April 12, 2012
Talk with retail grandee Luc Vandevelde
The former Chairman of Marks & Spencer and Carrefour founded private equity fund management company Change Capital Partners (CCP) in 2003.
The London-based business invests in medium-sized consumer goods companies and retailers throughout Europe.
Vandevelde (61) is thus in an excellent position to compare the very different worlds of the Plc and the private equity-financed mid-cap.
This polite, polyglot Belgian is modest about his own achievements and stresses the importance of fellow MDs Roger Holmes, Steve Petrow, and Stephan Lobmeyr.
He also feels that the title CEO should be translated as "Chief Enabling Officer“ rather than as "Chief Execution Officer“.
Mr Vandevelde, how is CCP structured?
CCP was created at the end of 2003 after I left Marks & Spencer as Chairman. We now operate our second private equity fund. Our first fund of €300m has closed, and all investments were sold.
Our second one has committed capital of slightly less than €200m. We are about 70 per cent invested and should like to do two or three more investments.
What type of companies are you looking for?
We invest in mid-cap consumer goods and retail businesses across Europe. Typically these companies have annual revenues of €50m to €200m and an enterprise value of €25m to €100m. Our average equity cheque is around €30m, beyond which level we aim to attract co-investors.
Do you always control the companies you co-invest in, and what is your typical hold?
We only take controlling stakes, or ones where we can exercise a major influence on our investment. The funds have a lifetime of around ten to twelve years, which is fairly typical for private equity; and we keep our portfolio companies for an average of around five years.
You invest your own money in the fund. Who else is behind CCP?
We have a total of around 20 LPs (investors). My friend and mentor Paul-Louis Halley was the sponsor of our first fund. Our investors include pension funds, high net worth individuals, and funds of funds.
What are your current portfolio companies?
We have five investments that span four European countries. In Germany we are invested in food brand Schneekoppe, as well as in Munich-based fashion chain Hallhuber; Paule Ka is a fast-growing luxury fashion brand in France; Macduff is a frozen shellfish company with great potential in Scotland; and Rossopomodoro is a major high-end Italian restaurant chain that we are developing internationally.
You used to be invested in fashion company Jil Sander. Are you now moving more towards food?
Not just food, but also consumer goods, as they are our real core business. The other operating partner, ex-Marks & Spencer CEO Roger Holmes, and I have a considerable background in consumer goods and retailing. Therefore we would not do B2B, financial services or high-tech, where we have less expertise.
What type of return are you looking for?
We are shooting for a 25 per cent internal rate of return. Depending on how long we keep a company, we expect multiples to range from two to five times our investment.
Don’t such expectations almost invite an asset-stripping mentality whereby gain is maximised at the cost of jobs and the long-term future of the company?
I hear this type of question in Germany more than anywhere else, and I would like to set the record straight once and for all. It is a myth that private equity companies milk their portfolio companies.
Barbarians at the gate?
Casting witticisms aside, value creation basically depends on two things: how much you pay when you enter a company and how much you receive when you exit. The price you get when you exit is the determining factor, and this depends primarily on how much value you leave on the table.
If one has stripped a portfolio company of its jewels, you are unlikely to get a good sale price. We carefully plan our exit and prepare the company for its next phase of development. So the buyer will clearly see an opportunity beyond what you have already done.
How about an example from your own portfolio?
Take Hallhuber. We have invested in new management, new systems and store expansion. The number of employees has increased by 16.5 per cent in 2 years. The previous owner considered Hallhuber a non-core activity and was therefore reluctant to expand the business.
We aim to make the company national in Germany, which we are doing rapidly, and then to prove that the concept can be internationalised. Once we have done this, we shall probably seek a buyer.
Why do you believe that private equity has come in for some bad press in the past?
One of the reasons why private equity had a relatively bad reputation in some parts of the world in the 80s and 90s is that it sometimes just sat on businesses and waited for the multiple to expand. It was a way to make money without doing very much, especially if you had reasonably-priced leverage.
Would you subscribe to the criticism that private equity is by nature short-term-oriented?
Contrary to what public opinion often thinks, we have a longer-term perspective than the average Plc. We tend to think at least four or five years down the line when we buy a company. Believe me; in public companies, where a CEO is obliged to immediately justify every single step he or she takes, that is very difficult to accomplish!
Why do you mostly finance deals with your own money rather than use bank leverage?
The banks are now much less willing to finance companies in general and do not view leveraged buyouts as a priority. Therefore, private equity companies need to put more capital to work than in the past. We still have leverage on some of our companies, but it is relatively low, which is often preferable.
In the case of a turnaround it is better not have any leverage at all because there is always a certain degree of risk of execution.
Also, if you buy a retailer like Hallhuber, where you intend to create value through opening stores, you do not want to overleverage the company up front because you will need the cash generated for expansion purposes, not to repay lenders.
To what extent has CCP been hit by the credit crunch?
