Turning around German distressed portfolios

There is a lot of opportunity to restructure dysfunctional funds in continental Europe, particularly in Germany where direct secondaries specialist Evoco sees the most promising situations, says co-founder and partner Michel Galeazzi.

How are the portfolios Evoco acquires different from traditional direct secondaries portfolios?

We look at small- and mid-cap buyout funds in continental Europe, where there is a succession situation of the current general partner. We don’t really look at tail-end funds, but instead for opportunities where we help existing GPs and LPs find a solution in a complex situation. The LPs get increasingly more active and have generally understood that a soft liquidation of an average performing fund is unrealistic and may lead to disastrous outcome. Our deals are also coming out of investment clubs and banks but our deal flow is whatever we create. Out of the 120 situations we have looked at in the last 18 to 20 months, only three have been from brokers. Most of the deals are originated by us. We typically look at situations with a transaction value between €20 million and €70 million for each portfolio which consists of between four and six companies, although they can have up to 10 assets.

How would you characterise the growth of Evoco and its strategy?

We’re growing both in terms of capital and in terms of team members. Right now we have four professionals based in Zurich and three operating partners. We spend most of our time in German- and French-speaking Europe. That’s where most of the deal flow is coming from.

What makes the German direct secondaries market attractive?

There are a lot of smaller private equity funds that were raised in a boom between 2002 and 2007. Now those funds are coming to an end of their lifetime, which reveals whether the GP has a future as a team or if the fund was a one-time structure. The German private equity market is only about 15 years old, which is why there’s a wave of funds and managers in need of a solution. The secondaries market in continental Europe is generally about five years behind that of the UK and the US. It’s interesting to pick up on that trend and create that market. Europe however is quite fragmented in terms of regulation, cultures and language, which makes it difficult to have an office in London covering the whole continent. The language aspect really shouldn’t be underestimated in the small- and mid-market.