Q&A: GMT's Stefan Franssen

Is being an industry specialist a help or a hindrance in Europe?

Being an industry specialist is not particularly common in Europe. It is wonderful in that we have relatively little competition, but it also means we have to explain what we are doing in a very detailed manner to our investors. Among investors, that is, limited partners, attitude towards industry-specific funds is changing for the better in Europe: investors are increasingly keen on industry knowledge and specialism as a means of driving value creation in portfolios. We are celebrating our twentieth anniversary this year so are well established in this market and currently speaking to investors for our fourth fund.

Industry-specific funds have been part of mainstream private equity in America for some time, but not so in Europe. Is this changing?

The most pertinent explanation for this phenomenon is that Europe itself was a pretty non-homogeneous market for quite some time. Many people complain about the European Union and yes, there are inefficiencies, but what it does do is create homogeneity. That then helps investing across various countries in the same sectors – for example a unified regulatory body in telecommunications gives a reasonable amount of certainty for what can, should and will be done in the sector. These developments across the European Union and Europe have helped industry funds gain increasing prominence and I don't expect that trend to reverse any time soon.

Reaction to our latest fund from prospective investors is very positive as people are looking increasingly towards specialised industry funds. The background to this trend is value creation: essentially, there are three buckets into which value creation in private equity falls: the first is buying cheaply and selling high – there is a lot of timing and luck involved with that. The next is to buy businesses that generate a lot of cash, which can be utilised to pay off debt or lever the business up, that is, minimise external equity funding requirements. And the third is to grow a business profitably, which is the most sustainable way of generating returns. But to do that you have to understand the industry enough to pick trends, invest at the right time, with a fitting strategy and so on. To excel in growing businesses profitably, industry knowledge is an essential prerequisite. Celebrating 20 years in the industry is a good starting point!

Which sub-sectors of TMT present the greatest opportunity?

I would say that the big sectors that see a lot of activity across Europe have to do with data, social and mobile.

For example, when you look at data, it is interesting to note the quantity and diversity of opportunities that arise in this area: firstly, an example is that the raw amount of data being created and analysed every day is growing rapidly and to handle it, one needs both storage and processing capacity. This is the fundamental driver behind data centres, which require significant capital to build in addition to important considerations around energy consumption and connectivity.

Many small to medium-sized enterprises, but also some large corporates, are not well versed in storing and processing their data or running applications (software). The consequence is that many of them use outsourcers to provide these services and as a result you have the hosting industry: managed and cloud services as well as shared services.

Furthermore, data can also be analysed. Data is increasingly important for marketing purposes. In turn, that makes analytics ever more important: it can be the engine for betting, the customer and product research or marketing.

In conclusion, data means many different things to different people and there are a whole raft of opportunities in that space alone.

Social... We wouldn't invest directly in consumer-facing media. But what social means is you have an audience, you can provide services to that audience, sell goods to that audience, do market research with that audience. Facebook and LinkedIn are big depositaries of data, so what can you do with that data? Social is also coming into companies, so how do you share documents, collaborate, how do you make the workplace more collaborative? Social gives you a way of keeping companies together and facilitates modern, global economies.

Business information... It is a very big area and we like it a lot. One example might be Karnov Group, one of our portfolio companies in Scandinavia. It's a very straightforward business; it provides legal information to lawyers. Its value-added is that the information is commented upon, and those commentaries help lawyers to interpret the law and come to the right conclusion. What can you do to expand that business? Well you can start helping the lawyers by providing contract templates; that would be an investment into software, which provides an additional service. Alternatively, you can create an algorithm to analyse all searches done by the users of our product. You can then add value in many situations. For example, a user searches for M&A in a particular case and has looked at certain laws, and then you have another lawyer that searches M&A, but doesn't look at all of those documents. We can therefore suggest he considers other documents. It is called guided research, it is essentially technology driven, and adds significant value to the information.

Given the inexorable developments in technology, how has the telecommunications industry evolved and what lies ahead?

Fundamentally, it is safe to say today that the amount of data being transmitted via both fixed line and mobile networks is only going to increase. In order to cope with the rising demand for data transmission, both networks need to be upgraded, which requires significant capital as well as patience, but there are also some physical boundaries. Take the example of mobile networks: they represent a myriad of cells transmitting and receiving data etc from stationary towers; to cope with demand, ever more of these towers and ever smaller webs of cells would be required, which is uneconomical and not pretty.

In all likelihood, we will see a convergence of both mobile and fixed-line networks playing to the strengths of each of them, for example, routing heavy data traffic over the fixed line. An example of this convergence is the recent transaction announcement from Vodafone making an offer to buy KDG in Germany, essentially reversing the separation initially started with the demerger of O2 in the UK. Another example is one of our own portfolio companies, Melita, which operates a fixed line and mobile network in Malta offering ‘quadruple-play' services to its customers: TV, broadband as well as fixed and mobile telephony.

There are many more opportunities in this area: for example future-proof networks. BT is starting with BT Infinity, but it will take decades. So you will see billions invested in the telecommunications industry in the next 20 years.

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