Leverage is obviously harder to come by. However, we probably suffer a lot less from this new phenomenon than most of our competitors in the sense that we have always emphasised operations expertise and the creation of value through operational improvements, rather than just through financial engineering.
Has the general illiquidity of the market increased or decreased your investment opportunities?
Generally, structural changes have played to our strengths. It is very difficult for a mid-cap company to go public in Europe because the markets are simply not there. Also, the tougher the environment becomes, the greater the need for the type of operational expertise that we can provide.
You have run both publicly-quoted and private equity businesses. What capital structure is best for corporate success?
It depends on the company situation and its stage of development. Obviously, when companies reach a certain size, they may need public money to finance their investment. However, when companies are in a turnaround or a start-up phase, you definitely don’t want to be dependent on public money.
Why not, isn’t that the dream of all entrepreneurs?
Believe me; you will have so many hiccups in your early life when you won’t want to be under constant scrutiny and have to explain every quarter why you are not on track.
In my opinion, private equity is one of the better capitalistic models, particularly for a company that needs more funding and expertise in order to pass onto the next level of development.
Your move from retail management to private equity investment puts you in some very good company. Among many others, Daniel Bernard, Andy Bond, Tony Denunzio, Steve Esom, Sir Terry Leahy and Sir Geoffrey Mulcahy have left retailing to start an investment career. Pure coincidence?
I think that you must differentiate between people who run their own funds, take their own investment decisions and invest their own money, as I do, and those who are advisors to a fund.
Most of the people you mention are advisors. Very often, they advise on companies that have already been acquired by the financial partners of a fund. Obviously, this doesn’t mean that their expertise isn't appreciated by private equity funds.
But the increased frequency of such moves over the last few years is beginning to look like a trend?
As financial leverage has become less of a value-creation factor, private equity funds need to make sure that they are bringing real operating expertise to their portfolio companies.
The people you mention have an enormous amount of operating expertise to which the portfolio companies themselves could never have gained access.
Do you believe that the increasing closeness between retail management and private equity investment could create a conflict of interest?
I don’t see that this question is in any way relevant to the names of the retailers that you have mentioned, but let me try to give a general answer to your question. Obviously, it all depends on who has a conflict of interest with whom. If all shareholders agree with each other, then there is, by definition, no conflict of interest.
The stakeholders in any business must have a similar view regarding the long-term strategic direction of the company and where they think they will extract value. If, for instance, an exit is part of the equation, then all stakeholders must agree on an exit strategy.
Conflicts of interest often occur when the short-term interests of one or two shareholders are not aligned with the overall long-term interest of the company and therefore the majority of the other shareholders.
You were Chairman of Carrefour until 2007. What do you think of trade rumours that this now troubled company could be split into a national and an international part?
Would be a shame! The international presence of Carrefour represents its greatest value as the French and European markets are sluggish. Last time I looked at it, Carrefour's operations in China, for instance, were still the winning concept.
While CEO at Marks & Spencer, you decided to exit continental Europe in 2001. Current CEO Marc Bolland returned the company to Paris at the end of last year and is said to be negotiating entry into other western European countries. Was the exit wrong?
When I took charge of M&S we were losing more than £200m a year in international operations and fighting for survival. It was pretty obvious that the then concept was completely out of phase with consumer needs and not able to meet local competition.
The proof that the decision to exit was correct is seen in how we were able to put the company back on track within only a few years.
So Marks & Sparks should stick to its guns at home?
I didn’t say that. There are certainly components of M&S which are really unique and which I think deserve to be exploited internationally. These include, for instance, the “Simply Food” concept which we launched in 2002.
Do you think M&S will be successful in continental Europe this time?
I am sure that Marc Bolland and his team have figured out in the meantime those components of the M&S concept that are competitive internationally.
If I understand their strategy correctly, they are not going to relaunch mega-department stores all over the world that are not easily adapted to local markets. Instead, they are going to sell selected products and services that are unique to M&S; this would seem a far more auspicious route to success.
Turning finally to your most recent investment in Germany, what made CCP take a 75 per cent share in Schneekoppe in February 2011, and how long do you intend to keep your stake?
It was a relatively small investment for us, and Schneekoppe is clearly in a turnaround situation. So we shall probably hold the company somewhat longer than usual.
Where do you see the potential?
The need for healthy, active food is growing rapidly. Schneekoppe is one of the very few strong brands in Europe that stands for healthy, active food. The brand content is perfectly adapted to consumer needs. We now need to improve distribution and marketing, and I am confident that we shall get there over time.
Finally, how do you view the German retail market?
The retailing scene in Germany is probably one of the toughest in the world. The reason why it’s such a challenging market is largely due to Germans being among the most rational consumers in the world. Rational consumers are, by definition, not very profitable. They tend to buy what they need and hardly indulge in impulse buying.
However, this very same tough local environment has made Aldi, Lidl or Metro C&C etc. very efficient and therefore very successful internationally.
Read in German: Interview by Mike Dawson in Lebensmittel Zeitung, Nr. 13, 30.03.2012