NEWS ROOM

Successfully launching a new product on the market involves setting up of an efficient supply chain. For startup companies, which mainly focus inward on technology and product innovation, sourcing components and managing suppliers can become a challenging task, which is often poorly addressed or addressed too late. For suppliers, new companies, initially, represent low volumes and complex requirements as well as a higher probability that startups might fall short of a supplier’s priority list. Nonetheless, the success of a product comes as much from its innovative dimension as from its efficient supply chain.

Rightly identifying and involving key suppliers early on in the life of a company, and in strategic decisions, offer several advantages, thereby, making the venture phase a winning one: close cooperation enables to rapidly improve the manufacturing processes, harness the technical capabilities to offer a high degree of product customization, enable co-creation, and the identification of better solutions fed by trust and loyalty. Similar to Japanese keiretsu systems, with their profound buyer-supplier links, an exchange based relation allows suppliers to become deeply ingrained in the ecosystem of the venture. Partnering suppliers gain insight into the needs and expenses of buyers. Proactive partnering suppliers might also help reduce the cost of manufacturing the product. Frequent exchanges of ideas regarding technology lead to quick innovation cycles, which in turn motivate suppliers to provide exceptional levels of quality with strong involvement.

To reach such an integration level, the management of a startup company needs to identify very early on – even before the inception of a company – the suppliers they would like to partner with. The management also needs to transmit the passion of the challenge, the product, and technology. Only then can both partners foresee the mutual benefits of working as strategic partners and define the terms of the collaboration.

As part of the strategic review and support carried out for clients, ValleyRoad Capital addresses this dimension of the value chain.

Ramping up a new start-up company can be a nightmare for first-time entrepreneurs or even experienced ones. The business operations alone can consume most of the business founders’ time and effort. Managing day-to-day operations of a start-up company can prove overwhelming even for experienced managers, so it is crucial to take a back seat during the initial start-up phase of a new business.

On the surface, it seems reasonable enough to put this issue on the back burner, given that most start-ups are put together by acquaintances. As a result, human resources policies are frequently reduced to verbal agreements in an early stage of business most of the time. But, this is often a crucial mistake because they neglect the prudent option of hiring a core team of smart people that share the start-up company’s vision and are willing to take the risk with them. Friends and relatives often do not fit the bill.

The biggest challenge for the founders & CEO of a start-up company is to have a helicopter view from the beginning on key positions and to focus on involving the right people in the right positions at the right time.
The real working capital in a start-up company is the dream team, which needs to be in place at the right time in order to deliver expected targets with the ability to develop a vision and a working plan and execute it with a sense of urgency.

The only way to implement a strong culture, from the start, is to explain how the success will be shared and how important each position is for a successful development of the company. The incentive has to be the same for all key guys who are willing to act as entrepreneurs and to share the risk. There is no place for ego or prestige in the dream team. Clearly, without a reliable team, the investors take a risk they cannot control and it will be too late when it is discovered.

ValleyRoad Capital recommends the following profile for the start-up team and any other position:

• To have leadership skills necessary for driving the growth and development of each department of the company.
• To be a decisive, customer-driven, and results-oriented achiever.
• To be inventive, flexible, open-minded, and used to working in a small team.
• To have a dynamic and committed personality with the desire for responsibility and eagerness to meet new challenges.
• To be entrepreneurial and business minded.
• To have the ability to search adequate, pragmatic, and creative solutions.

If the founders and CEO have the capacity and can invest time and efforts to put in place the right people for the expected challenge, and to implement a real culture, then, they will beat any strategy on the paper.

The right team is unstoppable.

Over the last years, traditional investors in private equity (PE) like institutional investors, as well as high net worth individuals and family offices have become highly sophisticated in evaluating private investment opportunities. As a consequence, and to complement traditional investments through PE funds, co-investments have become increasingly popular among professional investors seeking higher returns together with lower fees, enhanced transparency and greater control over their investments.

According to a survey conducted by Preqin dealing with over 100 institutional investors from around the world, the two major reasons leading investors to opt for co-investment are better returns and lower fees. Co-investing with General Partners also provides investors with direct exposure to industries they would not access otherwise, thus, enhancing their experience in new sectors of economic activity. Furthermore, direct investment provides a solution to the issue of lacking transparency pertaining to PE funds, as direct investors have a better control over their investments.

