LP Profile: YielCo preps for influx of special situations opportunities

YielCo currently has a 45-strong team and services more than EUR 8bn AUM across funds-of-funds and direct mandates managers. It has offices in Munich and Zurich, covering its global investments from these two European bases.

The firm manages strategies in infrastructure (across all segments core, core plus and opportunistic), private debt (with a focus on senior secured direct lending and specialty lending), and private equity (deep value and value investing).

Its private equity strategy includes separate Europe-focused and US-focused funds-of-funds, as well as a special situations co-investment strategy. It currently manages five funds-of-funds and one co-investment fund.

The LP announced first closes across its US and European strategies in May 2021, as reported, amassing EUR 820m in total. Its latest European fund has collected around EUR 250m in commitments and is expected to close in early 2023, while its newest US-focused special situations fund held a USD 190m first close recently, Laib said.

Alongside the first closes announced last year, YielCo announced the launch of its debut co-investment fund, YielCo Defensive Investments. The co-investment fund focuses on value investing with strong downside protection elements, but generally does not engage in turnarounds or negative EBITDA situations. The fund has a EUR 150m target and the firm expects to close the vehicle by the end of this year.

Lessons from crisis
Laib co-founded YielCo in 2013, having previously spent time with Diamond Asset Advisors, Adveq (now part of Schroder Adveq) and Kearney. With more than 21 years' industry experience, Laib is attuned to how the private equity industry has changed through cycles and to the shifting market that the industry is currently seeing.

"Back when we re-entered the PE market in 2015, we expected a potential market cycle change in the next two to three years," Laib told Unquote. "We saw parallels to a US special situations initiative that I managed in 2005-10: if you invest at low entry multiples and low debt, with managers with high operational expertise, two things happen. Firstly, you have protection from multiple contraction on an industry; and secondly, low levels of debt won't be putting a big interest burden on the company when things are not going well. And, you are positioned perfectly well for attractive investments in companies getting into trouble in a difficult market environment. This is exactly what is happening now."

These comparisons inform YielCo's approach to the current market. "Even in H1 2022 and in Q3, we're seeing that when the market cycle changes massively, you have to be careful," Laib said. "The first deals that were done in Q1 2009 were not that successful in hindsight – sellers' expectations did not adjust quickly, buyers did not know what was coming yet, and the weaker companies went belly-up first. But starting in Q4 2009, expectations had adjusted – so 2010 to 2012 were wonderful vintage years, and then 2013-14 was a great debt environment to recap these companies, and to enjoy a massive multiple expansion."

Upcoming opportunities
As for the current environment, this comparison indicates that 2022 will be a "year in transition" that sees buyer and seller expectations still adjusting, Laib said. "2023-2025 should be excellent vintage years for special situations strategies. In a first step, we expect to see companies getting into trouble suffering from massive cost increases which they cannot pass on to customers, in a next phase we expect to see a number of companies with high leverage which are unable to refinance. As for 2026-2027, we will have to see how market recovery potentially looks, but this is too far out."

Opportunities arising from the current market will come from a number of avenues, with LPs seeking private market returns amidst fluctuations on the public markets.

"With valuations adjusting downwards, we're actively seeking opportunities in mid-cap technology via our special situations fund-of-funds," Laib said. "We've always had a 20% share of mature tech companies in our portfolio, but we focused on the smaller end of the market where even in recent years you could find companies at reasonable valuations."

Although technology is a "long-term super-trend", and Laib remains bullish on the sector, he is expecting to see "a huge adjustment" in valuations. "On the mid to larger tech side, my gut feeling is that valuations could be 40-50% lower in 2023 than they were in the 2021 peak time," he said. "For existing portfolios, this implies much longer holding periods and a market where you really have to increase EBITDAs in the long-run."

Turnarounds are expected to be another source of dealflow for YielCo's strategy. "Where we increasingly see opportunities is on the turnaround side, which we had not seen much in Europe recently," Laib said. "We're expecting to see opportunities emerging from overleveraged companies to stay over the next two to four years, as well as from the continued adjustment of industrial megatrends, e.g. in the automotive sector or in retail."

These opportunities are also likely to emerge on the large-cap side, according to Laib. "Over the next three years, I think we will see a number of companies on the larger end, which were bought at high multiples and high levels of debt, getting into trouble," he said. "This should present very attractive investment opportunities. But you need the track record and the skills to invest here, and many of the EUR 5bn-plus funds are not necessarily positioned for that. We just see less than a dozen larger firms with a proven track record for such troubled companies."

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