Spotify goes public, not through an IPO

Spotify goes public, not through an IPO

Spotify will go public before the end of the first half of 2018 and has already filed confidentially with U.S. regulators for an initial public offering. Morgan Stanley, Goldman Sachs and Allen & Co to advise on the listing, acting as commission brokers that will only help selling the shares.

Spotify, the privately held Swedish music company, last valued at $20 billion,  will not be selling its shares and raise any capital through a standard IPO process but it will be the first large company to go public via an unusual direct listing on the NYSE.

Spotify is the biggest global music streaming service with 70 million paying subscribers as of January 2018 (compared with Apple Music’s 30 million), over 140 million active users worldwide and 30 million songs available to stream straight from the internet.

While Spotify’s losses are mounting – the company experienced net losses over the last 5 years and saw losses more than double in 2016 to 556.7 million euros – its revenues increased by 52.1 percent in 2016 and by 39% in 2017.

One of the reasons behind this unusual choice might be found in that the company had raised $1bn (£740m) in a debt deal with private equity companies in 2016. The deal provided that the debt interest rate would increase by 1% every half of a year until the company went public.

Moreover, Spotify’s listing would benefit not only its CEO Daniel Ek who controls 25% of the company and Martin Lorentzon, co-founder and director and former chairman, owning 13% of the company, but also Sony Music Entertainment International, Technology Crossover Ventures, Investor Tiger Global and Tencent which are the major investors of Spotify.

Company founders will retain control of the company by holding onto a separate class of shares, so-called dual-class, with enhanced voting power. The “dual-share” structure, employed previously also by Facebook and Alphabet, is not the only feature that sets this listing apart.


What is unusual about this

First, when a company decides to go public it does so by issuing new shares and increasing capital. However, Spotify decided not to go for the traditional route and thanks to the direct listing the private company will sell their shares on the market by bypassing the underwriting process by directly selling shares to investors at a price determined by the company without any help from investment banks.

Second, direct listings have occurred mostly in biotech and life sciences and have been limited to small-cap companies, Ovascience (market cap: $55 million) and BioLine Rx (market cap: $83 million) being two examples.

Third, when a company decides to go public it needs to register with exchanges, which are usually NASDAQ and the OTC market.  However, Spotify has asked NYSE to change rules, and for the first time it will go public via a direct listing on the NYSE.


The Process

The process for going public is very similar to the IPO. In fact, the business presentation, due diligence, prospectus preparation, and forms required are the same as for an IPO but with an exception. What is different is that a direct listing does not require the 2 week roadshow.

You will ask, is a roadshow really needed? Usually it is carried out in order to setting up meetings and interviews, so that the investment bank will increase demand. However, being Spotify a large company, with an established brand and a knowledgeable customer base, a roadshow is not really needed.

Direct listings can be compared to the opening of a shop and hoping people will just drop by. The store is open, but you do not have anyone marketing or setting up meetings.” says Kathleen Smith. Private shares will become legally tradable and therefore whoever owns Spotify stock will have the chance to offer it on the public market and slowly Spotify’s stock will begin trading like any stock.

However, since there will be no agreed ‘starting’ price it is unclear what will happen at  start of trading if the demand will be higher than the supply, hence we could see huge volatility (more than in an underwritten IPO) of Spotify’s share price.


Advantages of a direct listing

A direct listing will leave less money on the table as people will not sell their shares at a lower price. Moreover, since no new share will be issued there will be no dilution for existing shareholders.

In addition, investors can sell their shares more quickly as there is no lock-up period that prevents insiders from selling shares in the months following a listing. Finally, a direct listing requires no underwriters and  therefore is cheaper because of no fees.

To sum up, in three words,  direct listing is faster, easier, cheaper.


However, there are some disadvantages

Since there is theoretically no need for an investment bank, the company will not benefit from a professional support from investment banks (especially in terms of demand generation and liquidity support). Moreover, it will not have buffers against volatility (especially on the first day where volatility is usually high), and will not take advantage of presentation support from advisors (important for small to medium companies). In addition, its price will purely be determined by demand and supply and Spotify will not have any control over it.

Lastly, the company will be less likely to have long term investors, usually gained during the roadshow process.



Spotify’s unusual way of going public could change not only the way that large technology companies go public in the future especially those who do not need capital and would like to go public like Uber and Airbnb but could also impact investment banks’ business model as they would not be able to collect many underwriting fees. However, if Spotify, falls below the valued amount, it would probably not like a successful roadmap to follow.


Are We on the Verge of a Trade War?

Are We on the Verge of a Trade War?

Many of us have been asking ourselves this question after President Trump announced his intention to impose 25% and 10% tariffs on steel and aluminium imports, respectively. Trump’s announcement might be challenging the GATT (General Agreement on Tariffs and Trade) which despite evolving throughout time, have remained the WTO’s foundation since its establishment after World War II.

