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In this episode of the NextWave Private Equity podcast, host Bridget Walsh, EY Global Private Equity Leader, discusses the evolving middle market landscape.
In this episode, Flor Kassai, Head of the Buyout Fund at Inflexion Private Equity Partners, a leading mid-market private equity fund, joins our host Bridget Walsh, EY Global Private Equity Leader, to discuss the evolving middle market landscape.
Key takeaways:
Middle market companies present some very distinct opportunities for investors and it's an area where we've seen tremendous growth.
Mid-market is a market that is driven by relationships. People buy into people.
You can also listen to this podcast on Apple and Spotify.
For your convenience, full text transcript of this podcast is also available.
Teaser
Welcome to the EY NextWave Private Equity podcast, where industry leaders come together to discuss emerging opportunities and industry trends shaping the global private equity landscape.
Flor Kassai
So we have the benefit I think by being in the mid-market to still be able to tap into corporates, to be able to sell our businesses.
Bridget Walsh
That's Flor Kassai, Head of the Buyout Fund at Inflexion Private Equity Partners, a leading mid-market private equity fund. I'm Bridget Walsh, EY’s Global Head of Private Equity.
Walsh
In this episode, Flor will be sharing her views on the evolving middle market landscape. Hi, Flor and welcome to the podcast.
Kassai
Hello, Bridget. Thank you for having me.
Walsh
Oh, it's great to be here with you today. Flor, middle market companies present some very distinct opportunities for investors and it's an area where we've seen tremendous growth. Can you talk a little bit about Inflexion’s journey?
Kassai
Yes, of course. So look, Bridget, we've always been focused on the mid-market. What we do is we provide a range of solutions to entrepreneurs, that can be a majority or a minority. But we don't just provide capital, we also provide skills. So I like to call this, intelligent capital.
Walsh
Oh, I like that phrase. Intelligent capital.
Kassai
But we see a real opportunity in the mid-market. That's why we've been focusing throughout our history and in fact this year is our 25th year anniversary.
Kassai
And what we did is we saw what was happening at the larger end of the market. We saw the aggregation of capital and talent that was happening at the larger end of the private equity market, but not so much in the mid-market. And therefore, we decided to focus on the mid-market. But unlike our competition, we wanted to do it more at scale and focusing on repeating investment strategies in a more industrial way.
Walsh
When you invest in a company, how do you infuse them with the enthusiasm that you're sharing with us here today?
Kassai
Yes. Look, I think part of that is a little bit of self-selection, mutual self-selection I would say. So I believe that the partnerships that we do with management teams, the best partnerships that we do with management teams are those where we see ourselves and part of our culture reflected in them and in the way they run the business, and vice versa. And so, there's a constant, an instant, you know, click of, you know, this is a match. So, we look at businesses that have high revenue momentum, high EBITDA margins, high cash conversion and that have, for the most part an ability to internationalize.
Kassai
And I think the mid-market is very much a market that is driven by relationships. People buy into people. The people that we hire at Inflexion, we make sure that they're people that are not just excellent gurus and super smart we want people that can relate and connect with other people, that have a life outside of work. And look the fund that I manage, which is the Buyout Fund 6 which started only two years ago.
Walsh
How large is that fund?
Kassai
It's a 2 ½ billion sterling. This fund is, we have seven investments so far. Four of those are headquartered in Europe and we only opened our first European office three years ago. So that tells you that in a very short period of time, a business like ours that for, you know, 20 plus years had been quintessentially, you know UK focus and that started to venture outside of the UK, we got the model right because it's working and it's working to the point that the majority of our investments today are coming from Europe.
Walsh
So not only are you applying a model to grow out your own business and take the best learnings, you do, of course the same with your portfolio companies. We are in the age of value creation, how interventionist are you with the companies you invest in?
Kassai
Yeah, that's a good question. And intervention is also a very good word to use to define. I think there's a spectrum in terms of interventionism, which is, you know, pull and push. We are very much in the pull camp. We want our portfolio companies to say, right, I would like that, that and that from the menu for you to help me in our portfolio company. We have a lot to offer. We have a digital team that helps on technology and digital enhancement. We have a talent team that helps identify talent as these companies want to grow internationally or set up new product lines.
