Macro-to-Micro - Headwinds
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Why we like headwinds

This is the story of an all-weather deal-machine. It runs smoothly when the sun shines and it really performs in nasty conditions. Guillaume Jacqueau, Equistone’s Managing Partner, tells PLATFORM’s Ross Butler why a challenging market backdrop accentuates the strengths of Equistone’s investment model.

THE QUIET confidence of Equistone’s investment team over the recent turbulent years has been more than vindicated by a period of strong exit performance across all its markets. Its March AGM, held in a Paris barricaded amid mass protests, opened with a parade of five exits that will return around 90% of the drawn capital on its latest Fund.

But you can’t out-run the wider situation forever. Eventually, the headwinds will take their toll, surely.

Equistone’s Guillaume Jacqueau, Managing Partner and Country Head, France.

“Actually, we like headwinds,” says Guillaume Jacqueau, Equistone’s Paris-based Managing Partner, before adding, “I should probably explain this!”

First of all, he says, back in 2011 Equistone itself had a challenging birth, and the memory of this struggle, to raise its first standalone fund while acquiring itself from its parent and emerging as an independent entity, encoded into the firm’s DNA an affinity with complex challenges and adverse conditions, and the team has been energised by complexity ever since.

This may be true, but nobody really likes headwinds, do they? If there is a choice, people will always choose plain sailing. So I ask, what about the increased likelihood that things will go badly?

“We are well positioned,” says Guillaume, “because our model is more resistant than many others. We are naturally diversified, in terms of the number of deals that we do, the six core sectors that we invest across, and the seven geographies that we cover. This diversity and truly European model means we can choose to slow down or even walk away from a certain situation if we wish, because we have no pressure to invest – or to not invest – in any geography or sector. This means we can remain calm when faced with local crises and specific headwinds. We are extremely selective, but also pragmatic.”

“But,” he stresses, “it’s not just that we are well protected. We actually like headwinds, because we like complexity.”

At this point, I’m starting to think he really means it. So, I ask, what is it you find attractive about adversity?

“When there are major headwinds,” he explains, “the volume of dealflow falls, but what remains tends to be less competitive. This plays to our strengths because we always prefer investments where factors other than price are decisive. When there are tailwinds, every business is expensive, and every process is fast. Of course, we do very good deals in tailwind situations, but there is higher chance someone will offer a crazy price or apply crazy levels of leverage.

“But with headwinds, you have to be able to manage situational complexity and be more creative – when it comes to valuation and leverage; when it comes to creating value alongside management teams during the investment; and when it comes to exit. And this need for creativity plays to our strengths.”

“Some things are harder, like raising finance, but we don’t believe the current situation is a real obstacle to deal-making,” he says. “We’ve always been reasonable, so the fact the market is now becoming more reasonable is, to me, a positive.”

But with headwinds, you have to be able to manage situational complexity and be more creative – when it comes to valuation and leverage; when it comes to creating value alongside management teams during the investment; and when it comes to exit. And this need for creativity plays to our strengths.

Prudence also plays a role. Equistone tends to avoid highly leveraged structures, even in good times, giving its companies more headroom to deal with adverse situations.

The classic private equity ‘glass half-full’ perspective is that downturns are buying opportunities, for bargains and for turnarounds. But Equistone’s stance is more nuanced than that. At no point in the cycle will you find it buying trophy assets. The firm seeks out non-vanilla situations even when they don’t ‘need’ to. In other words, seeking-out complexity is an all-weather strategy.

“We take on deals that others don’t want to do, because they appear too complex or don’t neatly fit certain criteria, but this doesn’t mean more risk.”

Exceptionalism, ironically enough, is the norm in the Equistone portfolio. For them, a fundamentally attractive business with cosmetically unattractive features – from disjointed operations, to high customer concentration, to unfashionable market segments – all make for a good investment. Take Acuity, a business largely overlooked by the UK buyout community when its US parent was divesting, but in which Equistone saw great potential, which it recently realised in a sale to Permira. To Equistone, the business’s complexities were part of the attraction.

