The private equity industry is only just beginning to grow in Romania, while it has about 40 years of history in Europe. In order to better understand what a private equity fund means, we talked to Edward Bernard Wiegman, also known as Bert, the managing partner of private equity fund Langholm Capital LLP. He has over 30 years of experience in mid-market private equity investing, since joining County NatWest Ventures in 1978.
Today, Bert advises Morphosis Capital, one of the first Romanian private equity funds, investing in high growth industries like consumer goods and related sectors, niche healthcare, technology and B2B services with EBITDAs of over EUR 500,000. Business Review took the chance to talk about private equity with Bert Wigman, the man who has seen the industry’s development since its first days in Western Europe.
How is the private equity industry in Europe today?
There is a main characteristic for the European market, which is 35-40 years old; prior to that there was no venture or private capital. Many companies that were family owned are now either owned by private equity funds or listed on the stock exchange. There are also institutional funds that manage the money of the pension funds and they are always looking for good investments, for good return.
Private equity funds in Romania and South-East Europe are just starting to develop and are almost bound to follow the same rate of development as other European countries.
How will it develop in the future?
These funds fill a capital gap, a shortage. The economy is made up from a large number of SMEs and they get money from banks or from their parents or other relatives. At the larger end of the scale they can get funds from the capital markets, but between those ends there is a gap that private equity can fill. We can see that demand exists, that is what I saw in the first few days here. The advantage of being in the EU and the advantage of a low-cost labor base and access to the EU market all are things that show Romania is bound to grow.
As that growth takes place, in a period of, say, 10 years, you will see changes in the consumer market, in consumers’ demands. Everybody is on the internet, everybody can see the trends in fashion or food products, and the Romanian consumer is no different from other European consumers and they are going to be just as demanding as other Europeans. Going to gyms and eating healthy, there will be a level of demand here, but not necessarily the same level of supply. This is an investment opportunity for private equity.
You may have a certain opinion about private equity, that it is financial engineering, possibly unfairly held and making a fast buck, not necessarily making a contribution to economy or to society. But it is not the case. For example, when we were doing research we looked at ready-made breakfast cereals as a category and what’s going on in this segment. Not much was happening as a whole, except for a category where you could see a decline: the products with a high sugar level. And a sharp increase in those that were more natural. This was not a surprise, maybe only for the big players like Kellogg and Nestle, who are not able to see what is going on in their own backyards. So, we looked at muesli in particular and looked for companies that would supply the best muesli out there. And we found a company that could make that product. Three years later, it turned into one of the biggest producers of healthy food. It is an example of using private equity as a force for good.
How would you describe the owners of a company looking for private equity?
First of all, the owners are rare creatures, they’re very demanding, a bit iconoclastic (that is why they didn’t get a job), an odd breed, very proud. We can talk about the 3D’s: death, divorce and debt. They are approaching retirement ages and they can’t find a heir to take over the business because their children are involved in other things or just don’t want to get their hands dirty in the family business. So they ask themselves, who am I gonna leave it to? And who are all these competitors that are coming into the market? That is the moment when they say I have to sell this business. I’ve never met an entrepreneur who owns a business and wants to sell it to me because I asked him to. So the reasons are usually the following: death is something that comes unexpectedly, while divorce is not something that comes out of the blue, but is very damaging to wealth. And debt – there are a lot entrepreneurs taking on too much debt, with plans that are too ambitious, and they just can’t give the money back.
Those are the main criteria that create an investment opportunity for a private equity fund. You need a meeting between opportunity and desire to make an investment.
There are not many private equity funds in industries like food, but they rather focus on areas like technology. Why?
A good private equity fund is a fusion between capital and management. The fund will do its research in the field and at the same time look for the best management team to bring in to lead the company. We have to do a lot research for that as well. But where can you find such a guy? Where can you find a guy that knows all about muesli? Sometimes you can find them in competitors. And the private equity fund can tell that person that after 5 years it will make EUR 50 million from the investment and he will make EUR 10 million. Kellogg cannot say that to him because it would damage its entire reward system. But I can say that.
During the 35 to 40 years’ history of private equity, this way of finding good managers was not seen as positive, but today, after the market has proven that the funds can bring good returns, it is a move considered to be normal in an individual’s career.
How do you find opportunities to invest?
We look at a specific industries, find the best players and pursue them. So when they are ready to sell, we are there to make the investment.
How high is the risk involved in an investment?
Well, you can lose all the money. I would say in a typical fund you make 10 deals over five years. And of those 10 deals, two will go badly so you either lose all or most of the money, six will do as expected, in other words you will make 2 or 3 times the money, and two will do really well, like in excess of 4 times the money. Mostly for reasons you didn’t expect. Sometimes the due diligence was not done well enough, so you didn’t find a fraud inside the company, sometimes the market is rapidly changing and you don’t see it.
We analyse our field a lot. So you probably look at a 1,000 companies over a period of a year in order to get really interested in about 30 of them. You do a lot of research and find interesting companies from the data you can extract about them, and then you go and look for them and see that some are already sold to a private equity fund.
When you find the 30 you start writing letters and schedule meetings and you get to write an investment project. So out of those 30, you might get 10 to write that project and get to the investment committee. And only two of those 10 might actually become an investment by the end of that year.
But if you don’t do all this research, you are not doing your work.
What are Romania’s main advantages?
The principal advantage is the low labor cost. And the access to European funding for capital equipment and infrastructure.
What does it take to be a good fund manager in private equity?
There plenty of forces at work here. If you make investments in periods of high inflation, then almost by accident, you get good returns out of your fund. One thing that I have seen occur quite frequently is that private equity managers make some good deals and make a lot of money out of it. And some are like a Pavlovian dog; they think that if they make this money it means they’re a good fund manager so they don’t listen to anybody else anymore. Then disaster occurs.
I think the answer to the question is to be part of the team, because one manager is susceptible to prejudice or imbalance. An inter-dependent, trusting team is important, and they must put objectivity first. There is nothing clever in this process, no one has a special sense for investments; it’s all about objectivity in analysis. You need a fact-base argument all the time, for every decision you make.
How is Romania seen from the other side of the continent?
I don’t think anybody across the continent is looking at it. It’s too early. “I want to invest in Romania” is not a thing that big funds say, they are not thinking about it. They may look at the region and look for opportunities, but not at Romania specifically, it is too early.