Private equity investor Sun European Partners has shifted its focus from typical turnaround investments to ‘good companies that we can turn into top companies’, said Mark Corbidge, head of Sun Capital’s European subsidiary, in an exclusive interview with Investment Officer. ‘Special situations awards we no longer accept.’
‘Sun European Partners originally invested only in loss-making companies, but over time we found that this approach gave us too much exposure to problem sectors such as clothing and restaurant chains. The poor performance of these sectors in particular had such a negative impact on performance that we gradually adjusted our strategy from 2013 onwards,’ explains Corbidge.
‘We now only want to buy good companies that we can turn into great companies. We don’t want very good companies. This is not only because they are very expensively valued, but also because we cannot add enough value to the management of those companies ourselves,’ Corbidge says. Although the change in strategy took place some time ago, Sun still occasionally receives awards for successfully converting problem companies. ‘But we no longer accept such special situations awards. It only causes confusion if the market still perceives us that way.’
Specialist healthcare
The new strategy focuses mainly on industrial companies, technical service providers and specialist healthcare. In the latter sector, the Briton cites a chain of dermatology clinics (West Dermatology) and dental care (Clear Choice) as specific examples. ‘Our investments in healthcare have in common that patients come for treatment and then leave immediately. We do not invest in hospitals. In general, the more specialised the investment, the higher the margins so that’s where our focus is.’
This type of investment is mainly found in the US because healthcare there is mainly privately financed. Nevertheless, Sun increasingly invests in Europe, which now accounts for 44% of the total invested capital, according to Corbidge. These European investments, 15 companies in total, are spread over a number of sectors, from specialised suppliers in the industry to retailers.
Brovid
Corbidge emphasises that the coronavirus crisis has made companies in already-strained sectors such as the clothing industry even more vulnerable. ‘For every investment we make we now look very carefully at the impact of Covid on their business model. For example, we are now not looking at brick and mortar retailers anymore.’
An additional challenge facing companies is the disruption of global supply chains. ‘Container transport has become three times more expensive in a short period of time, and the prices of semi-finished products have often risen due to uncertain supply conditions.’ And that’s not just to do with Covid, Corbidge emphasises. ‘You shouldn’t discount the effect of Brexit either. Brexit and Covid have reinforced each other, and the combination of the two is really quite dramatic. Internally, I therefore talk about Brovid.’
Spac’s
In response to the crisis, Corbidge has seen a concentration of capital towards ‘Covid-proof’ sectors. Isn’t it hard to find interesting deals now as investors all flock to the same kind of firms? After all, the amount of ‘dry powder’, pledged private equity money that is still waiting for a destination, has risen to a record high. The increasing competition from spacs, listed investment vehicles looking for a private company to take over, comes on top of this.
Yet Corbidge says Sun manages to put their money to work relatively easily. ‘We now have over 50% of the money for our most recent fund invested. That took us less than a year and a half, and we are now investing more money a year than in our previous funds.’
The Briton says he is not bothered by competition from spacs anyway. ‘We haven’t come across any spacs bidding against us,’ he says. Corbidge expects a true tsunami of spac’s. And many of these will list in Amsterdam. ‘There’s a handful of listed spacs in London now, but I’ve been told by reliable sources that a multiple of these are now preparing for an IPO in Amsterdam.’
Amsterdam is developing into a very important stock exchange, and that includes spacs. Former Commerzbank CEO Martin Blessing, among others, recently founded spac on the Damrak.