Blurring the Lines between Venture Capital, Growth Capital, and Private Equity
February 2021 - With You, a digital magazine by Argos Wityu
Like the companies they support, investment funds have gone beyond the period of adaptation particularly in terms of investment. How is that changing the investment criteria, particularly in terms of debt and solvency?
In terms of how companies navigated the crisis, remember: there was no instruction manual for this event unprecedented in living history. So, having teamwork – with professional investors acting as true shareholders, supporting filings for state-guaranteed loans to help weather the crisis, and providing employees with the reassurance and protective gear (such as masks) while adapting processes to the new environment – was vital. It took intense teamwork, but it worked to navigate the crisis and make a positive difference to where we are today.
In general, we can say that companies emerging in the best shape from the health crisis are those which were the most agile (on all dimensions in particular the social one), and the most digital. Tech savvy companies managed digital supply chains better and were less disturbed by work-from-home regulations, etc. Overall, companies that could shift their business model online (e-commerce, e-health etc.) have done better and will do better whatever the sector. However, continued volatility reminds us that leverage can be a dangerous game and should be handled with care.
One could have expected the investment market to stop short, as happened in 2011. This did not happen. The deal flow never dried-up; in fact, three classifications of companies are still very much in focus for investment today:
Very-high-demand companies, which have increased their revenues during the crisis. Surprisingly, there are many companies in many sectors in this situation. In general, these were the well-run companies, already digitized, with strong governance and a compelling competitive advantage. Aside from industries which have been badly hit such as hospitality and travel, there are many sectors like education, agriculture and even real estate where we find well run companies. There is a lot of dry powder in investors’ pockets, but there are fewer targets, and this is pushing the price up for these targets. To some extent this is logical, because the health crisis is an acid test of resilience.
Companies in the « wrong sector ». The crisis was so violent some companies had no choice but to restructure, and I am amazed by the speed at which companies in aerospace and defense, for example, have adapted their cost structure. The paradox is that the survivors are likely to be fitter after the crisis. This creates opportunities for investors who have a specific risk appetite. Of course, expectations have been updated – sometimes with a massive discount to BP’s designed before the crisis.
The large majority of companies, performing in parallel with the overall economy. That is, -10% in 2020. The dust has not settled yet, but investors have adapted their lenses to determine which ones are the most promising.
I am not sure debt and solvency will be the issue for well-run companies in the short term. The ECB has done its job and promises funding will remain strong for good quality assets.
In addition, we are likely to see a case for deep transformation on the sustainability front. A wave of new regulations is coming, the elections in the US have changed the mindset, a “green deal” could be part of the next phase of the US stimulus package, etc. As with digital transformation, there will be winners and losers in this category.
Have investment funds reviewed their priorities in terms of sectors in which to invest? Artificial intelligence, training, customer journey management etc.?
It is more about being picky in each sector than choosing new sectors. Even the no-fly-zone sectors will have investment opportunities.
If you were an active investor in AI before the crisis, you are likely to be wealthier. In my view this is more about the importance of the digital readiness of existing companies rather than about the health crisis.
Have companies modified their value-creation strategies to adapt to this context?
The crisis has likely reinforced the importance of the digital lever over and above the traditional levers of good cost management, sound organic growth, and build-up acquisitions.
In the longer term, the lines between Venture Capital, Growth Capital, and Private Equity will blur. On the one side the best start-ups will be valued more than established companies, on the other side, well established companies will have to behave more like start-ups, acquire some of them, attract new talents which will help them capture new growth opportunities unleashed by technologies and therefore twist their equity story towards more organic growth and increase their multiples.
Do you see an increase in employee shareholding, an effective lever for rewarding teams and strengthening cohesion around a corporate project?
This crisis has shown that a good team can make a difference. Certainly, employee shareholding will remain a key lever for attracting talents and retaining them.
However, investment is a risky game, and I would remain cautious about broadening employee shareholding too much, because employees should not take risks with their savings. It is reasonable to share part of the upside if any, but it cannot be symmetrical. A professional investor knows that he can lose his shirt; this is not acceptable for employees in general.
Are the strategic development axes also being rethought? ESG, relocation of production in sensitive sectors (such as pharmaceuticals, for example), development of e-commerce, composition of governance …?
ESG is not an option today. It is no longer just about compliance; it goes beyond that. Today, we see that ESG can be strategic, leading to new business opportunities, leveraging new consumer behaviors and expectations, and potentially leveraging public spending and new regulations.
Some industries like automotive or aerospace will be challenged very badly and will have to reinvent their model if they want to survive. This will require big investments, a lot of agility but the Tesla example shows that being ahead of the pack on the innovation route can lead to superior returns and valuation.
The money injected in the economy for energy consumption reduction and building renovation will very likely open new avenues of value creation for all incumbents. Anticipating to be at the right place at the right time will have a lot of value.
