Gathering over 100 participants at Deloitte Luxembourg’s first Private Equity (PE) symposium, speakers debated around the private equity market trends of 2014 as well as the results of the Deloitte Luxembourg survey on the local market.

Key speakers Alexandre Prost-Gargoz, partner at Deloitte Luxembourg, Georges Hübner, HEC Management School, Richard Butler, Partner, ESO Capital Group, and Claude Rosevegue, Partner, APAX France shared their views on several of the challenges discussed during the conference.

What are the main challenges and opportunities of the private equity industry this year?
Alexandre Prost-Gargoz, partner at Deloitte Luxembourg: “Luxembourg is a key jurisdiction for private equity inbound investment in Europe and plays a central role offering collective investment structures for institutional investors. These investors want to increase their allocation to private equity with a strong focus on Europe. At the same time, Luxembourg has upgraded the toolbox dedicated to private equity funds with a revamped version of the limited partnership and a pragmatic implementation of the AIFMD. So, all indicators are clearly showing a positive outlook in terms of business potential for Luxembourg.  However, competition has never been so challenging in Europe as many countries now want their lion’s share, fighting on infrastructure offering (AIFMD), arguing on tax (not only pointing at Luxembourg as Belgium, Ireland, the Netherlands and the UK have been recently under the spotlight as well). Thus, we need to remain very close to our clients and continue to be tremendously professional and extremely agile to anticipate the market’s expectations”

What is the most efficient way to finance Venture Capital (VC): public or private?
Georges Hübner, HEC Management School: “In Belgium, from our sample of 515 firms and over the studied 1998-2007 period, VC-backing alone is not a sufficient condition to ensure a fast efficiency in transforming inputs (= production factors) into outputs (= value-added). Nevertheless, private VC seems to create short-term efficiency, while public VC on average do perform worse than non VC-backed companies. This confirms their typical claim that they have no intention to create short-term value; yet, this phenomenon does not contribute to their objective of creating new employment.  We could probably combine the best of two worlds when public authorities, when they wish to intervene, adopt the very strict and unpopular governance standards common in the private VC industry, but with a recognition of their smoothening (anticyclical) role of supporting the economy during economic slowdowns: a role that private VC are typically reluctant to endorse.”

Please share your thoughts on the following statement: What is the difference between profit and cash flow? Often, it is the difference between success and bankruptcy.
Richard Butler, Partner, ESO Capital Group: “In my view, profit is a long term objective, and it is something we all strive for. Ultimately, realising good profits is what will make us wealthy. However, cash flow is what keeps the lights on. You can cope without profit for a couple of years, but lack of cash flow will kill you, regardless of profitability. Items that drive profitability might do the exact opposite to one's cashflow, so it is key that one is never pursued in isolation from the other.”

Claude Rosevegue, Partner, APAX France: “This statement, in the PE business, can be translated into ‘cash is king’.
This means

1. measuring and forecasting the cash you are going to generate or burn
2. how good you will  be in optimising your need of working capital
3. how good you will be in investing and financing your investments
4. how good  you will be  in communicating with your financial partners

A company and in particular its CFO must monitor its Profit and Loss (P&L), of course, but  must also monitor the balance sheet and therefore the cash flow.
Fast-growing companies are often more at risk with their cash than the others as they may not anticipate how fast their spendings are going to increase versus the cash they will generate.
Start-ups are also at risk if they do not measure their burn rate and needs for future financing correctly.
Therefore, a budget must include a monthly P&L together with a monthly balance sheet and a cash flow statement. And the three must match!
Beside the P&L, the management must focus on the needs of working capital: cash collection, supplier payment conditions, inventory management. And the investments and their financing must of course not exceed the available cash.
Lastly, I think it is extremely important for a company to communicate with its financial partners properly: equity sponsors, banks, credit insurers. That means providing timely and accurate information and anticipate bad news. A company must generate confidence.  Even if the news is not as good as expected, the financial partners will be prepared to support the business if are informed early enough before the crisis and trust the management.”

A survey conducted by Deloitte Luxembourg on the local private equity market, presented during the symposium, concluded that the local service providers consider PE as a strategic activity for their organisation, with a fierce competition which is now shifting towards specialised, value-added services, a global service offering, fees and overall service quality.
Furthermore, cross-border and multi-jurisdictional service offering required by GPs prompted asset servicers to set up operating models that include competence centres across the globe, with GPs being more hands-on in the fund creation process and aiming for a more collaborative partnership with asset servicers.