In Conversation with Kurt Björklund of Permira Advisers
Kurt Björklund, co-managing partner of Permira, one of Europe’s largest private equity firms, is testament to the long-term, transformative and positive power of private equity.
Kurt Björklund has spent the majority of his professional life working in private equity. Together with Tom Lister since 2008, Björklund, the Finnish born, has co-managed Permira, one of Europe’s largest private equity houses with €25 billion of committed capital.
The Worldly’s Editor Sabian Phippen met Mr Björklund at the firm’s London office to discuss his views on the global economic outlook, private equity, Permira and his advice as to how to secure an elusive career in private equity.
SP: In January 2015, you delivered a keynote speech at the LSE SU Alternative Investments Conference, titled ‘Accessing Global Growth’. What were the main ideas that you spoke about in that speech?
KB: One of the main ideas is that economic growth in the ‘mature west’ is likely to be lacklustre and remain at low single digits for the foreseeable half-decade or so. Therefore, if you want to access growth, you have to back first of all, micro-themes that have substantial, underlying long-term structural growth. This could be anything from the ageing population to investing in productivity in the food value chain.
Secondly, you want to back companies that have products, brands or business models that travel well around the world. Even if the company is based in an economy, which is low growth or no growth, by exporting into markets where you see much stronger growth, they can achieve very high levels of growth.
The third idea is around market leadership. By backing market leaders, in these themes, you can support both organic growth and growth by acquisition, as leaders are often in a strong position to consolidate their sector. If you do this, you compound these three different growth drivers.
SP: In that sense you can effectively ‘ride’ the macroeconomic cycle a lot easier?
KB: Yes, absolutely. You should then become relatively agnostic as to whether you believe that the macro environment over the next five years is going to be 0.2% or plus 1.1% GDP growth. Instead, you can focus on what fundamental growth you believe you can find in the companies that you back.
Additionally, as a private equity model, it is a lot more attractive than the more financial engineering model – where you acquire a low growth company using cheap debt to make the acquisition. Here instead, what you aim for is growing the business, growing profits, growing employment in the business and growing the reach of that business. It is much higher quality and also more fun.
SP: Turning to Europe, the latest figures seem to suggest the tentative beginnings of a bit of growth in the Eurozone. Do you feel optimistic that the good times will return again?
KB: Well, based on the previous question, we should not worry too much about whether the answer to the question is yes or no. Having said that, I think there are a couple of drivers that we are seeing in Europe at the moment.
One is that the Euro has very substantially reduced in value. European based export industries – depending on what their input cost base is – will benefit very substantially from this depreciation and that will, over time trickle into employment, consumer confidence and a renewal of domestic consumption.
‘Our business is not to try to play the macroeconomic.’
The second driver is the falling oil price. Depending on which country you’re in and what the taxation model for petrol is, that will translate into quite a significant boost into a family or consumers pocket. That will then work its way back into the system in Europe.
Thirdly, we are starting to see in our southern European consumer focused businesses, some early signs of recovery. It’s been a really long, painful decline in those economies. Now for instance, we’re starting to see some signs of employment emerging in Spain from some horrific levels. The magnitude of the output gap in Spain was a lot larger than it was in the UK. As employment starts to increase, we could see a relatively benign scenario.
Now, are we backing that? Our business is not to try to play the macroeconomic in southern Europe. Our business is to try and find those businesses, which generate growth based on the themes that we’ve discussed before.
SP: Finally, on the global economic outlook, which emerging markets do you see the most growth potential in over the next 5 years or so?
KB: China has been the obvious answer to that question for many, many years. However, I think that we are seeing very interesting developments in India at the moment. India has a large population base and a large economy. It’s a lot messier than China is, which makes it harder to approach on a consolidated basis. But I think that India could prove an interesting base for companies to target and we could see quite strong growth in the India macro. But there are risks to that.
Latin America is also interesting in some sectors. Over the last 30 years it has repeatedly failed to really fulfil the full growth potential that it has, but I still think that it does offer quite good opportunities. The commodity cycle is a big issue in Latin America, which has made it harder on those countries.
SP: Moving onto the private equity industry, it’s now almost 7 years since the onset of the global financial crisis. How significant of an impact do you think that the credit crunch and subsequent global recession had on the industry as a whole?
KB: I think there are a few different things. One is simply the realisation that private equity is actually a relatively cyclical industry, whether people like to admit it or not.
The industry has become a little bit more humble about the fact that it is, like many other industries, cyclical.
The predominant driver of that cycle is the availability of capital. When there is a lot of capital pushing into the industry, that pushes prices up and returns down. When fundraising is really tough, debt financing to buy companies is difficult to access and the industry tends to perform really well. So there is a sort of counter intuitive cycle. When people don’t want to back private equity, they should and when they do want to back private equity, historically the returns have been worse. So I think that the industry has become a little bit more humble about the fact that it is, like many other industries, cyclical.
