Financial investors - spotting opportunities across sectors

An interview with Steffen Görig, Chief Executive Officer of Quantum Capital Partners GmbH


» With globalisation, digitalisation and increased regulation more and more companies are forced to think about a fundamental reorganisation of their business model and radical spin-offs of entire sectors. What advantages does this provide for financial investors and how can businesses profit from this themselves?

Spin-offs of non-core activity sectors are precisely what we live for as financial investors. Our principal business is to buy out a range of these sectors from big corporations. Of course, I couldn’t say whether these non-core activity sectors are sold solely for the reasons mentioned above. In most cases though it happens that these areas no longer belong to the core business and the corporations therefore want to separate themselves from them. For us as financial investors, these spin-offs of big corporations present a big opportunity.

Steffen Görig, Chief Executive Officer der Quantum Capital Partners GmbH

» Spotting the potential for improvement, growth and development in businesses and then investing correspondingly is a huge challenge these days. Are there any specific markers you’re able to use to orientate yourself?

Unfortunately it’s impossible to simplify the process like that. When corporations sell non-core activity sectors to us, there is a meeting of widely differing viewpoints. The corporation states that the sector is no longer a part of its core activity and it wants a split-off. However, we look at this sector and see (if we buy it) opportunities that are there to be developed upon. In the meantime, it will become clear whether these sectors are to have a positive outcome in the future. For example, by fashioning out directions under new management which perhaps were not possible or permitted as part of the corporation.

» Jeffery Perkins, the German Director of the investment bank Harris Williams & Co. has said: “There is too much capital to be invested in too few, high-quality businesses, which leads to high and ever increasing prices.” To what extent to you agree with this statement?

For us that is definitely an important issue. There is currently a great deal of liquidity in the market which is looking for a return, and which can’t produce any returns with its conventional liquidity products. This means that alternatives for the capital to flow into are sought. One alternative is to buy shares instead of entire companies. Ever increasingly we are encountering situations in the market where in great demand a limited supply comes up against big reserves of liquidity. For this reason we have to expect higher prices for shares and businesses. Therefore it could be the case that over the course of several years the market prices for companies increase.

» Renewable energy has played a big role in Germany for a while now and will in the future too. Where do you see the advantages of this development for the “financial investment” industry?

I’m always sceptical of investments which depend greatly upon governmental regulations and politics. When a leader decides to phase out nuclear energy, alternative energies become valuable. When a government decides to reduce the power input of solar cells, solar energy investments become less valuable. It’s always difficult to invest in sectors which are so dependent on political decisions. That means it’s not really an area of investment that’s particularly important for us.

» “There aren’t currently many big plans in Europe in the area of project financing,” explains Ulrich Winkelmann, Offshore Specialist at NordLB in Hanover, in an interview with Die Zeit newspaper. In your opinion what are the reasons for this?

Recently we looked at a company that was for sale and produced component parts for offshore wind energy. If I remember rightly the financial data was in the offshore wind energy industry and the outlook looked good. So I don’t really know how far I can back up this statement.

» How does it look in other industries?

It really depends on the industry and the country. Differentiated perspectives are required here. We invest in all industries, but mostly in the classic Old Economy, the manufacturing industry. We see potential there and so also invest our money.

» As a study from the HEC Paris business school and the private equity company Activa Capital showed, carve-outs triple the buyer’s investment. Does a carefully planned carve-out open up new opportunities on both sides?

I would say that this “tripling” is in many cases a very conservative assumption for a carve-out. We do 80-90% of our carve-outs in big corporations. Looking at this over the last few years, our return assumption is in most cases higher.

It’s dependent essentially on employed capital, as we sometimes buy companies which are not economically healthy. In these cases we are sometimes buying at a symbolic price.

As an example: If we buy a company symbolically for “one” euro, it’s possible to triple the investment relatively easily. If we go onto sell the business for 1,000 euros then we have increased our capital a thousandfold. The magic of the “small number” is clearly evident here.

To summarise: To take a business out of a corporation and to manage it independently offers a much higher appreciation potential.

» Financial investors haven’t structured as many buyouts in German middle-sized businesses as they did last year since the record year in 2007. How do you judge the current market situation?

If you mean leverage buyouts in the sense of financed business acquisitions, then I’d say that, yes, creditors have returned. In our view, it’s now once again easier to refinance purchasing prices through financial institutions. The market has become more receptive than in previous years. For us as buyers that isn’t such a big issue, as we receive no leverage or external investment for the businesses which we purchase (for example, because they are in financial difficulty).

» Research conducted by the specialist magazine Finance on behalf of Deutsche Beteiligungs AG (DBAG) on trends in the German middle-sized business area highlights the risk of exaggerated valuations. In particular, the prices for medical technology businesses and technology companies are said to be so high that there is a danger of a financial bubble forming in these sectors. What are the solutions to this, in your opinion? Do you think that other sectors or industries are also affected?

If a industry is overheating and I continue to invest there, I can hardly be surprised that starting prices increase and my investment doesn’t fair as well as in other industries which aren’t experiencing this overheating problem.

An industry starts to sound interesting to other investors when it is affordable for all and it has been shown to be profitable. At that point a lot of money flows in, of course, and the few companies for sale in the sector raise their prices correspondingly.

» History shows that the loss risk in a share investment is largely determined by the length of the investment period. In your opinion, should an investment horizon spanning as long a period of time as possible always be pursued?

A longer investment horizon is better than a shorter one. Since a risk only arises when a discrepancy develops between the assumption and the performance.

Over the course of a longer period, companies and economies develop in a direction in a much more stable fashion. To answer the question: if an investment has been made, there is always an expectation of how much and when something should be returned. Flexibility in this area of tension is important. In this way it’s easier if you send these questions relating to returns far into the future.