Globalisation has triggered global economic expansion and development, leading to substantial real income growth. However, developed countries’ middle class has not experienced such an increase on their real income. A decrease in their purchasing power has lead them to blame globalisation and free trade agreements for this.


This sentiment has triggered an increase in protectionism, being Brexit and Trump’s election two illustrations of this anti-globalisation movement. Trump’s potential tariff imposition is therefore another protectionist measure founding his campaign’s slogan: “Make America great again”. Previous protectionist tariffs, such as those imposed by George W. Bush in 2002, resulted in a loss of 200,000 jobs. Will it be any different this time?

Despite affecting other countries, such as Canada or Mexico, in a more devastating way, when Trump talks trade, he talks China. Decreasing China’s record high trade surplus with the US is one of Trump’s main targets, which he has emphasized throughout his mandate.


China, the EU and other countries have expressed their concern regarding steel and aluminium tariffs and have threatened to apply several countermeasures.

CHINA– China is one of the leading US export car markets as well as being one of the top tourist and technology-purchasing markets. Additionally, China holds over $1tn of US debt. Some likely countermeasures could be industry-specific, such as restricting automobile, semiconductor or agricultural imports from the US. Examples of firm-specific measures include restricting iPhone sales or substituting Boeing for Airbus aircrafts. Other counteractions might include discouraging travel to the US (more than 100 million Chinese people travel around the world every year) or limiting the number of Chinese students in the US. The Chinese Government, however, remains cautious in attempt to restrain a potential trade war.

CANADA– Canada would probably be Trump’s most sound victim if these tariffs are actually applied. Prime Minister Justin Trudeau classified them as “absolutely unacceptable” and expressed Canada’s intention to respond to them by targeting two symbolically-valuable industries: manufacturing and agriculture. Trump, however, announced that Canada and Mexico could be exempted from these tariffs if NAFTA were to be renegotiated.


EU– The European Commission president, Jean-Claude Juncker announced that the EU’s will engage in a collective response with other countries affected by these measures. Additionally, Juncker expressed EU’s intention to prepare a list of potential retaliation tariffs which would most likely add up to almost $3 billion. These tariffs would target a list of products including clothing, cosmetics, motorbikes, boats, agricultural products and industrial products.

UK– Despite being the US one of the UK’s most important trade partners and even though a possible US-UK post-Brexit free trade deal had been rumoured, Theresa May has expressed her “deep concerns” regarding new tariffs and confirmed that “while the UK remains part of the European Union, any action would come as part of an EU-wide response.” [1]

According to the WTO, Mexico, Japan, Australia, India and South Korea are also “very concerned” with Trump’s potential tariffs and have announced their intentions to apply countermeasures.



Despite easing trade war likelihood, the application of such tariffs would have a remarkable global impact if it escalated to a trade war. Some possible long-term consequences would include:

  • Global economic expansion slowdown triggered by decrease in global output
  • Gross job loss
  • Worldwide inflation driven by increase in product prices because of tariffs
  • Equity market sell-off driven by lower corporate earnings expectations
  • Decrease in risk appetite, increased demand for safe havens
  • FX fluctuations
  • US Tech sector decline


CONCLUSION –Imposing these tariffs on aluminium and steel may seem insignificant at first, however, this would most likely result in a series of retaliatory measures which would in the end lead to a trade war. “Protecting” these metals, mostly input goods, would have a negative impact on other aluminium and steel-consuming industries. Assuming no retaliatory measures are applied, negative consequences would still escalate to other countries, in a world where globalised supply-chain dependency is a reality. For a country that accounts for 13.9% of the world’s imports and 9.1% of the world’s exports a trade war definitely does not sound like the best solution.



Carmen Álvarez Álvarez



Mifid II: what about the markets?

Mifid II: what about the markets?

3rd of January 2018, while the markets started well their year and were keeping a bullish direction before the recent increase in volatility, something else started. Yes, it’s the new European Union Markets in Financial Instruments Directive known also as MiFID II.

Most people talked a lot about it during the last quarter of 2017 and were trying to understand the possible opportunities and threatens related to this topic. But first, let’s see what it is about.


The Directive

The aim of this big EU directive (more than 7000 pages) is to protect investors and make sure they receive “fair” deals when dealing with Fund and Asset Managers and so try to make Financial Institutions more transparent. This happens thanks to reports filled within 15 minutes from the transaction so that the regulators can spot abuses in all existing asset classes (Bonds, Stocks and Derivatives) and consequently become more diligent.

A major related change is for Bonds and Derivatives as they will not be any more phones involved in those processes, but everything will be done electronically. In this way, the EU wants to push back a lot of trades to public exchanges so that they can be monitored.

On the Equity side, EU was pushing for stricter limits regarding dark trading but at the last minute it was set back, probably to broaden this aspect, making still possible to trade more than 600 stocks on dark pools. The dark pools are basically private exchanges or forums for trading securities not accessible by the investing public. In those exchanges there is no transparency at all and are mainly used by institutional investors who do not wish to impact the markets. This is confirmed by Trista Keller’s (Bloomberg) statement which says: “For a lot of people MiFID II has still not happened, at list on the equity market”.



