Recovery period a good time for private equity returns, says Trilantic

Trilantic Capital Partners Europe, the transatlantic private equity team spun out of Lehman Brothers Merchant Banking in 2009 following the firm’s collapse, believes 2013 will be a pivotal year for private equity, because the asset class historically provides the best returns in the wake of a financial crisis.

Vittorio Pignatti, (pictured) chairman of Trilantic Capital Partners Europe, notes that it is a very competitive environment, but power has shifted to investors and fund selectors, who can insist more than before on investing their own terms.

Many private equity firms are under pressure to deploy their remaining capital and make the exits they need to achieve before the next round of fundraising. Investors are far more discerning than in previous cycles, where leverage was the main instrument in securing double-digit returns.

Differentiation by process

Pignatti, formerly a Banque Paribas executive with experience across the Middle East and in the US, says firms have to differentiate themselves by their process and how they add value to their portfolio companies. Trilantic Europe targets unlisted mid-market firms, and has been active in southern Europe, where many private equity firms fear to tread, after first engaging in 2009.

“We look for, rather than wait for opportunities,” he explains. “And we like to see the glass as half full, not half empty. There are big differences in opportunities across Europe but we like to be local. The defence of Europe is its lack of uniformity in the unlisted mid-market. Even if you see the opportunities, it doesn’t mean you can close a deal.”

He notes that in private markets, the firms are often well established, but “you can never time value as you can in public markets. In our world, you believe a sector and a geography, and you have maybe three or four opportunities, not 55. You have to clear your mind of any sense of urgency, and try to make the best deal happen, but be prepared to sit out if necessary.”

Trilantic’s €574m Fund IV Europe is still investing, having completed deals in Spain and Italy last year (Spanish telecoms company Euskaltel, restaurant group Istanbul Doors) and delivering strong performance. Fund IV Europe returned 1.6x MOIC /IRR 19.8% in 2012.

Pignatti says the firm has a ‘buy-in’ not ‘buy-out’ partnership approach, a well-developed framework for execution and extensive industry and operating experience. It uses leverage or debt financing only “prudently”, where it enables flexibility to adapt to changing economic conditions.

The team focuses on sectors, identifying themes, such as, most recently, European companies with emerging markets exposure. It does not enter auctions, and would normally expect to exit via public or private markets within three to five years. Each successive fund “accumulates credibility” with investors.

Target firms for the funds are those with strong market positions, unique franchises, secure and growing market niches or distinctive products and services that command premium prices or margins. There is greater value placed on business fundamentals and opportunities for growth rather than what may appear to be bargains or undervalued assets.

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