attractive valuations, when it has a clear plan of transforming the company and its market position. It focuses exclusively on five core sectors of expertise (business PAI pursues an investment services, food & consumer goods, general industrials, healthcare and retail & distribution) where it can leverage its strategy centered on driving experience, reputation and networks. PAI is primarily transformation through targeting equity investments in the range of €100 million to investment, international €400 million in companies with enterprise values between consolidation and strategic €300 million and €1.5 billion. PAI is a buy-and-build specialist partnerships to build premium focused on helping European companies transform their assets for strategic acquirers. businesses through M&A (e.g. transforming Froneri, previously known as R&R ice-cream into a global player through a joint venture with Nestle). PAI also has a history of facilitating corporate carve-outs by empowering division managers to build niche market leaders. PAI played a key role in several carve-out

Leopold Tikvic HEC Paris MIF success stories in the past, such as Panzani (Danone’s pasta and condiment unit) or Yoplait (Sodiaal’s fresh dairy products unit) and many others. Some of its current portfolio companies and their adjacent investment strategies are shown below. As can be seen, in all of the cases the investment strategy is heavily relying on value creation through M&A (buy-and-build, bolt-on, joint venture).

Value creation M&A is not the only way in which PAI creates value in its portfolio companies. It has at its disposal a multitude of levers it can pull to create value. Those can be broadly divided into operational drivers (topline, cost optimization, product offering, governance & HR), financial drivers (dividend recap, debt refinancing & repricing, structuring & tax optimization) and often used M&A-related drivers (transformations, build-ups, post-merger integration). PAI’s most significant value creation levers are operational improvements which have accounted for 76% of total value creation in its investments so far, mainly through increased topline and margins. In order to drive value creation initiatives in the portfolio companies PAI has a dedicated Portfolio Performance Group and external Operating Partners whose role is to work with portfolio companies’ managers in executing value creation strategies and post-merger integration. As Francois-Xavier Oliveau, a Principal at the Portfolio Performance Group described to me during the PE Summit in April 2018 at HEC Paris, PAI’s success partly owes to the fact that its performance consultants get involved in deals from the very early stage in the deal lifecycle during pre-deal operational due diligence. By getting involved early, they help to validate the improvement potential of the target company, understand its organization and operations and build trust with its management, thus minimizing the execution risk and probability of occurrence of bad surprises once the company is acquired. In the ownership stage, performance consultants support the management in the preparation of the 100-day plan and the value creation plan, while in the exit stage they prepare the operational part of the vendor due diligence, thus helping to maximize the value at exit.

Funds raised and performance PAI Europe funds have consistently delivered performance in the first or second quartile of all Europefocused PE funds based on the net IRR since inception (source: Preqin, Private Equity in Europe).

Leopold Tikvic HEC Paris MIF

Fund PAI LBO Fund PAI Europe III PAI Europe IV PAI Europe V PAI Europe VI PAI Europe VII Total

Vintage 1998 2001 2005 2008 2015 2018

Size (€ mn) 650 1,800 2,700 2,700 3,300 5,000 16,150

Status Liquidated Liquidated Exit phase Exit phase Investment phase Fundraising

Net IRR 29.6% 8.2% 10.8% 15.6% 26.1%

CoC 2.8x 1.4x 1.8x 1.3x 2.2x

Position vs. Europefocused PE (Preqin) 1st quartile 2nd quartile 2nd quartile -

Competitive positioning PAI has positioned itself as a European buyout specialist in the upper mid-market segment (target companies with EV between €300mn and €1.5bn). PAI’s main competitors are other buyout specialists with European-focused funds such as Bridgepoint (Bridgepoint Europe VI, €5.5bn raised in 2017), Equistone Partners Europe (Equistone Partners Fund VI, €2.8bn raised in 2018) and Ardian (Ardian LBO Fund VI, €4bn raised in 2016) among others. Furthermore, its market segment is also targeted by global mega funds on a selective basis (KKR, Blackstone or Advent International). PAI has a distinctive brand in continental Europe, especially in France where it has established itself as the largest and leading buyout fund. The fact that PAI often teams up with global mega funds in its buyouts comes as a proof of its sector and local market expertise in the markets that it covers (e.g. PAI teaming up with KKR in 2018 to take private Korian). But, what is special about PAI is that it has a strong local presence in many regional markets (France, Spain) which allows it to differentiate himself from competitors and often get access to deals without intermediation.

