MJH: You hold a PhD in Biochemistry and Molecular Biology from the University of Washington School of Medicine and Humboldt University of Berlin. Not a bad thing to have in your back pocket….How useful has your PhD been in your private equity career to date?
Dirk Steinwärder: My PhD was in clinical cancer research which, combined with the consulting work I undertook throughout my studies, gave me a strong understanding of the underlying science of medicine and hospital processes. This has been very helpful in understanding the healthcare sector businesses that Cognovia invests in. Also, people in Germany, Austria and Switzerland, which are key markets for us, can be more title-oriented, so it’s sometimes useful to have “Doctor” in front of your name when doing business.
MJH: What are Cognovia’s key M&A investment criteria and where do you see investment opportunities at the moment?
Dirk Steinwärder: We look at businesses with an enterprise value between EUR 50m to 100m, usually with a healthcare focus, in Western Europe and North America. Germany is currently a very attractive market for us because of its strong culture of mid-cap companies. Many companies currently face succession challenges with owners nearing retirement, which presents an opportunity for the right kind of buyer. The businesses we invest in must have an established business model with proof of product and strong organic growth, rather than growth generated through cost-cutting. We also look for management teams with critical knowledge spread out across the team with a strong, cohesive entrepreneurial spirit, which is a key driver for the right kind of growth.
MJH: Cognovia partners mainly with family offices. How does this shape your approach to M&A and how do family offices’ expectations compare with those of institutional investors?
Dirk Steinwärder: The family offices we partner with are usually more entrepreneurially driven than, say, PE funds and other institutional investors. Our investors are also very interested in understanding the businesses we invest in. We get a fairly long leash in terms of deal selection and general operational control – we can easily adapt our strategy to hold a business for 10 years if that makes sense. Institutional investors usually have strict internal criteria and can apply more pressure on a PE fund manager to exit an investment within a defined timeframe. Our funds generally deliver returns on a deal-by-deal basis, which is more unusual in Europe as most funds deliver returns based on the fund’s aggregated performance. The downside, given our investors’ strong interest in the underlying businesses, is that we are beholden to more regular, detailed reporting (monthly not quarterly).
MJH: Are there any interesting cultural differences between the UK and Germany in the approach to M&A?
Dirk Steinwärder: A key difference in Germany is that it can be considered an insult to approach someone to buy their business, particularly owners of mid-cap businesses that have been closely held for a long time. Many business owners simply won’t return a call from a potential buyer. In Germany, if you are a strategic investor or one with relevant industry knowledge, and I would put Cognovia in this category, that may get you a conversation with a business owner whereas a typical PE firm will more likely be shut out altogether. By contrast, UK business owners often see an offer for their business as a compliment or key milestone and will engage with both trade and PE buyers if the deal is right. I’ve also found UK sale processes in the initial stages less protracted as UK business owners are generally committed to their decision to sell once they’re in the offer letter process. German business owners are known to pull out of deals late in the offer stage for a reason as simple as the deal no longer felt right.
MJH: UK assets are starting to look cheap for some overseas buyers, but there is also the inescapable “B word” (Brexit). Did Brexit come into your thinking when you recently acquired a UK business and, if so, how?
Dirk Steinwärder: In terms of M&A deal execution and post-completion operations, there are of course practical steps to take, such as hedging arrangements to mitigate currency fluctuations. However, the importance of this will vary depending on whether you are buying a business with international operations and multiple currency exposures. Some downside/upside analysis may be required when you are looking at buying a UK business, but so may a crystal ball….Then you have regulatory aspects – will this change after Brexit, for example, in the healthcare sector? Maybe yes, maybe no. For us, it’s hard to believe that there will be dramatic changes in the healthcare sector in the next 5 to 10 years as many regulatory standards are international, so Brexit has not had any impact on our investment decision making in that sense.
MJH: What do you see as the greatest challenges for your business and in private equity generally in the next 12 – 18 months?
Dirk Steinwärder: This is not easy to answer. Cheap money is a big problem right now and the market feels frothy. Businesses in our target space, and more generally, that previously commanded a 7 to 8 times EBITDA multiple on exit are now at 10 to 11 times EBITDA. Deal leverage seems to be increasing and, in turn, deal risk. It’s very important not to lose perspective on what is value for money and exactly what kind of business you are paying for.
MJH: “Macro” questions aside, is there any particular lesson you’ve learnt from your M&A career to date (or in life!) that you apply in your approach to M&A deal-making?
Dirk Steinwärder: It sounds simple, but be prepared to say no. Do not get emotionally attached to a deal or catch “deal fever”. Be prepared to walk out of the room at any time. If the metrics don’t match, walk away.
Cognovia Capital GmbH was established in 2004 and is a strategic partner for family businesses, entrepreneurs and small and mid-cap businesses seeking additional equity investment: http://www.cognovia.com