With this little, simple and effective table published by Bloomberg, we can have an overview of the rules that the European regulator introduced and the result that should therefore arise.



The implications

Let’s now look at the implications of this directive. First, different studies showed a decrease for Research inside banks, both in budgets and in people. Therefore, many professionals of the sector decided to leave earlier to create their own firm. This because an increasingly large number of leading asset managers already announced they will internalise the cost of research in their P&L instead of charging it separately to investors via Research Payment Accounts which are accounts exclusively created for the clients to put funds in to pay for research and directly managed by the financial institutions and banks. A McKinsey report estimated a 10-30% reduction in buy side’s external payment for research over the next three years and a S&P survey indicates that, asset managers’ EBIT may decline by 15%/ 30% because of the shift to P&L accounting for external research expenses.

From the following chart, the first impression is that big banks need a lot of information and their demand seems very fragmented. However, 20 banks account for 64%. Therefore, according to 80:20 Pareto’s rule, one can dominate the market by providing reports of Equity Research to a small number of big players.


Moreover, the impressive decrease in European Research budgets both in terms of advisory and brokers, could lead to a big change in banks demand.


Another big effect is on Sales&Trading which last year has seen a declining number of traders together with an introduction of electronic trading engineers. Indeed, specific data compiled by McKinsey on the Equity segment of the top 9 investment banks show the overall Sales&Trading headcount declined three times faster than Research since 2011. For example, Goldman Sachs’ US cash equity business moved from 600 traders in year 2000 to only 2 traders in 2016.

In fact, with MiFID II will cause lot of job loosing but at the same time many have been, are and will be created. For example, the number of job adverts on LinkedIn for MiFID-related roles has more than quadrupled in the last year in a sign of how companies have been trying to be well prepared for the far-reaching European regulation. Banks, asset managers, consultancy and law firms have all embarked on a hiring spree ahead of the introduction of the second instalment of the Markets in Financial Instruments Directive.

This is quite a revolution happening in banking which is also related to Fintech and Robo-advisory recent success among investors. Indeed, this disruptive companies are recently receiving large funding from high-profile investors and hiring new talents to take advantage of growth momentum.



Until now, MiFID II has created some advantages that benefited some players such as:

  • Pension funds and family offices will be advantaged as they will be more aware of the fees payed for researches and so increase their bargaining power. Regarding the price, also big money managers such as BlackRock and Vanguard Group will benefit.
  • Platforms in general will benefit from this directive and particularly in hedge funds where they will ease compliance and reduce again costs.
  • Individual investors will be more aware of the fees and this might lead to a big shift from funds to ETFs due to their lower cost. Indeed, they are forecasted to surge from 725 billion dollars to more than $1 trillion in next 1 to 3 years.
  • Big Investment Banks will be able to compete on prices for research eventually building a new revenues stream.


As any other piece of legislation, MiFID also created some “losers”:

  • Smaller companies with lower budgets will encounter higher prices for obtaining information and may charge higher expenses to clients which could cause a negative impact on business. The same goes for smaller investment banks and boutiques that cannot afford a war price on their research products.
  • Hedge funds will have to insert reports within 1 minute for the equity side and 15 for the fixed income products. This will probably impact their transaction volumes and costs in terms of time and money.
  • Research teams will shrink and so their effort higher or the output poorer. Are unexperienced investors ready to independently search for stocks without being able to rely on recommendations? Will they take the risk or miss the opportunity? What would happen to the relatively unknown small cap? Would the capital run towards big firms leaving the small ones illiquid? As trades would not be any more done over the phone but via platforms, who will now loose his voice and go to the doctor? And what about the already declining fixed phone business?




Lorenzo Bracco

Private Equity – Snapshot & Outlook

Private Equity – Snapshot & Outlook

– In 2017, Private Equity markets continued to reach new record highs with regard to capital commitment, deal valuations and number of active investors. Competition for private investments increased dramatically, largely caused by traditional asset managers shifting significant proportions of their capital into private markets. With easy access to capital and increased competition for deals, Private Equity investors increasingly experience problems to effectively deploy their capital. However, the valuation rally is expected to continue in 2018, introducing new forms of investors, so-called megafunds. –

STATUS QUO – Private Equity markets are booming: Private asset managers raised a record sum of nearly $750 billion globally, extending a cycle that began eight years ago. In addition, less traditional investors such as pension funds or sovereign wealth funds increasingly engage in direct investments in private markets due to a lack of profitable investment opportunities in more traditional asset classes. With more capital available, the total deal volume rose by 14 percent to $1.3 trillion compared to the previous year, reaching almost its record high of $1.4 trillion from 2007. In contrast, deal count dropped for the second year in a row by 8 percent. As a result, the average deal size increased from $126 million in 2016 to $157 million in 2017, a 25 percent increase, mirroring the increased competition among investors.