Unique selling points One of PAI’s key competitive advantages is the previously mentioned local footprint in its core geographic markets through a network of 8 offices (Paris, London, Luxembourg, Madrid, Milan, Munich, Stockholm and New York). Local expertise benefits PAI both in terms of sourcing of new investment opportunities and execution of post-investment value creation strategies in portfolio companies. Local presence provides PAI and the portfolio companies with better access to local networks (e.g. managerial talent pool, experts, financiers, advisors, decision makers) and better knowledge of the local market environment and competitive dynamics. Close personal connections with local market players often allow PAI to generate proprietary deals, which is its key differentiation point. For example, Swissport buyout was completed without the formal auction process thanks to close personal relationships with the Spanish construction and infrastructure conglomerate Ferrovial. Likewise, investment in Konecta (shown in table above) was made on a proprietary basis with Banco Santander. Additionally, being close to local markets helps to identify addon opportunities for the execution of buy-and-build strategies, which PAI frequently employs. Another PAI’s competitive advantage is the unique sector expertise within its dedicated sector teams who are responsible for developing extensive knowledge about the opportunities and growth drivers in their respective sectors and for tracking of companies over the long term. Using the same example of Swissport, PAI has acquired it in 2011 after more than 10 years of tracking the company and the sector, which sounds really astonishing.

Leopold Tikvic HEC Paris MIF

Major events in PAI’s history However, it was not all roses in the history of the firm. In 2009, Monier, one of PAI’s portfolio companies was forced into bankruptcy in which PAI lost all capital invested in that company (€256mn). This event spurred a battle for the control of PAI which was later named in the press as the “putsch of the 21st of July” against Dominique Megret. The temporary crisis of governance in the company led to the resignation of the two most senior executives at PAI, Dominique Megret and Bertrand Meunier, and the naming of Lionel Zinsou as the new CEO of the firm. On top of that, the departure of Dominique Megret and Bertrand Meunier triggered key-man provisions in the limited partnership agreements and finally ended up in half of the funds of PAI Europe Fund V being pulled out by the LPs. However, this was only a temporary blow to the firm. Later in 2015, PAI went through a smooth leadership transition when Michel Paris took over the helm of the firm from departing Lionel Zinsou. As a further proof that the 2009 governance crisis didn’t hurt PAI’s relationships and trust with its LPs comes from the fact that PAI didn’t face any problems in the subsequent fundraising rounds in 2015 and 2018 where investor demand greatly exceeded its hard cap on fund size.

My motivation to join PAI Partners I chose to analyze PAI Partners after meeting its principal, Mr. Oliveau at the PE Summit conference at HEC Paris. He spurred my interest in the firm by outlining its leading position in the European middle market buyout segment and M&A driven (buy-and-build) value creation strategy. The fact that PAI Partners is a buy-and-build specialist attracted me the most to the fund, since using M&A expertise and sector knowledge to build strong European companies into international leaders sounds very exciting to me. Considering PAI’s strong reputation, long experience in European buyouts accumulated over 20 years and strong deal pipeline, I believe that the firm is a great place to start a career in private equity. I will be doing my summer internship in M&A at Morgan Stanley this summer. I believe that once I gain certain sector expertise and a sufficiently high amount of deal exposure in PAI’s core sectors such as healthcare or consumer & retail, I will be well-equipped to add value for a firm like PAI Partners.

References PAI Partners website, http://www.paipartners.com PSERS Public Investment Memorandum PAI Europe VII (2017) Preqin, Private Equity in Europe (2015), http://docs.preqin.com/reports/Preqin-European-Private-EquityJune-2015.pdf LaTribune.fr, Grand PAI devient petit (2009), https://www.latribune.fr/journal/edition-du0312/enquete/319246/grand-pai-devient-petit.html