The distinguished Financial Times journalist Henny Sender has always wanted an invitation to the investment committee meetings at Warburg Pincus. Given that she is yet to receive one, she was delighted to be able to share the main stage in Potsdam 1 on Wednesday morning with Co-CEO Joseph P Landy.
What, Henny wanted to know, were the subjects under discussion at his last meeting?
Unsurprisingly, an ongoing review of their global equity portfolio, alongside looking at new opportunities to invest equity around the world, both across a variety of industry sectors, as well as a variety of different levels in the cap structure, was his answer.
In contrast to the prevailing sentiment within the PE industry, Warburg Pincus is pretty positive about the future:
“We’re energised and enthused by the current environment and what it means for us in terms of placing equity to work at attractive risk/rewards,” he said. “If we look at the pipeline we just reviewed, it’s as flush as it has ever been in my 30 years in the business,” he said.
Energy
Warburg Pincus has deep expertise in all of the sectors that have dominated the conversation over the last three days here in Berlin: energy, emerging markets, and technology. Henny wondered if their business model – that of backing management – had offered some protection in the current climate within the energy sector.
“Our professionals are working with these management teams and constantly trying to get closer to where the earnings and the cash flow are, and what it takes to build the business,” explained Joseph.
“We’ve got the luxury of time on our side. If you take a long-term view you can look past the 30 dollar oil price and start to get your mind around where deals will price out at.
“The good news is that there is a reset of expectations. We know a lot of things in energy now, we know the price can go to 30 dollars a barrel. If you’re out there looking at new transactions you at least have the advantage of knowing where the current oil price is and what kind of return you can make on your equity at those levels.”
“A number of our managers, and not just in the energy sector, are continuing to do well.”
What happens when hedges roll off?
“Right now if you’re a PE firm and you’re sitting on an equity position that basically has no value because of where the price of oil has gone, there is no one to sell it to,” said Joseph.
“You’re in a waiting game, you’re hoping that the price goes up and you can create some value on the asset. It hasn’t happened yet.”
“You are going to see those hedges rolling off, you are going to see banks having to dispose of those assets, and you’re going to see a lot of PE firms looking at other positions in the cap structure.”
Emerging Markets
Given that Warburg Pincus just celebrated its twenty-year anniversary in emerging markets, was this still an attractive time to go into this area, asked Henny.
“Right now you can’t sell much of your portfolio or whatever position you own in those markets, everyone is running in the opposite direction. To us that’s the time you want to go in and be thinking about buying,” explained Joseph.
This didn’t entail buying in the emerging markets index, he warned, but rather, seeking out individual opportunities in market segments that are outperforming.
“I’m not sure you want to own a steel company in China right now, but owning a consumer-driven, domestic demand business could be and has been a very attractive place to be.”
“Volumes have exploded for us in those markets. The percentage of our funds that we are investing in emerging markets has increased significantly.”
Technology
Warburg Pincus has always been very good in technology in both developed and emerging markets. How did he see technology at this point, asked Henny.
“It feels like pricing is actually getting to the point where the risk/reward feels very good,” said Joseph, referencing the US.
“Our expectation is that with the management teams we’re going to back, and the pricing now approachable, we’re going to find those kind of investments that we can play into the future.”
When it comes to tech in the emerging markets, Joseph referenced how Warburg Pincus took the business model of Craiglist to successfully create 58.com.
“Being local is very helpful, it helped us get into that investment, find it, and complete it.”
“China doesn’t have the legacy problems that we deal with in the US. So when you’re talking about web-enabled business models, or next generation kinds of technology plays, we’re actually seeing some of them in China, we’re going to bring them back to the US! We’re actually thinking through those kinds of opportunities as well.”
“You really need to be local to understand what’s at play and what’s going to work.”
Five years from now
With investors proactively seeking out Warburg Pincus as somewhere to place their investments, Joseph says that the company is very comfortable with its business model.
Having stated publicly that it has no interest in going public, Joseph also outlined that there were no succession issues either, or founder issues that going public would resolve.
“Five years from now our strategy is going to be the same, it hasn’t changed in 50 years.”
“We just closed a fund so we don’t need anyone’s money right now, this isn’t a commercial, but the business model of being diversified, of having flexibility, it’s a very powerful tool to have in your tool chest when you’re facing volatile environments where you have sellers that have to sell, interesting opportunities that can’t be funded, and management teams that have great ideas but no capital.”
“That’s what we’re there to do,” concluded Joseph. “To provide that equity, to take a long-term perspective and generate attractive returns for our investors.”