Typically, co-investors are existing limited partners in an investment fund, who make minority investments directly into an operating company, alongside a financial sponsor or other PE investor, in a leveraged buy-out, recapitalization or growth capital transaction. From the PE firm’s side, co-investments are also highly beneficial as they allow managers to make larger investments without dedicating too much of the fund’s capital to a single transaction, or sharing the deals with competing PE firms. In addition to providing further capital, co-investors could offer strategic benefits to a portfolio company. For instance, an operating partner who co-invests in a fund may bring special skills to the portfolio company, developing strategic relationships or offering industry expertise.

The “win-win” co-investment between minority investors and PE funds can take two different forms; either at the level of the holding company, which then invest in the operating portfolio company, or directly in the operating portfolio company. Whether the co-investment is direct or indirect will depend on investors’ expectations, such as the level of control required over investments, the level of interaction with the fund, the management fees they are willing to accept or the transparency of the portfolio company.

ValleyRoad Capital, in its pioneering role at introducing Mezzanine Trade Finance as a new segment of PE investments is offering flexibility to investors by proposing direct co-investment, together with investing through the traditional fund structure.

Sources :
Pepper Hamilton law
Preqin

You must be wondering while reading your favorite newspaper or magazine, why is there so much fuss about “wearables” (these electronic gadgets you wear on your body) and how they are going to change your life. You are asking yourself “does it make any sense?” because you’ve heard that litany before (the new tech gadget that is going to change our lives).

Frankly, I was not paying much attention until I read how many of those “wearables” (electronic devices that you wear on your body) have been sold (IDC reports 19 million for 2013) and that they will grow by 78% per year until 2018[1]! This should result in nearly 120 million units sold by then, of which a majority of watches and wristbands; now compare this with the watch industry: 1.2 billion watches sold annually worldwide, of which about 30 million of Swiss watches, representing 54% of total sales in value. You may actually deduct that there will be more “wearables” sold two years out than Swiss watches. Now that is news!

I have been involved with the Swiss watch industry for more than 2 decades and have witnessed the evolution and the resilience, nothing you can compare with the fast fading electronic novelty, where life span of devices is measured in months, not years (think of your smart phone). Now, how can you reconcile two very different industries, with different values and time scales? How is the consumer going to value a nice Swiss wrist watch, as compared to his Samsung or Apple electronic wristband?

The universe will have to seriously warp to reconcile luxury and consumer electronics. Remember Vertu®, the luxurious phone, initially produced by Nokia? Customers always complained that the technology within the phone was two or three generations behind the latest Nokia phones; this is because luxury rhymes with durability and it is very hard to reconcile the fast evolution of electronics technology with the long lasting impression of a precious object.

We believe there is a way of doing this and we are actually speculating that Apple is taking its time because they are struggling with the same dilemma.

We, at ValleyRoad Capital, are working through this dichotomy, finding new ways to bring together luxury and technology for the benefit of our clients.

[1] IDC, 2014

When a Buy-side mandate is given to manage the whole acquisition process of a target company which has already been selected by the prospective buyer (mandatory) but where a strong and evident culture barrier needs to be overcome, it is important from the outset for both sides to define their expectations for a successful transaction, in order to establish the foundation for future mutual benefits.

At ValleyRoad Capital, we very much take into consideration the existing cultural barriers when doing in business between different countries, even in Europe, from Nordic Countries to Central and to South of Europe. In particular, one will find huge differences in the understanding of value creation before and after merger or acquisition transactions.

From the beginning, it is important to inform the sell-side that their legal advisor (it is strongly recommended to use an experienced law firm which can handle corporate finance and private equity deals) should be hired for the transaction in order to ensure that the terms and conditions of the term sheet are properly understood by the seller and to assist him in clearly defining the representations and warranties.

To finalize the purchase price and to reflect the outcome of the price negotiation, try to be creative when it comes to defining the sale price of the target company. It is crucial to explain the basis of the evaluation methodology. The mission for the buy-side advisor is to integrate a constructive scenario in the negotiations, which motivates both parties and creates involvement from both management sides. One can for example introduce future reachable EBITDA targets as an extra additional payment mechanism.

Last but not least, it is important to define the timing for closing: the best time is usually during the morning hours so you can reach banks and government offices if it is needed…and also try to avoid Fridays, when correspondents are usually starting to wind-down for the weekend !