Furthermore, the Median EBITDA multiple for investments in 2017 exceeded 10x, displaying a significant increase from its previous all-time high of 9.2x in 2016. Despite record valuations, the number of exits fell for the third consecutive year, suggesting that investors believe in further value appreciation of their investments.



High investment performance and superior yields for limited partners attracted new types of investors, ultimately resulting in greater capital commitments and fund size: The latter can be attributed to a large part to the rise of US buyout megafunds, private blind-pool capital vehicles with assets under management (AUM) above $5 billion. The prevailing wisdom has long been that the “law of large numbers” might put a cap on megafund returns, however average returns have outperformed returns of other fund sizes consistently during the last decade. The latter was not only a US phenomenon: The rise of US megafunds was nearly matched in Europe, where several firms successfully closed big new funds totaling $40 billion, and in Asia, where megafunds—previously close to nonexistent— contributed more than $20 billion of the $60 billion raised in 2017.

Besides buyout funds, it appears that other private asset classes constitute increasingly attractive investment opportunities for investors. First, private debt markets are more and more seen as a good alternative to banks and public debt, fueled by all-time low interest rates and investor demand for portfolio diversification. Second, real-estate gained popularity following collective rent rises in major cities. While investors have historically viewed Real Estate as a source of alpha, more and more are coming to see it rather as a source of income. In a world of compressing yields, relatively low-risk assets that produce annual returns of 5 to 7 percent, appeal to many investors. Finally, infrastructure investments remain an attractive alternative for investors. Since 2016, some of the largest general partners have raised record-breaking funds for traditional, brownfield infrastructure strategies.

CHALLENGES – Due to the continuous popularity of Private Equity as an investment vehicle, new challenges have emerged, pressuring the superior profitability of the industry. Higher number of sophisticated investors, ranging from pensions and endowments to family offices, decrease the likelihood for exclusive bidding. Hence, valuations continue to approach artificial highs, which makes it considerably more difficult to reach desired return multiples. This can be mainly attributed to thriving public markets, corporate strategic investors as well as the low-cost debt environment.

The public markets are hot despite some recent wobbles, which has been driving comparables’ valuations to new heights. Furthermore, the low-cost debt environment of the past decade encouraged strategic buyers to open their pocketbooks and quickly expand through acquisitions. In so doing, they are competing directly with Private Equity for deals and pushing multiples even higher. Another factor is the ongoing availability of cheap debt, which is driving up leverage levels for company acquisition, thereby increasing the risk for lenders in case of default. The mere unlimited rise in valuation manifests in fewer investments from general partners, zeroing in on targets where they can still earn an attractive IRR. However, what constitutes ‘attractive’ is undergoing revision, as many firms lower their hurdle rates in response to higher prices. Thus, investors sit on a whopping $1.8 trillion of dry powder in 2017. A continuation of this trend over the coming years would result in a vicious circle for general partners, forcing them to further reduce hurdle rates as well as to deploy capital in situations they otherwise would not.



OUTLOOK – The next years will undoubtedly mark a decisive period for Private Equity as a mainstream asset class. Following the rise of megafunds, we expect to see assets to consolidate at the top of the league table, i.e. private market funds are beginning to concentrate into fewer hands. This trend will be supported by a growing number of co-investments between traditional Private Equity investors and new direct investors such as pension funds.


In addition, funds will aim at bringing more structure and scale into their processes to cope with the changing market environment, innovation and unconventional investment horizons. For example, we currently experience first attempts of next-generation sourcing, which aims at improving sourcing with sophisticated analytics. Funds may be able to automatically match their sourcing activities with investment criteria and their respective perception of industry attractiveness. Besides, we expect to see investors increasingly engage in active management, as digital transformation processes open up new opportunities for value creation, which cannot be realized (at least in the holding period) without major involvement of the investor.

Due to uncertainty about future interest rates and valuation multiples, Private Equity investors will increasingly deviate from average exit periods: On one end, exit cycles for investments purchased at high multiples may decrease to as little as two years, as firms cash in on multiple growth early when they anticipate that multiples will decline. On the other end, Private Equity investors allocate theirs funds to private asset classes generally associated with longer holding periods (e.g. infrastructure, natural resources, and Real Estate) due to their high value creating potential.

In summary, Private Equity will remain one of the most sought-after assets classes experiencing further growth in both number of investors and average deal sizes. However, the future will show whether today’s high valuation levels are reasonable and enable superior exit returns.



Paul Theilig

Felix Schafer



  • McKinsey Global Private Markets Review (2018). The rise and rise of private markets.
  • Pitchbook (2017). European Private Equity Breakdown
  • Bain & Company (2017). Global Private Equity Report

Breakfast with: Federico Tenga, Bitcoin Entrepreneur and Co-Founder at Chainside

Breakfast with: Federico Tenga, Bitcoin Entrepreneur and Co-Founder at Chainside

Breakfast with: Federico Tenga (alumnus MiM ESCP), Bitcoin Entrepreneur and Co-Founder at Chainside.