Amadys is another example of such exceptionalism. It was once a business of fragmented brands and management teams, operating in an attractive market. By integrating and professionalising its operations, while adding 11 bolt-on acquisitions, its fundamental attractions are now plain to see.

Managing the portfolio

The performance of Equistone’s latest fund, raised in the innocent days of 2018, is evidence of this all-weather approach.

“I consider our latest Fund VI as a “headwinds” fund. Since then, we have had Covid, Ukraine, the supply chain problems. This was a real-world test, and the performance so far is excellent,” Guillaume says.

Generally, private equity returns since Covid have been somewhat determined by the arbitrary sector exposure of portfolios prior to the lockdowns, especially when benefiting from increasing TMT valuations. But this cannot explain Equistone’s success. Quite the contrary.

Courir, its French high street sneakers brand, was “drastically impacted by Covid,” with all the stores forced to shut down. “This could have been a real disaster for the business,” says Guillaume. “Instead, together with the management team, we decided to see this as an opportunity to invest heavily in its online offering.” Online sales grew from 5% of the business on entry to more than 20% on exit. “It was part of the original strategy, but the Covid challenges convinced us to accelerate this.” In April it announced an attractive exit to a corporate buyer.

Of course, in particularly difficult macro-conditions, there will always be challenge within a portfolio, and while that is never part of the strategy, the firm’s affinity with complexity means it is well placed to manage unplanned trading difficulties. Karavel-Promovacances, a travel agency similarly faced the full brunt of the Covid policies. “The Covid crisis could have killed this group, but in fact, this business has been reinforced by crisis.” 

As was its event-catering business CH&CO in the UK, acquired in 2019 and which is once again thriving despite having lost 90% of its turnover in the first weeks of lockdown.

A reasonable reaction to crisis is to hit the brakes and hope your portfolio still has enough of a heart-beat for resuscitation when things improve. Another is to see each challenge as a genuine chance to improve. By not panicking and continuing to invest, many companies backed by Equistone have emerged to find much of their competition either gone or on dramatically curtailed.

The value of experience

Many private equity firms can say they have survived many past crises. But the real question is not whether the firm endured, but how they performed and behaved during them. Do they run for cover, only to emerge when the dust has settled?

“We never stop investing,” says Guillaume, “we just become more selective and try to find creative solutions that suit all parties and that will create value.” The firm has completed 182 primary investments in the past 20 years, and more than 350 add-on acquisitions. It averages nine new deals a year and a similar level of exits.

We never stop investing, we just become more selective and try to find creative solutions that suit all parties and that will create value.

Equistone is an all-weather deal-machine, and this is the real point about experience. It is not about length of service but how much action you see. And every deal-maker at Equistone gets a huge amount of exposure. New joiners will quickly get several deals under their belt and will be exposed to a variety of situations at the sharp end, while their peers at another private equity house might wait years behind a desk running models and waiting for their first completion dinner. By contrast, Equistone is constantly testing the market, testing strategies and refining their behaviours.

This seems to be the source of the firm’s aforementioned confidence. In recent years, Equistone has been intensely analysing its own behaviour and implementing process improvements, from Investment Committee processes, to sector focus, to systematising its analytics, enhancing liquidity reporting and professionalising ESG. Most of all, Guillaume emphasises the extreme selectivity and the culture of critical challenge that the firm has cultivated.

So, it looks like it’s all coming together. But Guillaume is not complacent: “There is no magic formula. Every situation is different and sometimes it doesn’t work. We will not be arrogant. Over-confidence is the main risk in private equity.” Guillaume says that when he is hiring, he actively looks for candidates with ‘humility’.

For anyone who knows the firm, all this rings true. Up until this moment, I had never really understood the point of humility. But that’s when it hit me: if the main risk is over-confidence, then it’s not the economy you should worry about. It’s what you did yesterday that matters. And what you are going to do tomorrow that counts.” 

A full version of this article appeared in PLATFORM 09, Summer 2023