Focusing on the SME opportunity and cornerstoning emerging managers can be a key to generating outsized returns according to recent Certior Capital Private Markets Seminar featuring guest speakers from Siguler Guff
HELSINKI – Certior Capital recently held a Private Markets Seminar in Helsinki for a group of local institutional investors including pension funds, banks, insurance companies, asset managers and family offices. The event included presentations and discussions on private equity and private credit opportunities in the US and Europe, with guest speakers from renowned investment firm Siguler Guff.
A case study on investing in alternative assets was also given by Jari Puhakka from the Seafarers’ Pension Fund before guests continued the discussion over drinks and dinner. The seminar was moderated by Ari Jauho, founder and chairman of Certior Capital. “We were very happy with the numbers of investors who attended and the high quality of the debate, and will certainly be arranging more events in Helsinki and other European cities in the future”, commented Mr Jauho.
During the private equity discussion, Kevin Kester, Managing Director at Siguler Guff and head of the firm’s small business investment unit, underlined the value of a sector-driven approach to investing in smaller, unlisted companies across the US. “Sector expertise is vital in helping to build strong relationships with business owners. As a private equity investor, a business owner will clearly be able to see the value that you can bring if you have real sector knowledge. It helps enormously in many areas including deal sourcing, board level interactions and introducing new customers”, he stated.
Speaking about emerging managers, Mr Kester made several further observations. “We don’t back first-time investors but we do back first-time funds. For a manager, there is normally a lot riding on the success of their first institutional fund. Looking at our own portfolio, the best performing funds tend to be a manager’s first fund by a small margin. Often, when a group spins out it has a few good ideas and these ideas often translate into outsized returns”.
Timo Hara, a founder and partner at Certior Capital, also made a related point to support the case for backing new firms in Europe. “First-time funds are generally established to fill certain spots in the market in terms of strategy, style or geography. They therefore tend to appear in segments that have been undercapitalised for some reason. First-time funds also tend to be very careful in only deploying their limited capital resources into opportunities that really excite them”.
On the private credit markets in the US, Sean Greene, a Managing Director at Siguler Guff and head of the firm’s small business lending platform, underlined that the firm typically invests in companies that have been in business for approximately 40 years and have therefore been through a number of economic cycles. In the US, the lower middle market – defined as a segment of about 300,000 businesses with USD 5-100m of revenues – represents a USD 25-30bn sponsored credit opportunity; however, only around 10% of credit fundraising is focused on this area. The vast majority of capital raised by private credit funds focused on much larger transactions. “In what is therefore a relatively undercapitalised area”, Mr Greene commented, “We can focus our portfolio on businesses that are recession resistant, have low leverage, cost flexibility and strong asset coverage”.
Turning to the development of the European private credit market, Mr Greene points to the fact that the proportion of corporate lending done by banks has fallen from around 70% down to 20% and that Europe is seeing the same trend but still has further to go to catch up. “Furthermore, in the US and Europe, sponsored deals are driven by the evolution of their private equity markets”, he adds. “Private credit is dominated by large funds but smaller, niche opportunities will emerge as well”.
Mr Hara underlines the differences between the US private credit markets and that found currently in Europe. “Europe is very much more fragmented than the US and this will not change. While the sponsored market in Europe may evolve in a similar manner to the US, the unsponsored market is fundamentally very different. In Europe, it is not practical to have a centralised deal-making hub given that entrepreneurs are spread across the continent, often in second or third tier cities and towns, speaking different languages and often operating under quite different legal frameworks”. Turning to the number of managers in Europe who have been through several cycles, Mr Hara is clear. “There is a small group of established private credit managers now in Europe, but there are no well-established teams focusing on the SME direct lending opportunity. This is where we see real value right now and where we are almost alone in our strategy of actively cornerstoning emerging teams”.
About Certior Capital
Certior Capital is a value-add focused private equity and private credit advisor and alternative investment fund manager supervised by the Finnish FSA. The firm’s core expertise is in European lower- and mid-market private equity and credit markets, where the team’s experience is one of the longest in Europe. The company’s latest fund, Certior Credit Opportunities Fund II, held a first close in August 2018 and has a target of EUR 300m. It focuses predominantly on the European SME direct lending segment, in particular in cornerstoning emerging managers. Certior also manages three other investment programs: Certior Credit Opportunities Fund invests in SME direct lending funds and makes investments directly into loans, Certior Credit Investments invests in European mid-market direct lending transactions and Certior Private Equity Fund I focuses on European small- and mid-market private equity opportunities, with an emphasis on backing emerging managers.
For further comments or additional information please contact Ari Jauho.
Tel: +358 50 3378 282