Federico is an early bitcoin adopter, co-founder at Chainside and consultant for blockchain implementations. In December 2014, he founded the Italian branch of the BEN (Blockchain Education Network) with the aim of spreading the network in the Italian Universities.

Q: First of all, I would like to thank you for taking part in this episode of the ESCP Finance Society’s “Breakfast with” agenda. How did it come to your mind to deepen your knowledge about Bitcoin in 2015? What did your classmates think about it at the time?

Actually the first time I learned about Bitcoin was in 2011, when I was still in high school, but even if I found the concept very interesting at the time I didn’t get passionate about it. Later, in 2013, I finally started studying it, trying to trade it and start with my first projects around Bitcoin. While at university I had many classmates that showed some interest in the topic, but just few decided to try to learn more about it or buy some coins.

Q: What is Chainside and what is your long-term plan?

Chainside’s goal is to make easier the interaction with the blockchain for enterprises, reducing technical barriers with a simple interface that abstracts the complexities of Bitcoin. Right now we are focused on bitcoin payment solutions for merchants, but since differently from some other competitors we built our own technology from scratch, we are able to enable new blockchain use cases according the customers demand. In the long-term, we aim to establish ourself as a leading company in the industry and facilitate the transition to a crypto-based economy.


Q: Why should a firm choose Bitcoin over fiat money? What are the advantages of the former over the latter?

Bitcoin presents multiple advantages, both for people using it as a medium of exchange and for those using it as store of value. A firm accepting Bitcoin payments can benefits from the absence of charge-back related frauds as the settlements of a Bitcoin transaction is some order of magnitude faster than any traditional payment system (just about 10 minutes). Moreover, thanks to its permission-less nature, Bitcoin makes possible financial interaction also with people who do not have access to traditional financial infrastructure, or people who care about their financial privacy and prefer to use a tool not controlled by any centralised entity, increasing the potential customers of a company. Bitcoin has also the advantage to be programmable money, making innovation and automation more effective.

On the other hand, enterprises looking for a superior store of value for them or for their customers will find in Bitcoin an asset with limited and deterministic supply backed by frozen energy, somewhat similar to gold but technically more advanced.


Q: Do you actually believe that Bitcoin is an expression of financial world’s democratization (given that 97% of Bitcoins is held by 4% of the addresses)?

I don’t think that the distribution of wealth is really related to financial democratization. Bitcoin is an expression of permission-less finance, meaning that anybody in the world can have access to advance financial tools without having to deal with the limitations imposed by local regulation. This means that under a financial perspective, people in developed countries won’t be as advantaged as they are today over people in developing countries with poor banking infrastructure.


Q: As of 4 February 2018, the number of existing cryptocurrencies is over 1,512 and still growing. Who will thrive in such a market in the long term and what is the competitive advantage of Bitcoin over the other cryptocurrencies?

Most of those cryptocurrencies out there are already to be considered dead, only few of them actually have a decent transaction volume. In general, I am expecting a consolidation in the coming years, if you think about that the purpose of money is to be the single intermediate good that everybody uses for trading, so with the exception of transition phases when better money substitutes inferior money, people will always converge on using a single currency. This means that there is no space for multiple cryptocurrency in the long term, and the market will converge on the best one, which at the moment seems to be Bitcoin as it has the more stable and battle tested technology and a stronger network effect. Some cryptos claim that their purpose is not to be a currency but something else (e.g. a world computer), so they are not in competition with Bitcoin, but the truth is that they still need a native currency to secure their blockchain, so they will suffer competition anyway.


Q: Do you think it is possible to apply financial theoretical concepts to Bitcoin and cryptocurrencies in general? For example, is it possible to identify the fundamentals of a crypto? If yes, please explain how.

There are fundamentals in crypto, as there is an utility that people consume while using cryptos. When you want to evaluate a cryptocurrency you have to ask yourself “do people have any benefit in using it” and “is it long term sustainable”, which also implies how scalability concerns are being addressed. Bitcoin has already proved to be a good store of value and a useful medium of exchange for a least some niches, and current protocol upgrade proposals create optimism about the future, while most other cryptos are in a phase where they still have to prove themselves to provide some kind of real value to the users and have long term sustainability.


Q: Different investors use different methods to analyse an asset before investing in it. Which method should an investor in Bitcoin use? And if you have ever invested in it, which one did you use?

I studied the technology and tried to see the potential and the limitations. I know it can be hard for people without a technical background to really understand how the technology works, but if you don’t make some effort to study it as much as you can, it becomes very easy to make very expensive mistakes when it comes to investment. Understanding the tech helps you to see what the long term trend can be, while for the short term I consider any kind of trading mostly gambling, so it can be fun but there is no much you can do to systematically outperform the market.


