Permira targets growth firms in high valuation markets

London-based private equity firm Permira will maintain its focus on high-quality companies and sector leaders with strong growth potential as valuations sit near all-time highs, its Managing Partner Kurt Björklund told The Korea Economic Daily.

With a time horizon of five to 10 years, the British firm has built strong track records in the sectors of technology, healthcare and consumer services, taking "deeper cross-sector approaches" to chase consumer-tech, fintech and services-tech companies.

"There is no question that valuations are at very, very high levels at the moment which means that there is less margin for error than ever before," he said in an email interview on Sept. 2.

"However, our strategy is to maintain a laser focus on backing high-quality companies with strong and sustainable growth. ... We will continue to look for businesses that we believe are on the right side of digital and technological disruption and are exposed to global megatrends."

The investment firm is also keen on subscription-type businesses which have recurring relationships with their customers.

Kurt became Permira's managing partner earlier this year, having been a co-managing partner since 2008. He joined the firm's London office in 1996.

Last year, during the height of the global pandemic, Permira invested in Seismic, a San Diego-based software company and Zwift, an indoor fitness app, which Björklund said were resilient through the pandemic and the beneficiaries of structural trends and digital disruption.

For divestments, it cashed out part of its shares in Allegro, a leading e-commerce player in Poland and Dr. Martens, a British footwear brand, through their stock market listings between 2020 and early 2021.

Since 2009, Permira has invested €9 billion ($12.5 billion) in more than 30 technology companies, which accounted for 70% of the total investments it has made in technology firms since its inception in 1985.

Last month, it joined hands with South Korea's GS Retail Co. and Affinity Equity Partners to acquire whole ownership of South Korea’s second-largest food delivery platform Yogiyo from Germany’s Delivery Hero SE for 800 billion won ($691 million).

Permira manages €44 billion pounds ($61 billion) with operations across 15 countries, including South Korea. Over the past 12 months, the valuations of its portfolio companies surged 47% year-on-year.

The following is the full transcript of the interview. 

▲Since the onset of the COVID-19 pandemic, can you tell us about the market situation from the global PEF perspective? How did Permira prepare for and get through the crisis over the last year?

"We learned during the Global Financial Crisis how important it was to move quickly and decisively to protect our portfolio companies. That’s exactly what we did again when we first sensed the pandemic was rolling fast around the world. We dived deeply into the financial and operating performance of every one of them to see where we needed to act."

"Then we moved to reflect on where it would be attractive to deploy capital. Whilst the immediate economic landscape was complicated and uncertain, we were able to identify a number of investment opportunities in high quality businesses that were resilient through the pandemic, such as Seismic (Global sales enablement software business) and Zwift (Interactive virtual fitness software application).

"These companies were all consistent with the themes behind which we have invested for quite some time, notably being the beneficiaries of structural trends and digital disruption."

"Overall our portfolio has performed very well over the last 12 months and valuations across the funds were up 47% year on year. We were also able to monetise a number of our more mature investments and generate strong returns for our investors, such as the listings of Allegro in Poland and Dr Martens in the UK. We believe that this performance is a good validation of our strategy of backing market leaders which are exposed to fundamental growth drivers and where we see opportunities to drive considerable business improvement."

▲On the acquisition of Poland's Allegro and Dr. Martens:

"Our funds acquired Allegro, a leading e-commerce marketplace and internet brand in Poland, in January 2017 along with two other PEFs. In September 2020, the funds were able to partially exit the investment by IPO on the Warsaw Stock Exchange at an implied enterprise value at US$12.4bn, an c.4x increase compared with the EV at acquisition. The transaction represented Poland’s largest IPO and the largest European internet IPO ever." 

"In January 2021, Dr. Martens priced its IPO on the London Stock Exchange at enterprise value of GBP 4bn. In the 7 years of the Permira funds’ ownership, Dr. Martens was transformed through an investment-driven value creation plan from a manufacturing-oriented wholesale business to a multi-channel digital first consumer brand, while remaining loyal to the original brand values (empowering rebellious self-expression). On an absolute basis, the revenue and EBITDA have grown by over 3x and 5x respectively. Dr. Martens is one of the most iconic footwear brands globally, selling over 11million pairs of footwear annually in more than 60 countries." 

▲Do you see any potential depression or inflation risk due to a sharp interest rate hike? What do you think about the changes in PE investing and PE fundraising environment given the interest rate hike?

"Here at Permira, we maintain a clear focus on backing long-term growth as the most sustainable and effective way of achieving returns for our investors. As a result we look for companies that will thrive despite market conditions and we aim to minimize the impact of the macro economy and risk factors that are outside our control."

▲Besides the specialty in the European market, what are the key differentiators of Permira comparing to the US PEFs, Blackstone, Carlyle, KKR, etc.?

"Permira is a thematically focused global growth investor. We back great businesses in themes that grow substantially in excess of GDP. We have a global footprint of 15 offices across 3 continents. If you look at the track record, we believe it is one of the strongest in the industry."

"The first thing that sets us apart is our people. We have a highly experienced, diverse investment team across 15 offices and we operate as one firm. This means that we have a long tradition of creating multi-geographic, multi-sector teams to share best practices and create a competitive advantage. All our geographic offices, all our sectors, and all the functional capabilities share a single incentive pool to support a highly collaborative culture. It means everyone in the business is aligned to work together in delivering great results."

"Secondly, our understanding and knowledge of the technology space allows us to use it as a horizontal capability across all of our sectors, such as in consumer tech where we have invested in a number of online marketplaces. The funds have invested around €13bn in technology since inception, of which almost €9bn has been invested since 2009 in more than 30 different companies."