Kassai
We have the international offices again to help them expand internationally. We have a commercial team that helps companies drive top line growth through either pricing initiatives or assessment of sales force effectiveness, etc. We have an ESG team as well to help them on their ESG pathway to become more ESG friendly. So, there's a menu that we offer, not all of them take everything. We make sure that they know what we have to offer. We make sure that they know what the benefits are for them. We encourage it, but we don't force it.
Kassai
We've entered now a new phase, I think in private equity where unlike the last, you know, 10 years in the last 18 months with interest rates rising, cost of debt increasing and you know, a macro worsening significantly, the idea of making any returns out of multiple arbitrage charge is gone.
Walsh
I totally agree.
Kassai
You know, in fact you need to now, our debates at IC, are about multiple compression and how much and therefore you know how we're going to create value, even in a scenario where there’ll potentially be multiple compression.
Walsh
If you were to project forward three, five years and I'm sure you do this for your fund, what does the future hold?
Kassai
I think it's really more of the same. It's continue to dive deeper into our sectors, potentially opening a few more offices and continue to support this model of you know, sector and region working hand in glove.
Walsh
How are you finding the exit market, there's a lot of talk at the moment about that and mismatching expectations, how are you finding it?
Kassai
Yeah. It's a, look, I think we had a great year in 2023. We had 10 new investments, eight exits. So very happy with how we've performed. And I'm very happy also to be in the mid-market in the current market, because I think it has took some of the larger funds and they've been basically quiet.
Walsh
You’ve been very active.
Kassai
Yeah, exactly. They've been very quiet for a while because of the, you know, there's no financing, lack of financing or expensive financing, but also the question of the exit, who do you exit. you know, an asset to, business to.
Kassai
So, we have the benefit I think by being in the mid-market to still be able to tap into corporates to be able to sell our businesses, but also some of the larger cap companies private equity firms.
Walsh
That's throwing up some advantages to your partnership fund.
Kassai
Absolutely. It's a very good observation. When we set up the fund, we thought this fund is focused only on teaming up with entrepreneurs and providing flexible capital. The reality is what we're seeing now is that actually corporates also want that and in the last six months we've done 2 deals teaming up with corporates, for example, who needed to raise cash, they couldn't go to the debt markets because some of them, for example, were listed and they were already maxed out in terms of how much that they could get.
Kassai
Others had looked to exit in full but given the mismatching pricing expectations and what buyers were ready to pay, they said we're not going to exit now but coming with a, therefore with a minority proposition and saying, we'll take a 30% stake, or you know 40 or 35% stake and we’ll help you now on that M&A that has landed in really fertile ground. And we've, as I said over the last six months, we've done two deals with corporates where we took a minority stake.
Walsh
Moving tack slightly, Flor, I know you're really passionate about the role of women in private equity and you've invested a lot of your time on behalf of the industry in this space. Could you elaborate please, why is this so important to you?
Kassai
Well, it's important to me because I feel that I had a difficult journey getting here.
Walsh
Can we digress into your journey a little bit for the moment. You’ve lived in numerous cities, maybe you can just recap for our audience.
Kassai
Yeah, sure. I'm originally from Argentina and I studied engineering, and I then went to the US to work at JP Morgan in New York, because my background had been in engineering, I wanted training in finance because I was learning everything on the job and I ended up doing an MBA at Wharton. And at that time I took on debt to be able to pay for my MBA. That was when Argentina devalued so there was no way I could come back home because I would take my whole life to pay for that debt. So I looked to come to Europe because of my languages. And I tried to get into private equity then and I was interviewing from the US being an Argentinian, I mean Bridget, I was not even getting an interview. It was so depressing.
Kassai
So I ended up taking a job with Bain Consulting in London. So that at least I could have my foot in London, work with private equity as clients and then do the transition from here. And that worked. And I joined HG Capital back in 2006 and had a phenomenal ride there and stayed for five years, and then in 2011 I joined Inflexion.
