“When everyone runs in one direction, we often head the other way”
May 21, 2014
Being contrarian is one of the key factors to Proventus success. In this interview, CEO of Proventus and Proventus Capital Partners Daniel Sachs elaborates on the definition of this - and how it provides the company with business opportunities.
How would you describe Proventus and Proventus Capital Partners?
Proventus is a private held investment company that has incubated Proventus Capital Partners, an active credit investor and loan provider to midsized companies in Northern Europe. We act as a strategic financial partner to the companies we invest in - and not just as a supplier of money. This is important, as we believe that the best result from our investments will come from assisting companies in making the most of the business opportunities they encounter. And to be able to help them to identify and assess these, we must live close to the companies and their operations over a period of time, for example by attending board meetings and staying in continuous contact with their management, banks and other stake holders. In addition to this, we also invest selectively in specific companies and situations in the market for high yield bonds.
Describe Proventus’ background and context
Proventus is a family controlled, privately owned investment company that has been active in the Nordic and European capital markets for the last 40 years. There have been three distinct phases in the company’s history. In the 1970’s, Proventus invested in the Swedish and Nordic stock market. As the market deregulated in the late 1970’s and early 1980’s, our focus shifted into taking larger ownership positions and being the controlling or driving owner in midsized companies. By being an active owner, Proventus was able to create significant value such as in the Puma investment. Proventus was listed during this time, but was taken private in 1995 and has been a private company since then. In 2007, Proventus made its last equity investment, but already in 2002 we embarked on the third phase with the main focus of providing credit funding for midsized companies in Northern Europe. The non-bank lending market in Europe was underdeveloped at that time, compared to the US market. But our strategy has been proven right, not least since the collapse of Lehman Brothers in September 2008 with the credit crises and the effect it had on the global financial markets.
Why did you abandon your strategy of controlling ownership?
The market for active ownership in this part of the world is now relatively well developed with a number of successful private equity companies. When studying the market, we saw great business opportunities in becoming a strategic financial partner to midsized companies and their owners. Another observation was that the need for financing outside the banking system was substantial and growing. And, of course, this increased significantly from 2007. We also realized that we needed to act in cooperation with other investors in order to have a major impact, which meant developing our own investment vehicles with the backing of leading institutional investors. Our first structure was launched in 2009 and fully invested 18 months later. We are now in the process of finalising the investment of our second structure and setting up the third.
What have you learnt from the past – and how do you make use of your experiences?
Most importantly, we strive to see opportunities where others see problems. We describe ourselves as being contrarian. By that, we mean that when everybody runs in one direction, we have found opportunities by looking the other way. This doesn’t necessarily mean that we take bigger risks than others. As a substantial part of our funds come from Proventus’ own balance sheet, we are strongly motivated to reduce potential risks. But we have proven that by using our expertise in analysing complex situations and structuring credits to address a specific situation, we have been able to see opportunities and assist companies when the banks have been reluctant, thus creating value. We are independent and small enough to go our own way, which is extremely satisfactory from both a philosophical and business point of view. Another important thing we have learnt is that our business is more about managing relations than managing capital.
Why midsized companies in Northern Europe?
Geographically, we have chosen to act on the markets we know best, and these include Scandinavia, the German speaking countries and Great Britain. As for size, midsized companies have less access to traditional bank financing as well as to bond markets, both for expanding their businesses and refinancing, as a result of the credit crisis and the impact it has had on the banking system. Today, some 50 per cent of the funding of European midsized companies is provided outside the banking system compared to between 10 and 20 per cent before 2007.
How do you select your investments?
Apart from the criteria already mentioned, one of the most important aspects is that we believe in the management of the company - back to the importance of relationships. We have a well-developed network of contacts that provide us with leads and we constantly evaluate new, potential investments. We invest in sectors that we know and understand and where we see a clear potential. Often there is some sort of complexity regarding the company, which reduces their choice of financing opportunities – some of them have been in a position where they were losing money or in a turnaround, but in these cases they have had other assets that we could base our funding on. Our investments include alternative energy sources, such as wind power in both the Nordic region and Ireland. Another example is the German company Puralube, which recycles waste oil to produce lubricants. But you could say that the most typical feature of our investments is that they are atypical – and this stems from us being a complement to the banks’ more rules-based approach to lending and our contrarian culture.
You also talk frequently about sustainability. Do investors have a responsibility versus society?
Definitely. We have a responsibility, but what it really boils down to is self-interest, about contributing to a society in which we wish our children to grow up and where we want to be able to do business also in 20-30 years. And if you have a long-term view on society, you cannot disregard issues regarding the environment, human rights and democracy. This means that we also focus on such aspects of the company and its operations when we assess whether to invest in it. We have a clear, ethical policy and we expect our investments to have that, too. By focusing on sustainability, we strive to contribute to lifting these aspects in general. Recently, it has also become increasingly evident that a sustainable approach promotes businesses and creates profits. Unsustainable processes and products become very expensive in the long term. Our operations have always been based on a long-term view and this is reflected in everything we do.
Are banks your friends or foes?
Friends. Again, there has been a strong development of alternative funding in the wake of the credit crisis and the effects it had on both regulation and behaviour. Today, we have a well-established market for financing outside the traditional banking system through non-bank lending, but also through the bond market. Restrictions on lending have resulted in a new role for banks, where they have moved more towards becoming intermediators and advisors to their clients. This means that they often try to find alternative financing options through assisting in issuing bonds or cooperating with other types of investors, such as Proventus. In other words, we provide an alternative to banks, not competition, and we cooperate closely.
How do you see Proventus’ future and opportunities?
The on-going process of reducing risk in the banking system means that the non-bank lending market will continue to grow. Even though a major part of this growth consists of bonds and syndicated loans, it will increase our potential – especially since there are relatively few players that originate and structure credits the way we do. Today, we probably belong to the five leading players in our niche in Europe. We see many interesting business opportunities ahead, for example in Germany where there are many industrial companies with strong potential and competent managements while the banking system is fragmented and faces major challenges. We believe that we could play a role in restructuring the German funding market, which we believe is necessary and will come, but this is of course something that will happen over the long-term.
One short-term focus is to attract non-Nordic co-investors. Up till now, only Swedish institutional investors have invested in our funds, but we believe that it would add value to broaden this base. Considering that almost half of our investments are made outside the Nordic region, it should also be reflected in our setup of investors. It would be an important way of keeping up to date with what is happening in these markets and to create networks of contacts that will hopefully lead to new business opportunities. Another challenge, of course, is that we don’t know how future regulation of the financial markets will affect us. But we have a good structure, solid investors and we have been continuing to grow – three years ago, we invested 1 billion SEK and in 2013 that figure had grown to almost 4 billion. Apart from creating value for the companies we invest in as well as for our investors, we also contribute to creating job opportunities and development. And that I find deeply satisfying.