The second, quite fundamental element is that – despite some of the very significant challenges in 2009/10 – the actual performance of the industry has been strong. Investments made going into the crisis in 2006/07 – certainly in our funds’ case – have performed well, many of them even very well because the industry bought companies at attractive valuations, with less competition around.
Private equity has proven itself to be quite a resilient asset class.
Overall, private equity has proven itself to be quite a resilient asset class, unlike for example public markets or credit investments made during that period. That has surprised many observers who thought that the industry was going to go away or really suffer during that crisis. The main reason for this is the fact that we can be patient and take a five-year view and because we are fundamentally controlling investors, we have the ability to affect very significant change during a difficult economic period.
SP: What do you foresee as potentially being the biggest challenges facing the industry this year?
KB: The biggest challenge at the moment, and prospectively for the next 24 months, is very substantial amounts of capital coming into the industry. That will then drive up competitive intensity on the buy side, and it will perhaps lead to some players in the industry overpaying or taking the wrong kind of risk.
A business like ours is all about its people. We’re a talent platform.
SP: Moving onto Permira, 2015 is the year in which it will celebrate it 30th anniversary. What has enabled Permira to grow into the successful and resilient firm that it is today?
KB: The answer to that lies in our culture. A business like ours is all about its people. We’re a talent platform. We must be able to attract, develop and maintain the best talent in the industry, and if we do that well, then everything else follows. That’s the 80:20 essence of it.
Permira’s values are around partnership, integrity and entrepreneurialism. We allow people to take ideas and think differently and creatively. We provide support to each other when things get tough and leverage to people when they are on a roll.
We also grew up as a multi-national platform from the start. The genesis of the firm is very different from the founder-centric, often North American firms, where everyone seems made from the same mould.
SP: Permira’s current portfolio is incredibly diverse. Two current investments in your consumer sector that will be widely recognised and of particular interest to students are New Look and Dr Martens (Permira funds recently divested from Hugo Boss.) Is fashion an industry of particular interest to Permira?
KB: We often get questions and media comments around the fashion brands, the consumer facing brands that people know, love and recognise. That doesn’t mean however, that those consumer brands are anymore important or anymore successful – or have any higher priority as an investment strategy – compared to business-to-business software, industrial or healthcare services.
We are a platform that is very wide. We have five different sector teams but the consumer team is certainly one of the larger ones. We like brands, often global brands, which travel around the world. Hugo Boss, which has just been divested after seven successful years of partnership, is a great example of that, as is Dr Martens. But equally, if you look at the sector that has had the most capital invested in over the past 5 years, that’s actually been Technology.
SP: Of course, technology is a great strength of Permira too. For example Renaissance Learning, in terms of what you’re doing in education.
KB: Yes exactly. Renaissance Learning, which was very successfully divested in 2014, is the market leader globally in reading assessments for English Language students. It’s in more than 50% of classrooms in the US and we contributed to that success through our funds’ investment.
SP: First-class academic credentials, though essential, are arguably not enough for any aspiring student wishing to enter the increasingly competitive and complex space of private equity. What are the key characteristics required to be successful in private equity today?
KB: Independence of mind, entrepreneurialism, teamwork, a long-term mind-set and drive.
SP: Do you think we may see more graduate-level entry opportunities begin to emerge in the industry?
KB: I think that different firms have always had very different approaches to that. We’ve always found that people who do best in the firm are those who enter the firm at a young age and really absorb the culture, the experience and the values of the firm.
From our point of view, we are recruiting and are very open to recruiting young people into the organisation. Whether that means someone straight out of school, or more likely someone that has spent two, three, four years doing something else first to learn to work in a broader project-based organisation, perhaps to learn some of the basic ‘tools of the trade’.
SP: What other advice would you give to any student wishing to pursue a career in private equity?
KB: We are ultimately about building businesses. The more you understand what really goes on in companies – what it takes to be successful in a company and as an investor into a company – the better position you’ll be.
We also believe hugely in diversity in terms of experience base. Rather than have one type of student, we want to have a wide range of different types of personalities, experiences and approaches to a problem or an opportunity because that is how you create strong teams.
SP: What values and philosophy would you say underpins your personal outlook on private equity and life?
KB: For me, independence of mind underlies so much of what we’re doing. My view has always been to define my role in the broadest possible sense. So, take responsibility, together with my colleagues for everything end-to-end. And really believe that we can only be good at what we do if we have a really independent perspective. Otherwise you end up with groupthink and doing what everyone else is doing and that’s never good for investing.
Great people, empowered, can achieve great things.
I think that I also have an incredibly strong sense of integrity and fairness – and it’s probably something that I’ve grown up with.
Whatever you do in your dealings with people, you have to be honest. You have to be straight and tell people what you really think because life is long, and you’re going to come across the same people again. It’s never just a one off negotiation.
Finally, I believe in people. I think that great people, empowered, can achieve great things.