Q: Warren Buffett in an interview to CNBC said: ”I can say almost with certainty that cryptocurrencies will come to a bad end.” In your opinion, are we witnessing the burst of the bubble or a healthy correction?

I believe that corrections are a natural part of a price discovery process, so as an asset gains popularity it is to be expected to have both bull market and bear market phases. The fundamental value of the technology is growing with new protocol upgrades being proposed every week, so I consider the daily price fluctuation just a distraction.


Q: Last question, what is the most important piece of advice you can give to the ESCP students that would like to pursue a career in Fintech industry? What are the most important qualities to succeed?

You need to be willing to go out of your comfort zone and start studying stuff you know nothing about on your own, you can’t be successful in Fintech if you don’t know how the technology works under the woods. You also have to deal with the fact that the university cannot help you in any relevant way to be prepared for the industry, it is a fast changing environment and few people are knowledgeable about these topics, and they usually don’t teach in universities. The good news is that nowadays there is so much information freely available on the Internet, so  you can easily learn a lot alone, but it requires commitment and genuine interest. 


It has been a pleasure to host you at our “Coffee Break”. Thanks again for your time and patience, Mr. Tenga!


Andrea Simoni

Private Equity – The best asset-class of the last 25 years

Private Equity – The best asset-class of the last 25 years

Private Equity – What is it?

Private equity (PE) has gained a great amount of influence in today’s financial marketplace, but only few people actually understand the ins and outs of the industry.

This quick article (less than “360” seconds long!) breaks down the topic, discussing in brief (i) the different types of PE strategies; (ii) the main PE firms out there and (iii) the current momentum of the industry.

First things first. What is a PE firm?

To make an (extremely) long story short, PE Firms are essentially asset-management companies (AMC) advising, managing and investing investor’s money through registered investment vehicles called “funds”, each having a different investment scope. AMCs need to comprise skilled and trustworthy Investment Professionals able to raise capital and attract investors promising in exchange solid and constant returns.


PE investments range from listed and non-listed companies to physical assets (i.e. real estate), offering returns much less correlated to indexes than the returns available in classic public market investment opportunities. However, the tradeoff is that these investments are illiquid (i.e. 3-7 years to generate attractive returns) and thus require longer investment periods.

PE Firms can invest in a wide mix of private investment strategies, with the mix varying greatly from firm to firm depending on the firm’s size, stated strategy, geographical scope, industry and transaction expertise. There are many different types and sizes of PE firms / Funds specialised in either a specific industry or a specific geography.



7 PE strategies – The key elements

Here are the main PE strategies everyone should be aware of:Venture capital (VC) – startups and young companies / little to no track record of VC investments are made with the goal of generating outsized returns by identifying and investing in the most promising companies and profiting from a successful exit (the most desired being an IPO)

  • Growth capital – mature companies / proven business models / looking for capital to restructure their operations, enter new markets or finance an acquisition. Typically, these are minority investments in more mature companies than for a VC scope
  • Buyouts – mature companies / generating significant and steady cash flows. PE firms make buyout investments when they believe that they can extract value by holding and managing a company for a period of time and exiting the company after significant value has been created. This strategy typically involves debt (i.e. usually above 50% of the total acquisition value) to finance the acquisition, enabling the PE Firm to generate high returns while only risking a small amount of capital
  • Fund of Funds (FoF) – investments are made in PE funds rather than directly in the equity of companies. By investing in a fund of funds, investors are granted diversification and the ability to hedge their risk by investing in various fund strategies
  • Debt/Mezzanine – consists of both debt and equity financing to support a company’s Companies that take on mezzanine financing must have an established product and reputation in the industry, a history of profitability, and a viable expansion plan. A key reason of why a company may prefer mezzanine financing, is that it allows it to receive the capital injection needed for business without having to give up a lot of equity ownership
  • PE Real Estate – investing in ownership of real estate properties. The 3 common strategies are: (i) investments in low-risk / low-return assets with predictable cash flows requiring some form of value added element; (ii) medium-risk / medium-return investments involving the purchasing of properties to improve and sell at a gain; (iii) high-risk / high-return investments in properties requiring massive amounts of enhancements (i.e. investments in development, raw land, and mortgage notes)
  • Special situations & Distressed funds – target companies that need restructuring, turnaround, or are in any other unusual circumstances. Investments typically profit from a change in the company’s valuation as a result of the special situation. (i.e. company spin-off, tender offers, bankruptcy proceedings…). Besides PE Firms, Hedge Funds also implement this type of investment



The main players – American legends vs. European firms

Henry Kravis (KKR), Steve Schwarzman (Blackstone), David Rubenstein (Carlyle) and Leon Black (Apollo). These four men run the world’s largest private-equity firms.

Billionaires all, they are at or well past the age when CEOs of public companies move on, either by choice or force. Apple, founded the same year as KKR (1976), has had seven bosses; Microsoft, founded the year before, has had three. On average, public companies replace their leaders once or twice a decade. In finance executives begin bowing out in their 40s, flush with wealth and drained by stress.