You also have to inform the buy-side, from the beginning, of the expected quality and quantity of documents/lists for all needed appendices, which need to be added to the SPA :

– Loan agreements (company and personal loans)
– Building lease agreement
– Etc…

At the end, we (ValleyRoad Capital) discover through each different M&A transaction that if you don’t manage the expectations on both sides as well as emotions, you will not close the deal.

The financing of the real economy in Europe has traditionally taken place through banks, which provide around 80% of the corporate financing. The situation is very different in the U.S. where only 20% of the financing to corporation originates from the banking sector, the rest being ensured by bond markets, insurance companies, pension funds and direct lending funds. The share of financing controlled by banks has been trending down continuously in the US since the 1950s, when it stood at a staggering 75%: this is a clear evidence that there is ample scope for increased reliance on capital markets in Europe.

Following the 2008 crisis, the trend is toward downsizing of banks. According to Royal Bank of Scotland, European banks will need to offload about EUR 3.2 tn of assets to comply with Basel III requirements. For 2013, bank loans made to non-financial companies fell by 4.3% in the Eurozone, triggering huge pressure on companies to find alternative ways of financing[1]. The situation is becoming especially problematic in countries like Spain and Portugal, where SMEs – accounting for a significant share of GDP- find difficulties in accessing global debt markets.

Such an evolution of the banking sector creates huge opportunities for European borrowers and debt investors. Over the next five years, Standard & Poor’s forecasts that Europe will need USD 2 tn of new commercial debt to ensure a growing economy.

Although still in its early stage, the shift towards private debt in Europe brings diversification, as well as sources of higher returns to professional investors seeking alternative sources of yield, in the current environment of low interest rates.

At VRC, we are very active in structuring private debt solutions.

[1] Hedgeweek, July 2014

The scarcity of fresh water in major parts of the world is a well-known and alarming fact. Beside the water needed for agriculture, industry and human consumption, hygiene is often an unaddressed source of water consumption. Overall, water consumption is growing twice as fast as the population. Both, the need for better living standards and the inefficiency of our water-usage contribute to the accelerating growth.

By 2025, it is estimated that one third of the population will live in a water stressed area [1]. Different rules do not necessarily apply for tropical regions. For instance, Singapore, neighbouring Indonesia and Malaysia increasingly suffer from uncommon weather events leading to temporary droughts putting stress on the water supply system. Around 55 percent of Singapore’s water is now desalinated or recycled with an aim to be self-sufficient by 2061, when a 1962 agreement to buy 1.1 million cubic meter of water per day from Malaysia ends.

Price of water and its paradox

Nonetheless, water is at a dichotomy. Water remains the most undervalued commodity and at the same time a source of important conflicts.

In certain countries suffering from water stress, there is a clear political will to keep the consumer price of water low. This artificially low price has perverse effects, one of which is the resulting difficulty to change wasteful habits. Furthermore, those extremely low prices require substantial subsidies. In the most extreme cases, one can observe countries in the Middle East experiencing high water stress with water price to consumers below USD 0.1 per cubic meter, while production and distribution cost is between USD 1.1 and 1.3 per cubic meter. Similar to fossil fuel subsidy system, the subsidy of fresh water supply remains an important political tool for governments in place.

Fear of a world without water. It falls largely to governments to regulate fresh water use with foresight and intelligence in light of current and future constraints. Nonetheless, water saving technologies and solutions developed and promoted by private companies should not only offer an economical benefit to the user payer, but absolutely be sustainable economically. Water saving technologies (environmental technologies), which rely on government subsidies, are not deemed to survive. Henceforth, enlightened leadership from the private sector should sustain governments and political leaders to take relevant decisions to limit the excessive water footprint and offer sustainable solutions.

At ValleyRoad Capital, we support Swiss technology companies promoting water saving with unique, innovative and economically viable technologies that address both private and public sectors to limit water consumption for human hygiene while preserving, even enhancing, the comfort of users.

[1] www.unwater.org

Conventional wisdom imparted by bankers (and by many of the consultants advising them) says that the Wealth Management sector will not only have to rapidly consolidate in the face of the structural changes besetting the industry, but will also polarize in two very distinct sorts of banks, each being entirely dependent on the type of clients being served.