Kassai
But you know, it was tough. It was tough as a woman. I was always the only woman in the room. Every meeting that we went, every portfolio company, I sat on the board of. Eventually you get used to it and becomes part of your modus operandi. Right? But I think it became even more difficult when I had my first child because again, the maternity policies at the time were not very generous and, you know, coming back to a job after only a couple of months of having a child, you know, physically it's difficult. But also, you go back home, and you don't sleep very much as you know because babies require a lot of attention. And that was very tough. And I did not have any role models to be able to come to me and say, oh, you know, it's fine or don't worry about XYZ or go back home.
Kassai
In fact, a lot of my colleagues were males, and they were all working until very late hours. And you know, I had to go back home, and it was difficult.
Walsh
Really challenging.
Kassai
Challenging. So anyway, so my role now is I want to make sure that we change things for the other amazing women that are coming, you know, in the industry and that we make things easier for them, right? So that easier from the perspective of you know, maternity policies, easier from the perspective of internal networks of support. Easier in terms of showing that you know the role models in the firm that have actually been able to do the career and have a family and that both things are right, and you don't have to compromise. But also make the life easier for our men because a lot of our men also are fathers, and they want to see their kids. And so why can't we offer them also better paternity policies and make the whole thing a bit more equal, so that we can all have a good job and also a nice private life.
Walsh
And what has the impact of that been on your team here at Inflexion?
Kassai
Well, if you look at our team, we have a disproportionate amount of women in our investment team if you compare to any other firm in the UK, I would say in Europe. So that's the result of it. But we've been you know; we've been very focused on this point for many years. At the partner level, we have also a number of female partners in the investment team, but also outside the investment team. So, it's not just me. And then all of us also, as I said, make sure that we're constantly building these informal networks with our women within the team that understand how they're getting on. If there's any issues that I'm going to raise it personally, I'm going to look after them personally because I look after everyone, but I have a special soft spot for my women.
Walsh
And you've done a lot with the females in your portfolio companies as well?
Kassai
As well, yes. So we make sure also that we are connecting them to begin with to make sure because all of them, many of them are going through what many of us have gone through in terms of having, being only the only woman in the room many times. So by putting them together in this diversity exchange forums, as we call it, they get to know each other and actually you get into that room and there is 150 women and you see their faces lightening up saying, okay, I'm not alone. And then giving them time to network. And we also organize the day with really interesting content that actually they propose to us or would like to hear more about how to negotiate or we talked last time about someone can talk about Imposter syndrome and, you know, just really interesting topics.
Kassai
And we finish with a nice cocktail or dinner. But the idea is that these ladies then are connected to each other. And of course, they see again when we do the following event. But in the meantime, they have their own network. If they cannot have it within their business, they have it within their portfolio.
Walsh
No, it's fantastic. And there's a commercial motive as well because you're building better business by doing this.
Kassai
Exactly, yeah.
Walsh
Our industry has come a long way. What's the next step?
Kassai
I think the biggest change will be eventually when we equalize things. And what I mean by that, I mean men having paternity policies that are similar to women's maternity policies. And eventually when you make it ambivalent, whether it is the father or the mother that takes the leave. Because you need to have the policy but then culturally you need to be supportive of that policy. There's no point having the policy and then if someone is saying, I'm going to take paternity leave, and no one has done it in the last X number of years, well, that's no point. Right. So encouraging it and saying, well, you're expected to, so it has to be a good reason if you don't do it. I think eventually at that point is when we say, right, you know, it's exactly the same no matter your gender and frankly, both sides are also looking after the baby, which is important.
Walsh
Thank you very much. It's been fantastic having you on the podcast with us today. Thanks, Flor.
Kassai
Thank you for having me. It's been a pleasure.
Walsh
That's it for this podcast but do subscribe for more insights from the PE industry's top professionals. From me, Bridget Walsh and Flor Kassai, thanks for listening and goodbye.
Teaser
Thanks for joining the EY NextWave Private Equity podcast. For more insights and perspectives, visit ey.com/privateequity.
