BC Partners’ Nikos Stathopoulos has advice for anyone entering the private equity industry: “Patience is a very big virtue.” That holds truer now than at any point in the last few years, with firms holding assets for longer amid “the lowest deal volumes and deal values in the private equity industry that I can remember for at least a decade”, he told PE Hub Europe.
Stathopoulos joined London-headquartered BC Partners, an investment firm with more than €40 billion in AUM, in 2005. As well as being chairman of Europe, he is a partner and member of the management and private equity investment committees.
He began his private equity career at Apax Partners in London a little over 25 years ago.
Back then, interest rates were higher than they are now. But rates, along with inflation, market instability and a resultant misalignment on price expectations between buyers and sellers, are what is behind a drop in deals today, he said.
“For those of us who have been in the industry for almost three decades, this is not unprecedented,” said Stathopoulos. “We were, for better or worse, spoiled by the last decade of very low interest rates and very low inflation.”
The change demands a switch in approach where the patience Stathopoulos spoke of becomes key. The firm invests in businesses with strong cashflow and balance sheets – attributes that he said bolster margin and profitability. But value must also be created via operations – something particularly true today.
“In the current financing environment, we are very focused on managing short-term refinancing pressures given higher costs, and managers will need to be prepared to hold assets for longer.”
Such conditions also require creativity. That means finding novel ways to return capital to investors, such as minority stake sales – which do not trigger bank loan refinancings – and continuation funds.
The creativity in the industry, which has led to a variety of different business models, means that Stathopoulos “would not be surprised if we see more consolidation in the industry”, as firms seek to gain more exposure in sectors such as credit or real estate – businesses in which BC Partners already operates, alongside its flagship private equity business.
Monetising assets while avoiding new financing also requires novel approaches.
BC Partners has a concrete example of partially monetising an investment, one in which Stathopoulos is “very proud” and in which he plays a leading role, as he leads all the firm’s telecoms and media sectors deals.
Stathopoulos spoke to PE Hub Europe about the sale of the towers business of United Group, a southeast Europe telecoms company, back in April.
Looking at the investment more generally, he said it was an example of growing a business through organic growth, acquisitions and expansion in adjacent markets, allowing it to quadruple EBITDA to over €1 billion since buying it from KKR in March 2019.
“United Group is the fastest growing telecom and pay TV operator in Europe,” he added. “It’s a great example of where a private equity firm can buy a company from another private equity firm – one of the best, like KKR – and still with its own strategy, with its courage and conviction, and accelerate growth both organically and through acquisitions.”
The sale of United’s towers business was a sign of the shift in valuations, with Stathopoulos telling PE Hub Europe at the time that it did not achieve quite as high a multiple as it would have a year earlier.
While other sellers have not fully adjusted to the new normal, the conservative approach from buyers because of the wider macro picture means “valuations will inevitably come down”, he said.
Also, while inflation and interest rates will remain higher for longer than many economists predicted, the macro picture is stabilising. In Europe – where BC Partners invests about two-thirds of its capital – inflation is falling and interest rates plateauing, except in the UK.
“Markets will start to recognise this and respond to increasing stability and therefore I do think that we will see an uptick in market activity,” he said. “There’s a high degree of consensus that Europe and the US are going to avoid recession in 2023.
“The biggest opportunity for disciplined investors in this environment, is that it is actually a very good environment in which to invest. But to invest in these environments you need conviction, which comes from a combination of experience and an understanding of specific sectors and sub-sectors. You can see the trends through the macro instability and just focus on company fundamentals.”
That outlook comes tempered with his other bit of advice for private equity newcomers.
“Management of expectations in this environment is essential, because a lot of deals and a lot of effort may not result in a transaction,” he said. “But as an industry, I still believe it’s one of the best investing environments that I can think of.”