Gabriel Caillaux says large firms are throwing money at companies to boost market share, rather than digging down into difficult markets to find quality assets
Private equity’s fundraising bonanza is causing “pollution” in the market that could be unhealthy for target investments, according to the managing director of one the most prominent growth equity investors.
“What I mean by that is there are a handful of sectors we’ve had competitors show up and overcapitalise companies aggressively,” said Gabriel Caillaux, head of Europe, Middle East and Africa at General Atlantic.
“If you give [entrepreneurs] too much money they always find a way to spend it. We’ve seen that in some of the software-as-a-service (a software distribution model) market and some of the consumer internet markets,” said Caillaux. “I think that’s disruptive for building great healthy companies. Some will work out but we feel really strongly that you should grow in a healthy way.”
He added: “This philosophy of investing that says ‘I’m going to give you any amount you want to go for only market share’ is something that is in the long term damaging.”
Struggling
Private market funds are sitting on a $2.5tn cash pile and firms are struggling to find quality assets. Some companies are increasingly targeting growth investments to spend the capital they have amassed. Several buyout giants have specifically set up growth strategies.
But Caillaux expects the large buyout groups to struggle with origination as they start going after smaller growth businesses because they are used to “hunting for big elephants”.
“The returns they generate are typically through financial engineering and buying cheap and so on,” he said. “My process is meeting thousands of entrepreneurs every year. We then focus on the 20 that we love and most of the work is convincing them that they should take me on as a partner.”
General Atlantic has approximately $35bn in assets under management and aims to invest $4bn to $5bn per year globally. When Caillaux joined in 2004, the US still accounted for 80% of the firm’s investments. Now, that has come down to 40% and the Emea arm accounts for roughly 21% of the company’s portfolio, with a total of $7.2bn invested in the region since inception. Last year,
General Atlantic completed a $3.3bn fundraising for its third fund that is a long-term vehicle. The fund invests anywhere between $25m to $200m in businesses that typically have an enterprise value of between $400m and $600m.
Several of General Atlantic’s investments in portfolio companies have been followed by Softbank’s $100bn Vision Fund. Earlier this year, General Atlantic and Softbank made an undisclosed investment in Mexican payments start-up Clip – as part of a round that raised roughly $100m, according to a Reuters report. In June, Softbank led a $300m funding round for corporate fitness platform Gympass, with General Atlantic also contributing. The largest investment by Softbank into a General Atlantic company this year was an $800m investment in supply chain finance firm Greensill Capital, six months after General Atlantic’s $250m investment.
“If you look across the GA portfolio, globally Softbank has invested in a number of our companies,” said Caillaux.
He said the Japanese giant approached Lex Greensill, founder and chief executive of Greensill, with an offer to help the business grow in Asia – and have been good partners so far. Most of the investment from Softbank has been spent on Greensill’s banking subsidiary in Germany.
Other General Atlantic investments include several well-known brands like urban juice bar Joe & The Juice, media company Axel Springer and financial data provider IHS Markit.
“While we define ourselves as growth investors what we would ideally like to become the destination for entrepreneurs throughout their entire growth cycle after venture,” Caillaux said.
The Emea team also invested in payments provider Network International in 2015 alongside Warburg Pincus. Earlier this year, Network International listed on the London Stock Exchange, raising £1.1bn.
In 2014, General Atlantic led a $250m funding round for Dutch payments business Adyen. Last year, Adyen listed on Euronext Amsterdam with a market cap of €7.1bn, pricing its shares at €240.
The company listed close to 15% of its existing shares. On the first day of trading, the shares reached €455, giving the company a valuation of €13.4bn. In May 2019, General Atlantic, alongside another shareholder Pentavest, sold about 1.1 million shares in Adyen for €750m. General Atlantic continues to hold shares in the business.
Sceptical
Despite the firm’s success with IPOs, Caillaux is sceptical about growth companies going public. He does not believe the stock exchanges in Europe are suited for fast growth companies and for businesses to go public in the region, they need to be bigger and more mature.
This is partly because of the short term, quarterly reporting requirements of stock exchanges and partly because he thinks a private investor can help guide a growth business in a way that passive public investors cannot.
“I think we found it to be a great exit route when you have great companies. We care a lot about our reputation as sellers in public markets. The days of flogging over-levered no growth buyouts to try and get out at any cost, I think that’s damaged European public markets and I think public investors are fearful of that,” he said.
General Atlantic set up an office in London two decades ago. The firm, founded in 1980, also has a branch in Munich that houses eight people. Now Caillaux is looking to crack tougher European markets: Italy and France.
In July, the private equity firm hired Vodafone’s former chief executive officer Vittorio Colao, a well-known Italian businessman, who has deep connections in the country. Caillaux said Colao is his “secret weapon” to help the firm find opportunities in Italy.
“I tried to build a senior advisory group and decided to hire extremely senior people who are sector focused but are also global businessmen,” Caillaux said. “[Colao] is on the board of Verizon, Unilever and Bocconi University. We don’t need to localise with bricks and mortar, we can localise with intellect.”
This method has been tried and tested in France – another notoriously difficult market for foreign private equity because of corporate governance, convoluted shareholder structures and government interference. In 2017, General Atlantic recruited former Axa chairman and CEO Henri de Castries as a special adviser and chairman of General Atlantic Europe. Since then, the firm has completed four deals in the country – leading a €60m funding round for online education platform
OpenClassrooms; taking a 45% stake in online fashion brand Sézane; investing €150m into Doctolib alongside existing investors; and participating in a €110m fundraising for DIY marketplace ManoMano.
“His input has been invaluable and opening doors in France has been great,” Caillaux said.
Discipline
Caillaux says 67% of General Atlantic’s portfolio companies have no debt at all and 75% of all returns come from growth. These businesses on average grow their revenues by 25%. If the companies use debt, he said, it’s because “if you’re very profitable, you may as well have some financial discipline from debt”.
General Atlantic’s focus on growth and aim to help entrepreneurs rather that telling them what to do, is what attracted Caillaux to General Atlantic in the first place. Approximately 70% of General Atlantic’s portfolio is minority stakes.
Prior to General Atlantic, Caillaux was working as an investment banker at Merrill Lynch. When he decided it was time to move on, he went to interview with several buyout groups but, he says, something did not click. By chance he found out that an associate at General Atlantic in London was leaving, and called the company to see if he could get the job.
“I hustled my way into General Atlantic,” he said. Because at the traditional buyout firms, he “couldn’t understand how financial engineering was sustainable for long term returns”.
“Because it was a trick and everyone could figure out the trick. That, typically, is not defensible.”
Source: Private Equity News