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Deloitte Luxembourg's Private Equity Symposium - 04/04/2014

Looking into the market trends of 2014


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Gathering over 100 participants, Deloitte Luxembourg’s first Private Equity (PE) symposium was held at Mudam and chaired by Benjamin Lam, partner and Private Equity & Reals Estate leader at Deloitte Luxembourg, put the spotlight on the private equity market trends of 2014.

Some of the key speakers, including Alexandre Prost-Gargoz, partner at Deloitte Luxembourg, Georges Hübner, Professor at HEC Management School, Richard Butler, Partner, ESO Capital Group, Claude Rosevegue, Partner, APAX France and John Holloway, Director at EIF  shared their views on the opportunities and challenges facing the industry.

What are the main challenges and opportunities of the private equity industry this year?

Alexandre Prost-Gargoz, partner at Deloitte Luxembourg: “Luxembourg is a key jurisdiction for private equity inbound investment in Europe and plays a central role offering collective investment structures for institutional investors. These investors want to increase their allocation to private equity with a strong focus on Europe. At the same time, Luxembourg has upgraded the toolbox dedicated to private equity funds with a revamped version of the limited partnership and a pragmatic implementation of the AIFMD. So, all indicators are clearly showing a positive outlook in terms of business potential for Luxembourg.  However, competition has never been so challenging in Europe as many countries now want their lion’s share, fighting on infrastructure offering (AIFMD), arguing on tax (not only pointing at Luxembourg as Belgium, Ireland, the Netherlands and the UK have been recently under the spotlight as well). Thus, we need to remain very close to our clients and continue to be tremendously professional and extremely agile to anticipate the market’s expectations”

What is the most efficient way to finance Venture Capital (VC): public or private?

Georges Hübner, HEC Management School: “In Belgium, from our sample of 515 firms and over the studied 1998-2007 period, VC-backing alone is not a sufficient condition to ensure a fast efficiency in transforming inputs (= production factors) into outputs (= value-added). Nevertheless, private VC seems to create short-term efficiency, while public VC on average do perform worse than non VC-backed companies. This confirms their typical claim that they have no intention to create short-term value; yet, this phenomenon does not contribute to their objective of creating new employment.  ”

What is the difference between profit and cash flow? Is it often the difference between success and bankruptcy?

Richard Butler, Partner, ESO Capital Group: “In my view, profit is a long term objective, and it is something we all strive for. Ultimately, realising good profits is what will make us wealthy. However, cash flow is what keeps the lights on. You can cope without profit for a couple of years, but lack of cash flow will kill you, regardless of profitability. Items that drive profitability might do the exact opposite to one's cashflow, so it is key that one is never pursued in isolation from the other.”

Claude Rosevegue, Partner, APAX France: “This statement, in the PE business, can be translated into ‘cash is king’.
This means

  1. measuring and forecasting the cash you are going to generate or burn
  2. how good you will  be in optimising your need of working capital
  3. how good you will be in investing and financing your investments
  4. how good  you will be  in communicating with your financial partners

A company and in particular its CFO must monitor its Profit and Loss (P&L), of course, but  must also monitor the balance sheet and therefore the cash flow.
Fast-growing companies are often more at risk with their cash than the others as they may not anticipate how fast their spendings are going to increase versus the cash they will generate.
Start-ups are also at risk if they do not measure their burn rate and needs for future financing correctly.
Therefore, a budget must include a monthly P&L together with a monthly balance sheet and a cash flow statement. And the three must match!”

Investing successfully in European Private Equity – Key points to consider

In an interview with Nick Tabone, Partner at Deloitte Luxembourg, John Holloway, Director at EIF, discussed the successes of Private Equity investments in Europe. He first started by giving a brief description of the steps taken by the EIF prior to committing to invest in a GP. This mainly focused on ensuring a sound business plan, a viable project and more importantly a vibrant team. These 3 factors are key to make a successful Private Equity Investment fund.

On a concluding note, John also mentioned that the EIF receives more than 300 requests for investment opportunities, giving an idea that the European Private Equity environment is a healthy one.

Furthermore, a survey conducted by Deloitte Luxembourg on the local private equity market, presented during the symposium, concluded that the local service providers consider PE as a strategic activity for their organisation, with a fierce competition which is now shifting towards specialised, value-added services, a global service offering, fees and overall service quality.
Furthermore, cross-border and multi-jurisdictional service offering required by GPs prompted asset servicers to set up operating models that include competence centres across the globe, with GPs being more hands-on in the fund creation process and aiming for a more collaborative partnership with asset servicers.

 

Contacts

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Lu, Press
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Deloitte Luxembourg - Marketing & Communications
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lupress@deloitte.lu

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