Deloitte 2020 survey on M&A activity in the Swiss SME sector | 22

Gyrus Capital – An investment fund seeking transformational investments

Gyrus Capital is a Geneva-based investment fund created in 2018 specialising in transformational investments. The fund’s first transaction was to acquire the DuPont Sustainable Solutions (DSS) business, sold by DowDuPont Specialty Products, and to create a new independent management consulting and service business. The new company will be managed and run by the existing DSS management team and supported by Gyrus Capital. Deloitte acted as advisor, steering the entire carve-out and providing tax and legal services, financial due diligence and business start-up consulting.

Guy Semmens, co-founder and Managing Partner of Gyrus Capital, explains the fund’s strategy and reviews the acquisition of DSS.

You recently co-founded Gyrus Capital, a mid-market private equity fund, after more than 22 years at Argos Soditic. What was the motivation for this change and what sets Gyrus apart from other PE funds?

“Over the past 20 years, private equity has become much more standardised and professional, making it safer and more mainstream. The larger you are, the greater your transactions in value and number, the more you fall into the median range of private equity funds. And the median has become less and less attractive, with declining returns. With the creation of Gyrus, we are trying to do something different. We are a small team looking to make a small number of transactions each year in niche sectors that offer attractive returns. We avoid competitive processes, as well as a generalist approach and traditional sectors like retail, industry or engineering, because it is difficult today to create growth in these sectors in Europe. We look for industries that offer sustainable, long-term growth, such as healthcare, and we’re not afraid of complex regulatory environments. DSS is a complex carve-out situation and an example of a transformational and complicated acquisition in a sector that enjoys sustainable growth of the kind that we are looking for. ”

You recently finalised this first acquisition with the spin-off/MBO of DSS. Could you tell us more about the reason behind this transaction and how you gained access to such an opportunity?

“We seized the opportunity to make a very interesting business independent in a sector with long-term growth prospects, which was until now constrained by not being part of the parent company’s core business. The skills and technology created by DuPont are tremendous, and independence will allow DSS to unlock even more value. The task was to undertake a complex carve-out spanning 30 countries and create offices around the world, but the business has a remarkable management team that is free to develop the business operations as it sees fit.

We had a pre-existing relationship with DuPont. The seller’s initial reluctance to transfer the business to an investment fund without existing infrastructure for this type of business speaks volumes about the complexity of the spin-off. We had to establish transitional service agreements with the seller, create 30 legal entities and multiple offices around the world, install ERP and payroll systems, and transfer 620 people out of 1,400 part-time consultants. »

Do you see this kind of carve-out as a growing trend? And is this an opportunity for you?

“I think it has always been a trend. Whenever people revise their strategy or goals, then carve-outs tend to appear. Is that interesting for us? Absolutely, for two reasons. The first is essentially that it is not possible to implement such a split through competition. You can’t start an auction process with multiple parallel bidders and simply see who gets to the highest price fastest like you could with an independent business. You have to get involved, reach agreement, trust each other and work together to get there. And that gives you an element of certainty and security about the transaction, which is extremely precious in such a competitive market.

The second consideration is that there is a good chance that the seller is more interested in finding the right solution for the sale of the division and in the buyer’s ability to integrate it within good time and with a good outcome, rather than simply maximising the price. This therefore allows you to have confidence in the transaction and probably agree to a more attractive valuation than you would if it were an independent entity. So in a very expensive and competitive market, this is a way of establishing value criteria. But you need experience and patience. ”

We discussed carve-outs of large groups earlier, but going back to family businesses, what do you think are the main challenges when making the transition to a private equity fund?

“Over the past 25 years, 50% of the transactions that I have worked on have come from large companies and 50% from succession sales by entrepreneurs or families, and these are very different. In a succession sale, you tend to have less sophisticated structures in place. You also often find that the scope and depth of the management team is not as great as in the case of a carve-out. That said, successful family businesses often have a very clear focus on their core competency and absolutely excel at it. So you really have to be careful to preserve what’s there, because it’s a fantastic asset, but then you have to build the structure and the support mechanisms around it to allow the company to make this transition and continue to grow. Another recurring feature of succession cases is that the entrepreneur or family who built the business had a very paternal role, with a strong involvement at all levels. This is another important element to consider during the transition period.”

After more than 20 years of experience in implementing LBOs in the mid-market segment, what are your views on recent developments and 2020 with the COVID-19 pandemic?

“Private equity is becoming more and more competitive these days. We see more money, more players and more funds available than ever, for a limited number of transactions. So if you want to do deals at good prices, you have to be a little more creative and inventive. You have to roll up your sleeves and be ready to do what others won’t. This is why we seek value in complex transactions where we can make changes and improvements. 

One of the peculiarities of the recovery that followed the last recession was that the number of transactions did not increase, while prices soared. Competition therefore became even fiercer, which led traditional funds to turn to larger and less risky transactions. High-quality assets in straightforward transactions therefore fetched record prices. And this has been the case for the past three or four years.

A few weeks ago, we could legitimately ask ourselves if this trend could continue: there was no reason to think that the trend would reverse in an environment of ever-lower interest rates, with readily available and abundant debt and a lot of available cash. We thought that a market correction was possible, but what has occurred with COVID-19 is unexpected and unprecedented in nature. Will the world of private equity change? Yes, and radically. Companies will suffer and will be restructured, and valuation multiples will certainly come down. To what extent? It’s too early to tell: there is currently too much uncertainty about how long the crisis will last and what impact it will have on the economy. We are witnessing the shutdown of swathes of the economy and lockdowns of people in many countries. This is a highly unlikely recession scenario, for which no business was prepared. M&A transactions have continued in recent weeks and financial institutions continue to lend, but that may not last if market visibility does not return soon. Indeed, no one can say if the economy will recover quickly or if we will suffer a recession like that of 1929. Today the world is flying blind, and the lack of visibility is the biggest question mark – more than corporate valuations or liquidity. There will clearly be attractive restructuring opportunities, as in all other crises, but that time is not yet here. Some sectors will be more directly affected than others, such as transport and tourism, retail and consumer goods, which are already hard hit. The sectors we focus on and that offer sustainable long-term growth, such as healthcare, should suffer less or even emerge stronger, but it is too early to say for sure. The impact could also be significant if the counterparties and the entire ecosystem needed to run a business are deeply affected.”

Read the full report here:
https://www2.deloitte.com/ch/en/pages/mergers-and-acquisitions/articles/swiss-smes.html