"There aren’t many private equity firms with that depth of experience in the sector globally. Today, Permira is widely recognized as a leading growth-oriented investor with a strong European heritage and global presence. This means that we are able to partner with ambitious companies in Europe to help them enter other markets and vice versa."

▲What do you think about the current valuation level from a global PE perspective? In the assumption that you look back at the 2021 vintage fund in 5 years, what would you describe the 2021 vintage?

"There is no question that valuations are at very, very high levels at the moment which means that there is less margin for error than ever before. However, our strategy is to maintain a laser focus on backing high quality companies with strong and sustainable growth. We have demonstrated that the best protection we can have against falling multiples is resilient growth in our portfolio companies. We will continue to take a long-term view of 5-10 years focusing on risks that we can control. We like investing in companies where we have ability control the outcome and where we can partner with great entrepreneurs to help the business grow."

"When it comes to the asset selection, first thing that we look for is the market the company operates in. We want the market to be large so that the business can scale up very significantly and has plenty of white space to go for. Then we look at its market position – either where it is today or where we think we can take it. We have seen so many times that backing a market leader gives you massive optionality. And then we look at the business model and unit economics as an indicator of potential."

"One final point is that we love subscription-type businesses. We look for companies that have recurring relationships with their customers either in the form a simply subscription contract where underlying revenues typically scale up with the customer as the customer scales up and often buys adjacent services or then we can see the clear evidence of a reoccurring relationship with the customer where they keep coming back."

"It’s a lot of data to look at but our long investing history means we have a great reference base. So we know very quickly what great looks like. We know when businesses have characteristics that we like and how it compares in terms of quality."

▲Can you elaborate your investment strategy around high-growth technology companies?

"We have a long track record of investing in technology companies which have given us good experience and valuable pattern recognition. We have a strong conviction on who will be the winners in the sector and how we can help them continue to succeed. Of course, technology is a crowded investment space so we are very disciplined about the sub-sectors we focus on and only spend time where we feel we have a real competitive advantage."

"We talk about asset quality a lot – it has become the key north star metric which guides our investment philosophy. And in practice, we take a pretty systemic approach to evaluating it. That has meant developing frameworks to establish whether the businesses really are top quartile, if not top decile. In our technology sector team, for example, we use a set of 14 standardized quantitative and qualitative metrics to benchmark competitive strength and differentiation. The more we use these frameworks, the better we get."
 
▲Can you share your insights on what kind of investment themes or sub-sector focuses you have for mid-long term perspective in the next 5-10 years?

"We have been pursuing a growth-oriented, sector thematic investment strategy for more than a decade and have been investing in most of our sectors for much longer. We refined the strategy in the light of the global financial crisis and concluded it was the best way of managing the challenges of a volatile operating environment and generating high quality risk-adjusted returns for our investors."

"The specific sub-sectors that we invest into will shift a little over time to capitalize on opportunities but we will continue to look for businesses that we believe are on the right side of digital and technological disruption and are exposed to global megatrends."

"Permira’s sector teams develop long-term perspectives on resilient growth themes that can be narrowed down into investable opportunities. This drives a highly proactive approach to origination. Many of these themes have been consistent over many years and have generated multiple investments. Equally, our sector teams review and refine our themes on an ongoing basis to test the ongoing relevance of focus areas and to ensure we can stay ahead of waves of competitive interest."

"We also have a strength in technology as a horizontal capability across the sectors, so we have seen deeper cross-sector approaches in our portfolio: Consumer-Tech, Fin-Tech, Services-Tech. The horizontal capability works in value creation as well, such as digital customer acquisition, E2E digital transformation & automation and advanced analytics & AI."

▲Permira opened its Seoul office in 2012. In South Korea, which industry sector are you interested in?

"From time to time we come across opportunities in the Korean market but we have not yet closed an investment in the region – we hope that will change! We believe Korea has a big and deep market with many high quality and global companies with whom we could partner to achieve more growth."

"Currently, Permira Seoul office is operating as the Investor Relations oriented office as we have been building the long-term relationships with many institutional investors across Permira equity and credit funds."

▲Can you elaborate on how Permira is addressing ESG in the investment process? Can you also describe your effort to be a socially responsible investor?

"We have been integrating ESG into our investment approach for more than a decade and believe that this will become an increasingly important feature of our investment process over time. Fundamentally, we believe that responsible and sustainable businesses will be more valuable over the long term. We have a dedicated team to lead our ESG efforts but we think that it ultimately rests with our investment teams to ensure we are responsible stewards of the funds’ portfolio companies."

"We conduct detailed work on every advanced opportunity to make sure we understand the ESG risks and opportunities. When we make an investment, we conduct an even deeper ESG review and, where necessary, develop a plan with the company to address any risks or take advantage of any opportunity. Permira has taken a more formalized approach to ESG integration since 2010 and has been a signatory of UN PRI since 2013, reporting annually on its approach. Permira received A+ rating in both Private Equity module and Strategy and Governance module."

"As for social responsibility, we are really focused on investing in businesses that can make a positive contribution in the long term to societies around them. That will often mean creating employment as well as improving how they impact climate."

"At the beginning of pandemic last year, we guided our teams around the world in different offices to identify charities that worked directly on the frontline with people and communities that were being badly affected by Covid-19. So far, we have backed and worked with more than 100 different charities. It has been a very energizing thing for the firm and people have taken huge fulfillment from making a positive contribution through these challenging times."

Write to Chang Jae Yoo at yoocool@hankyung.com
Yeonhee Kim edited this article.