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MACRO-TO-MICRO THE CIO VIEW

In fair weather or foul

How well adapted is Equistone’s investment model for the uncertainty that lies ahead? Ross Butler sat down with CIO Oskar Schilcher to find out.

RB: 2020 will not be easily forgotten. How has it been for Equistone?
OS: We know how every one of our 50-plus businesses has been impacted, whether positively or negatively. Clearly, it has had an impact on value, but it’s a mixed picture. Some companies will have lost a year in cashflow. Others have had resilient or even stellar performance.

Counter-intuitively, we are finding that some of those hit hardest now appear to have the greatest strategic value and long-term earnings potential. Reshuffling in their sectors provides consolidation opportunities and advantages to those companies who benefit from the strong backbone that we provide.

RB: As we look ahead to 2021, how well is Equistone’s model suited for what comes next?
OS: In the type of environment we are in – one of uncertainty and significant changes within many industries – I think the essential features of our approach matter even more. That means forming trusted partnerships with management teams and working alongside them to create value. We don’t outsource this partnership. When things are tough, an ethos of trust and direct support is more important than ever.

In today’s market, a top tier management team that faces an uncertain environment may see opportunities, but they probably don’t yet know what the specific answers to addressing these are. To have a partner that will work through that with them in a constructive ownership fashion, will be attractive.

In the type of environment we are in – one of uncertainty and significant changes within many industries – I think the essential features of our approach matter even more.
Equistone’s CIO, Oskar Schilcher

RB: Is Equistone’s partnership approach a barrier to taking tough decisions in tough times?
OS: We are seeking to build strong professional relationships with management teams. Relationships that are characterised by transparency, trust, fairness, and most of all a common purpose. If you need to take tough decisions, that’s the best kind of relationship to have.

One of the worst things that could happen is a management team that feels they need to hide things from you. During the worst of the crisis, we had excellent visibility into our portfolio and our management teams were talking to us daily. And in doing that, they were just continuing a dialogue that was already in place. This meant we were able to fix any situation without having to create some new dynamic or enter crisis-mode.

RB: Many would say that treating management as expendable is the market norm.
OS: Yes, and the private equity house we hope we’ll never be is the one that goes into a management presentation, tells them it’s the best team we’ve ever met, and the day after closing, fire them. If we think a team is fundamentally flawed, we won’t invest in the company. Management teams know it is ok for them to have room for improvement and development, as we all do.

If you make that first investment decision in the right way and in good faith, it turns out to be a tremendously powerful model. It becomes strategically unwise to tear things down. When we’ve done our job well, we generate much greater value pursuing our goals in partnership with management, rather than in conflict with them. And having a reputation for that approach has become our differentiator, a clear strategic advantage in sourcing and winning deals.

RB: How would you describe your ownership approach? Will it change in a downturn?
OS: We try to be constructive owners, whatever the market environment. We are very close to our businesses. Unlike many competitors, the deal team that finds the opportunity and executes the transaction stays with that company all the way to exit. Our ownership style is very direct, deeply hands-on when it is called for, and supportive whatever the situation.

We try to be constructive owners, whatever the market environment. We are very close to our businesses. Unlike many competitors, the deal team that finds the opportunity and executes the transaction stays with that company all the way to exit.
Oskar Schilcher, discusses the firm’s investment and ownership style in the context of the 2020 economic disruption.

RB: “Hands-on” is usually a euphemism for imposing top-down operational interventions from the process improvement playbook.
OS: That’s not us. Firstly, we tend to be less intermediated: we don’t bring in an army of consultants and leave them to it.

On some of our transactions, we will be on the phone with the CEO on a daily basis. So is it hands-off, because we haven’t sent in a SWAT team from a consultancy and left them to it? I would argue it’s more hands-on.

Yes, there is PE playbook, be that working with a specialist pricing advisor, bringing in an ex-CFO to implement best-practices, attacking costs, etc. We can and have executed on every one of those plays. But we don’t force the same playbook down the throat of every business. Sometimes to outsiders that might look like less fireworks, because when we are directly talking with a management team, that’s a quiet process. But it is very hands-on.

RB: Is there any way of measuring or quantifying your value-uplift from operational improvement?
OS: We have completed 117 exits across our funds, including losses, and generated an overall 2.5x gross return. Of that 1.5x increase in value, 1.1x was from earnings growth. 0.3x uplift came from multiple arbitrage, which is a good indicator of strategic transformation. We can deduce from that that our operational impact is generating well over 2x returns and contributes the large majority of the value we generate.

RB: How are you assessing pricing and value in this market?
OS: We are always prepared to pay up for a quality business. What matters to us is that we can identify those eight to ten deals a year where the investment proposition and deal dynamic really resonates with us. In the European mid-market, there is a good supply of such transactions.

Also, because we tend to be closer to management teams, we often come to a different assessment of the risks. So while some private equity houses will turn down a transaction at the teaser stage because of some very apparent risks, we may be able to leverage our good relationship with management into a more sophisticated view of that risk.

RB: Are you confident you get to see those opportunities? Do you have the reputational visibility?
OS: In our core markets, France, Germany, the UK, I don’t think there is another private equity house that has as strong a reputation and brand for being the right partner in those types of situations. We have been building and jealously guarding that same reputation for 40-plus years. People know what we stand for. 

A full version of this article appeared in PLATFORM 04, Winter 2020/21