One thing is clear, the fame of the big names in the industry resides in the US!                    But Private Equity is not just an American thing. The “Old Continent” defends itself well. The UK leads the table when it comes to PE, placing 7 Firms in the European Top 10.




The current momentum – why does everyone want PE?

Last year was a massive year for private-equity fundraising, and there is little indication that the flow of money into the asset-class will wane any time soon. A staggering 48% of European investors plan to put more money into private equity this year, compared with 2% who plan to trim their allocation, according to a survey published in December by Coller Capital.

“As long as the demand from investors is there, we will see firms looking to raise bigger funds,” she said. “Some private-equity managers will try to raise as much as possible; others will try to remain more disciplined. Some managers, such as Vitruvian Partners and Partners Group, more than doubled their fund size last year.” – Britta Lindhorst, MD at HQ Capital

As of December 2017, there were 1,038 new private-equity funds (less in number but way bigger in size) in the market filled with $415bn of fresh capital (+6.5% vs 2016), compared to 1,324 funds seeking $390 billion a year earlier, according to Preqin. In brief, 2017 was another record-year for PE (i.e 7th year of consecutive growth), the tough times post 2009 financial crisis are long gone.


Reasoning on why PE gained so much attention in the last decades, one thing pops up quite immediately bringing us back to the title of the article: Private Equity is simply the most profitable asset-class of the past 25 years!





Massimiliano Marchisio

Nikita Kuzmich

Paul Theilig

Felix Schafer



AMC = Also called General Partner “GP”, is a financial institution approved and supervised by the local authority, whose task it is to manage the fund.

Fund = a fund is a “bucket” filled with investors’ money and managed by the AMC. The amount of money collected can be used to invest into any type of asset

Investors = Also called Limited Partners “LP”, are banks, insurance companies, pension funds, family offices, corporations, governments, HNWI…


Suggested readings

Barbarians at the Gate: The Fall of RJR Nabisco – Bryan Burrough and John Helyar (1989)



  • The Economist
  • Cambridge Associates Private Equity Benchmark
  • Street of Walls
  • Private Equity News
  • Private Equity International
  • Financial Times
  • Preqin – Research Center
  • Macabacus – Finance

Bidding War fires up the largest European deal of 2017

Bidding War fires up the largest European deal of 2017

On May 15th, 2017 Atlantia has announced its intention to acquire its Spanish competitor, Abertis.

Atlantia, Italian toll operator whose main asset is Autostrade per l’Italia, the largest concessionaire on the Italian highway network, is a holding company belonging to the Benetton family. Under the management of its CEO, Giovanni Castellucci, former partner at the Boston Consulting Group and manager at Barilla, the company has produced revenues for more than €4 billion and generated a net income of €1.12 billion in 2016. Its assets are strongly exposed to country risk, and an acquisition would be a way to enter new markets and diversify this exposure.

Abertis, headquartered in Barcelona and listed in Madrid, is a leading toll operator as well. Present in 13 countries, with a net profit of €897 million in 2017, a 13% increase from 2016, has appeared as an attractive target for Atlantia’s needs: the new conglomerate, in fact, would be in charge of the management of more than 14,000 km of highways and present in 19 countries.

The Italian company, advised by Mediobanca, Santander and Credit Suisse, has proposed a cash-offer, financed by Bnl-Bnp Paribas, Credit Suisse, Intesa San Paolo and Unicredit[1] valuing the Abertis at €16.50 per share and making up a €16.3 billion deal.

Alternatively, Atlantia has also offered stocks with the aim of making the offer attractive Criteria,  unlisted investment bank holding of the Caixa foundation and majority shareholder in Abertis with a 22.3 percent stake, with important investments in the Industrial and the Real Estate sector.
The Italian company would offer unquoted, locked-in stocks, at a fixed conversion rate of 0.697 Atlantia’s share per Abertis share[2], for up to the 23.2 percent of the total offer. This would value the Spanish operator at €17.34 per share; considering the latest trading price at €16.38[3], it represents a generous upside for the shareholders with a premium of around 6%.

This share-swap offer is not appealing for all of Abertis’ stakeholders. Instead, it is a strategic move to win the favor of Criteria, a strategic investor with long-term objectives: in facts, not only the holding keeps its current claims on dividends, projected to increase, but also acquires the right to appoint up to three directors in the Atlantia’s Board, whose size therefore increases from 15 to 18 members[4].

Should this scenario concretize, Edizione, the investment vehicle of the Benetton Family, would suffer a 5 percent dilution in Atlantia, with its stake diminishing from 30 to 25 percent, while Criteria would earn a 15 percent stake. Castellucci has stressed that the combined groups’ strongly performing Latin American assets would be transferred to Abertis, which would maintain its headquarters in Barcelona and would keep trading in Madrid[5].

