Marco De Benedetti, based in Milan, is Co-head of the Europe Buyout advising group, and has been associated with Carlyle for over a decade. The Carlyle Group is a global alternative asset manager having approximately US$ 200 billion of assets under management, with circa US$ 23 billion in dry powder available to be deployed for the most promising opportunities.
Leaders League. What is Carlyle’s investment strategy in Europe, and how is this reflected in its operating structure?
Marco De Benedetti. The Carlyle Group is a large alternative asset manager which has a number of different products, including the traditional buyout and private equity – the DNA of Carlyle.
Many of the other players, notably the American ones, have set up base in London and try to cover the continent from there. With such a strategy, in most instances you end up having your domestic market (the UK) representing 60-70% of your activity, with the rest of Europe being only bits and pieces.
What we have focused on since the very beginning, is having a truly Pan-European operation, and this is what we have sold to our investors over the last 17 years – a well-diversified European product. We have a network of offices with a strong operational presence in each of the five key countries: the UK, France, Germany, Italy and Spain. As a result of this, the UK, France and Germany each typically have a 25-30% share in our European activity, while Italy and Spain account for 10-15% each.
This combination of strong local capabilities together with the global platform is our unique strategic position. In our view, if you don’t have a local presence you will not be able to adapt to the market, because you need to build relationships. Just flying in and out of London is much harder compared to having people on the ground that speak the same language.
Leaders League. What does the Brexit hold for the European Private Equity market and for Carlyle?
M.D.B. It is too early to tell, because no one is in a position to have a precise view of what the Brexit really means from a practical point of view and how it will unfold. There are a number of different ways forward, and how the UK will negotiate with Europe might have an impact.
The Brexit started to have an impact in Q2 2016. There was a very dramatic slowdown in activity in the UK with the volume of sponsor driven transactions plummeting – everyone stood on the sideline and nobody was willing to commit to a deal before knowing where the referendum was going. The reason behind this was that people were not willing to take a bet on the currency, as well as on uncertainty on other factors.
Looking ahead, the referendum vote should not make the UK market less attractive from a private equity standpoint. The slowdown in activity was only in anticipation of the vote. Now that the vote has taken place, we expect the market to adjust.
We still believe that the UK will continue to be a large attractive market in the medium term and we are evaluating a few opportunities right now.
Financial services, which is not one of the main sectors in which our Europe buyout fund operate, is the one which may be more affected by Brexit, and this is where the UK potentially will lose the most by not being part of the European Union.
Leaders League. The talk has been about increased presence of banks and private equity firms in Paris and Frankfurt in the wake of the Brexit. Do you see similar trends for Milan as well?
M.D.B. For the time being I think it’s only talk and there’s not a very high likelihood of this happening. For businesses in the asset management space, including private equity, taxes are a more important consideration than Brexit. From a tax regime perspective, the UK is attractive at both the corporate and the individual level.
Another reason is that for a private equity firm, it is much easier to move around compared to a bank. A bank is a much more regulated business that needs a license to operate in every country, while a private equity business can close shop and relocate overnight.
Milan is attractive, but the environment in Italy is not so conducive from a business point of view.
Leaders League. In terms of European hotbeds for private equity, where in your view does Italy rank today?
M.D.B. Italy is near the bottom of the list in Europe if you look at the private equity volume to GDP indicator. UK (0.43%), France (0.39%), Germany (0.25%) and even Spain (0.15%) rank higher than Italy, where private equity investments as share of GDP stands at only 0.11% according to Statista. Traditionally, private equity activity has not been as large in terms of market size as that observed in other European countries. A key reason is the size of the businesses – Italy is an economy where the number of small to medium sized businesses is a much higher percentage of the overall GDP than most other European markets.
If one wants to operate in the large to mega deals category, Italy will not be very attractive. So while in Italy there are quite a large number of deals, they tend to be smaller. The dollar amount is typically less than €100 million and businesses are usually family owned or close partnerships. But it is a profitable market, and for Carlyle it has been a very attractive market in terms of returns.
Leaders League. Carlyle has recently raised $3 billion for Carlyle Global Partners which is said to have a lifespan of roughly 20 years – double the Carlyle convention. Is this a permanent shift in strategy, and is this likely to be reflected in new European funds as well?
M.D.B. As mentioned earlier, today Carlyle is a big group with circa $200 billion of assets under management. It’s not only a private equity manager, but is really an alternative investment manager. We have funds that are dedicated by geography and funds in some cases specialized by industry. We saw that there is a demand on the side of the investors on the one hand and there might be investment opportunities on the other that might not fit the exactly the same profile in terms of timing of the traditional model.
The creation of this fund should be seen as an additional product, a complement to our existing mix – as opposed to an indication that everything will move in that direction – that tries to capture a segment of the market both from the investors’ side as well as the investment opportunity. We continue to have our traditional funds that have a 5-plus-5-year life cycle, and I don’t think this will change.
Leaders League. Could you tell us a little bit more about your current fundraising efforts in Europe as well as the most recent successful exits that you have had?
M.D.B. As Carlyle, we have a large number of funds and on a regular basis there are funds that are raised. Concerning our European business, the last fund (Carlyle Europe Partners IV) was fully raised in 2015 and we are currently in the middle of investing it.
Recent exits in Europe were sale of majority stake in B&B hotels to PAI, sale of Sermeta, and sale of RAC to CVC Capital Partners for realized returns of 2.0x, 3.3x and 3.8x, respectively. The firm also sold its stake in Telecable for a 2.8x return and a 33% IRR.
Affan Bin Mahmood