According to this view, Private banks will have to choose between being either local and specialized institutions with a limited range of services tailored to the needs of local high net worth clients or being international banking behemoths serving the global super-rich.

As a consequence, pundits predict that Private banks unable to have positioned themselves resolutely at one or the other end of this spectrum by the end of the current decade will have died while trying. In other words, those caught out in the middle will succumb to the unforgiving conditions of Death Valley…

In considering the merits of this prediction, one might draw lessons from the realm of sociological and psychological non-fiction. In ‘David and Goliath: Underdogs, Misfits, and the Art of Battling Giants’ [1], author Malcolm Gladwell explores the nature of lopsided conflicts, confrontations and challenges. His central thesis is that what are ordinarily perceived as advantages may, in fact, be disadvantages, and vice-versa. He also argues that being in a situation of disadvantage may bring surprising benefits. In fact, we often tend to misjudge challenges by failing to look beyond the obvious. In the author’s own words:

“[…] we consistently get these kinds of conflicts wrong. We misread them. We misinterpret them. Giants are not what we think they are. The same qualities that appear to give them strength are often the sources of great weakness. And the fact of being an underdog can change people in ways that we often fail to appreciate: it can open doors and create opportunities and educate and enlighten and make possible what otherwise might have seemed unthinkable.” [2]

In his eponymous example of the legendary battle between David and Goliath in the Valley of Elah, the author examines the apparent forces at play as a giant warrior ensconced in protective armor is confronted by a small shepherd boy. He then delves into the reality of the conflict: the dominance of projectile warriors over heavy infantry, the accuracy and deadliness of a sling, the likely acromegaly of Goliath and his resulting vision problems and David’s speed, among other factors.

Thus, does the legend of the Valley of Elah carry any lessons for the Private Banking industry and for those banks considered to be facing the perils of Death Valley in particular?

We believe they do. In fact, as confidence in the financial markets revives, local wealthy clients’ needs are also likely to evolve, and the smaller sized “niche” banks may as a consequence have to broaden their range of service and product offerings. Likewise, while the “new wealth” generated by successful entrepreneurs pursuing supra-regional business opportunities requires a broader geographical footprint and a more diverse set of skills than those available in local banks, giant global banks may be considered by these same clients as being too big and complex to deal with.

The perceived advantages of being at either end of the spectrum may indeed prove to be tenuous at best when addressing the challenging requirements of certain Private Banking client segments, and many of the apparent mid-sized underdogs may well be ultimately better equipped to serve them.

We, at ValleyRoad Capital, therefore, think that a resilient Private banking “ecosystem” will in fact encompass a variety of sizes and shapes of organizations and that there will be room in the middle of the “Valley” spectrum for those banks which are adequately organized and capitalized, able to form strategic alliances and flexible enough to substitute quality of execution, speed of delivery and creativity for the perceived advantages of sheer size.

Bibliography

[1][2] Gladwell, M. (2013). David and Goliath: Underdogs, Misfits and the Art of Battling Giants. New York City: Little, Brown and Company.

Anderson, R., & Jõeveer, K. (2013, October 2). http://econ.sciences-po.fr/sites/default/files/file/Ronald%20Anderson%2002-10-13_0.pdf. Retrieved on 08.09.2014

Dominick Co. (2014). http://www.dominickco.ch/en/. Retrieved on 08.09.2014

Matthias Memminger. (2014, May 22). PwC Switzerland Publications: Surviving the Valley of Death. Retrieved July 3, 2014, from PricewaterhouseCoopers Switzerland Web site.

We are living a remarkable period of time, during which interest rates are very low and meant to stay that way for another year or two in the EU and Switzerland. Systemic risk is high and Western democracies are over-indebted (with a few exceptions). Several deep geopolitical crises are stewing (Ukraine for example), all having a negative global economic impact. Meanwhile, businesses worldwide are posting good profits and global demand appears to be generally holding up well, with the help of accommodating monetary policies. This creates a huge headache to central bankers trying to maintain some stimuli while avoiding shooting at the ambulance (increasing the sovereign debt burden and bloating central bank balance sheets).