According to the Spanish Financial Authority, the CNMV, on October 19th Abertis should have formally responded to Atlantia’s offer. Therefore, the bid carried forward by Hochtief, a German leading construction company operating worldwide, with important assets in the US and Australia and, controlled by the Spanish ACS[6], has been a surprise. Hochtief is offering €18.76 per share in cash, attributing to the target a value of €18,6 billion. Alternatively, Abertis investors may opt for a stock-swap option, the conversion rate being 0.1281 per newly issued Hochtief share. Should the Spanish constructor accept this offer, it would add more than 8000 km to the construction business of the German company and ACS, opening up the possibility to extend their operations in Brazil. Advised by J.P. Morgan, Lazard and Key Capital Partners, ACS and Hochtief are now tempting the investors with the promise of high dividends – the combined entity, whose stocks are intended to be traded in Frankfurt, is expected to generate revenues for €24.8 billion and has announced a retention ratio of 10 percent, meaning that roughly 90 percent of its profits would be paid out. Instead, some of the Abertis’ assets would be sold, among which shares in Cellnex Telecom SA and Hispasat SA.

The results of the takeover would be a decrease of ACS’s share in Hochtief, from 72 to less than 50 percent. This would cancel the leverage of the €12 billion net debt, contracted by its investment vehicle, to fund the cash payment, and would leave the company with a stronger position in the resulting entity8.

While Catellucci is considering raising its offer, that could be raised up to €19 per share according to some analysts5, and entering a bidding war, it also has to face a strong opposition by the Spanish government, which is concerned about the loss of the strategic assets owned by Abertis, and wants to prevent the company from falling under foreign ownership. In addition, in case of approval of the second offer by the CNMV, the Spanish Financial Authority, the government may still appeal to the administrative tribunal and cause severe delays in the execution process. The Hochtief offer, that would bring Abertis under the ownership and control of the ACS’ president, Florentino Perez, has encountered a much lower opposition, as the strategic assets owned by Abertis would remain under Spanish ownership. These governmental activities are not unusual: for example, in July 2017 the Macron government had decided to block the offer of Fincantieri and nationalize the building sites in Saint-Nazaire, considered of strategic importance for France, given the unique know-how of the employees, as reported by the French government’s spokesman Castaner[7]. Nevertheless, it is worth noting that such practices seriously harm free market competition and should be limited. Indeed, the issue of governmental interference in public utility companies has been long debated: a recurrent, and sometimes a bit abused, practice is the so-called Golden Share, which allows governments to acquire shares of capital and to appoint members in the Board of Directors of strategic companies and consequently to have a high influence on the decisions taken. This privilege has been, in some cases, sanctioned by the European Court of Justice as dangerous for the markets’ competitive functioning.

Financial markets have responded to the bids’ announcements. While Atlantia lost 1.2 percent, Abertis has been traded at a premium on the bid of the Italian company. The bullish trend has been followed also by ACS and Hochtief, which have gained 5.6 and 1 percent, respectively.[8]

In the end, Abertis seems to be the company benefiting the least from the deal: in fact, it is already well-diversified in terms of EBITDA sources. Additionally, the deal with ACS may be dangerous for Abertis’ creditors in terms of the exposure to the cash-flow volatility of the bidder.
Instead, Atlantia, whose main assets are located in the home market, could diversify its country risk away penetrating in Latin America. Furthermore, despite the poor synergies, it could benefit from an appealingly low acquisition premium embedded in its first offer and, in addition, may increase its cash-flows by building up scale. However, despite the higher acquisition premium of the eventual second offer these benefits would decrease, the Italian group would still enjoy substantial advantages.

With the recent approval of the second offer by the Spanish government, declared at the end of January, the two bidders are now free to compete. In the next 15 days the two companies will have to improve their bids, according to the Cnmv regulation, and then will submit their final offers.

What it is going to happen is still uncertain, but it is possible to see some general drivers in the wave of recent European deals. Low cost of financing, need of consolidation, low opportunities for organic growth are all factors that make M&A extremely attractive for European top players willing to compete in a global field. Just think about the deals between Johnson&Johnson and Actelion, Essilor and Luxottica, Mead Johnson Nutrition and Reckitt Benckiser, Toshiba and Consortium and Vodafone and Idea cellular. These are all examples of the cross-border trend of M&A in Europe, where external growth tends to be preferred more and more to internal expansion[9].


Author: Giacomo-Luigi Rossi


[1] Source: Reuters

[2] The conversion rate indicates the number of Atlantia shares that can be exchanged with 1 Abertis share

[3] Abertis’ share price on May 15th, 2017. Source: Yahoo Finance

[4] Source: Il Fatto Quotidiano

[5] Source: Financial Times

[6] Actividades de Construccion y Servicios SA – Spanish company whose President is Florentino Perez. ACS is headquartered in Madrid

[7] Source: Il Sole 24 Ore

[8] Source: Bloomberg

[9] Source: Factset