Verdane partner Staffan Mörndal relocated to Berlin last August to set up the direct secondaries firm’s Germany operations. Secondaries Investor caught up with him to discuss investment opportunities in the country, how to value assets in light of the novel coronavirus crisis and the firm’s investment plans over the next six months.
What was the thinking behind setting up a permanent presence in Germany?
We took the decision two years ago, and that was off the back of having done two portfolio deals at the time in Germany. We felt that we had been building up the German portfolio, since we’d already seen a couple of years of progress from the investments we had made, and it looked very promising. Since Germany tends to trail the Nordics on digitalisation in our investment sectors, there were also learnings from earlier investments in for example digital marketplaces that we felt were applicable to similar candidates in Germany.
In Germany, private equity has had a bit of a bad reputation. Is it easier to operate there as a minority investor?
We make both majority and minority investments, but I would say I have not experienced this negative part yet. Probably because we do software- and internet-focused investments. That being said, I’m based in Berlin and focused on the software space, so that’s probably the kind of area where you see the least of that kind of negativity.
As a direct secondaries investor taking a minority stake, how do you approach value creation?
Most of us have been entrepreneurs or operators before. We don’t have that many bankers in the team. Our skillset is more around trying to help companies grow with operational questions than it is to maximise short-term cashflows with one solution. For minority investments it becomes doubly important to secure alignment before investment. We draw heavily on our data pool from previous investments to help our companies understand their strengths and weaknesses versus industry category leaders at large. We also have a dedicated analytics team and launched an in-house team of operational experts called Elevate that helps the portfolio with growth spurt initiatives ranging from marketing to sustainability.
For the last two weeks, I’ve been in daily calls with all my portfolio companies. My ambition is to have a daily touchpoint with each company. In response to covid-19, we launched an online portal two weeks ago to help our companies keep track of the latest developments and collect best practice in one place. Our covid-19 coordinator makes sure it’s up to date, and we supply a daily business-critical update of the most important stuff our companies need to know. We launched a public version on our website last week, and it drew over 3,200 visitors in two days. Overall we try to be quite heavily involved.
What types of sellers do you do deals with?
We’ve done 40 portfolio transactions in Europe since 2003, and around half of them have had some type of VC or private equity seller. In those cases, it’s been a bit different when times have been tougher – then the problems have been more around fundraising. When times have been like the past two years, the challenges have focused more on tail-ends or teams wanting to do different things. Sometimes the firms have grown so fast that they have an old portfolio of assets that doesn’t really make a dent in the performance anymore, because now they do investments that are 100 times as big.
It could also be private individuals or family offices – which sometimes are almost the same thing – or industrial groups, or a university or public-type entity. We’ve done one ‘private investment in public equity’ deal.
How will you value assets in light of the current public market volatility?
For us, it’s not such a big problem. Our main valuation method builds on a plan for how we think a company should develop or price over five years, and what it should look like five years from now. Then we discount cashflows backwards to what that means we can pay for it today. Then we sanity check it a little bit, because you don’t want to pay three times as much as a public comparable is worth today – but that’s more the backwards sanity checking than the main driver.
The coronavirus is affecting dealmaking and financial markets around the globe. What is your plan for the next six months?
There are so many strange effects from covid-19. In mid-March, we observed a significant dip for one online fashion retailer, which doesn’t make sense, while of course physical retailers are down 100 percent. We’ve also seen online cosmetics retailers, which you would think should be very close to fashion, go up a bit. On the other hand, online groceries and online pharmaceuticals are through the roof.
Over the next six months, I think we are going to try to dare to do things when others might not. I believe there will be opportunities, but there’s always a chance to get scared and not do anything when markets are this upset. So we’re going to try to be open-minded – we’re ready to support key strategic moves for our holdings if it’ll strengthen their market leading position.
Staffan Mörndal is a partner who joined Verdane’s Stockholm office in 2006. He focuses on the software and e-commerce sectors and relocated to Berlin in August 2019 to set up the firm’s German operations.