Most developed countries have some form of state-organized individual pension schemes, aimed at providing retirees with means to live a normal life, namely pension funds. Pension funds are subject to strict prudential investment rules and are de facto forced to have a large exposure to blue chip bonds or sovereign debt, which given the current very low interest rates, hardly provide any yield at all to investors and pensioners alike. This is aggravating the situation for the state which may have to bail out a larger portion of pensioners having experienced insufficient returns on their pension plans. We see a typical case of vicious circle.

What can pension funds do about it? Well, get exposed to more risk in order to receive more reward sounds simple enough. Indeed, if you ask your average investor why any asset would provide a higher yield, he/she will invariably answer: “because it entails higher risk and there is no free lunch”. Fair enough, but assets can offer a higher yield for another reason: scarcity of demand. Low demand depends upon weak appetite of informed investors or simply because investors are not aware that such opportunities exist. This is largely the case for Private Debt in Europe.

There currently are myriads of middle-sized private enterprises in Europe, most of them family-owned businesses, with long standing solid business track records and which have never defaulted on their bank loans, but which have been finding it increasingly difficult to have access to bank financing because of deleveraging and regulatory constraints being imposed upon the banking system.

From a financial point of view, it can be easily demonstrated that a well-diversified portfolio of such debtors has a much better risk/return profile than certain sovereign bonds being sold at rock-bottom yields.

You may ask why these companies are willing to pay a high interest rate despite being creditworthy. Simply put, the answer is that because they do not otherwise have access to debt finance, scarcity of money drives up financing costs. Should this become mainstream, there will be an erosion of margins, but that will not happen tomorrow.

Pension schemes could widely profit from such opportunities and play an active role in supporting the same ecosystem on which they are feeding. That is called a virtuous circle.

We, at ValleyRoad Capital, have structured private debt deals in the past and are working with pension schemes and other yield hunters in order to promote these investment opportunities.

Traditional trade finance relies on short term revolving and self-liquidating credit lines provided by banks. The 2008 crisis and its consequences of increasingly restrictive regulations have put pressure on banks to deleverage. This in turn has significantly impacted trade credits and traders.

Trade finance plays a vital role in the economy as it allows commodities to be moved from suppliers to clients and into products. Given the current credit restrictions, players have no other choice than innovating with non-bank investors. Even if promising alternatives are emerging, they are still very limited, suffer from problematic disorganization and do not fully respond to small/medium traders’ needs.

Consequently, there is a great opportunity for new actors in offering alternative financing facilities to established trading houses at higher yields, through Mezzanine Trade Finance (MTF). There is an interesting opportunity for seasoned investors to place money at 90 days, with a revolving option, and cash in on interesting yields in Swiss Francs (above 9%), a currency of choice for stability.

ValleyRoad Capital is pioneering MTF’s as a new segment of Private Equity investments.

It, of course, is a truism to state that the Swiss Private Banking industry is undergoing very significant structural changes, which are being driven by the new tax (and regulatory) paradigm as well as by the changing competitive landscape, both in Switzerland and internationally. A consequence of those changes is that the gross profitability of Private banking books of business have eroded, while their market value have plummeted since 2007 – generally having been divided by a factor of 3 or even 5 times, a perfect example of operating leverage at work!

In this context, it is also generally accepted that Private banking businesses in Switzerland should be viewed from a perspective of M&A with extreme caution and that, from a prospective buyer’s perspective, the caveat emptor principle should be adhered to rigorously. As a result, selling a Private Banking business by way of a share deal (i.e. selling the corporation) has become extremely difficult and asset deals (i.e. selling certain assets of the corporation) have nowadays become the preferred route for most prospective buyers, the aim being to cherry pick certain groups of clients or geographic markets.

While we recognize that it is generally better to be safe than sorry, we do also wonder whether the new conventional wisdom has not taken things too far and that opportunities are being foregone. In other words are we throwing the baby out with the bath water?

We do believe that in a buyer’s market, there are opportunities to be reaped by acquirers able to shoulder the risks of a straightforward share buy-out. Such risks have to be adequately mitigated, both through focused pre-deal due diligence and careful structuring of contractual representations and warranties. Expert advice by seasoned industry practitioners will no doubt prove to be very valuable in that context.

For those buyers who have the necessary negotiation and execution skills, as well as being financially able to play the consolidation game, share deals might well just be the perfect way to acquire good businesses at rock-bottom prices and thus generate substantial returns on those investments.

So caveat emptor, by all means, but also bear in mind that winners generally do not follow the crowds…