Virginie Morgon: “The current fix in technology is healthy”

Eurazeo manages a portfolio of 450 companies. With that in mind, are you worried about the current economic situation?

We have never experienced such a crisis. The crisis of 1929 was primarily a stock market crisis; 1973, oil; 2008, financial; and in 2020 we had to face a health crisis. It is the sum of several simultaneous upheavals that we are experiencing. What is striking today is the heterogeneity of both the causes and the impact of this particular market moment.

Economically, this crisis is reflected in a number of unprecedented divisions: geographical, between Europe, the United States and Asia; sectoral, other industries that have to respond to very difficult challenges, such as energy, and are accelerating under the impetus of radical changes in lifestyle and consumption; the size of the companies is also a very strong differentiating factor. You need to know how to adapt in this context.

Times are less easy for technology. Do you think this is temporary or permanent?

Eurazeo is a European technology leader with over twenty years of experience. If we’ve seen cryptocurrency explode in tech, it’s a healthy correction instead. The sector is now recovering from the boom we witnessed in the second half of 2021.

Valuations have exploded, driven by the digital boom during the pandemic and the massive recovery of the economy since the end of 2020. In unlisted investments, this phenomenon has been particularly encouraged by the sometimes erratic and short-term appetite of Anglo-Saxon investors for these types of European assets.

Is the repair complete?

The “resetting” of this valuation will continue as companies show huge imbalances between revenue and profitability. We need to return to a more standardized approach to the business model that generates cash flow. In 2021, all the tech players found funding. From the second half of 2022, simple rules such as leader bonus and model quality apply. It is clean.

Should we expect a wave of failures in the sector under these conditions?

Nope. Europe’s big unicorns are well-funded globally for the coming months. In the medium term, the relevance of the business model and the ability to create breakthrough innovation will always make the difference. In the short term, we need to focus on cash consumption.

A distinction needs to be made between actors who tighten costs (cost reduction, manpower…) being more flexible and those who try to extend their existence for a few months. This is what separates those who have really grown up in recent years and those who have just grown up.

With rising interest rates and an economic slowdown, isn’t the golden age of the unlisted over?

On the contrary, I am very confident. The stock market creates value when enough growth engines are fired, but when the cycle turns like today, its volatility helps accelerate the move. So it became less attractive to mid-caps and is now reserved for large caps.

IPOs are declining in Europe and the US, and the number of listed companies has halved in a decade. The stock market horizon is very short. This is incompatible with the main concern of most companies today: their transformation.

Two-thirds of the value created by private equity comes from accelerating growth and transformation.

In contrast, the non-listed sector is deeply structured and professionalized and now offers a whole battery of expertise (sectoral, digital, international, CSR, etc.) that serves this transformation. For this reason, it attracts an increasing number of institutional investors and now also individuals. This is a real mainstream trend.

In France, more and more savers are investing in the unlisted, particularly under the impetus of the Pacte law, which made it available through life insurance. They benefit from the same opportunities as institutions.

Some investors and managers on the side accuse venture capital of being close to a Ponzi scheme. How do you answer them?

How wrong they are! From start-ups to mid-caps, two-thirds of value creation through private equity involves accelerating growth and transformation. Admittedly, some operators were satisfied with the mechanical increase in valuation multiples and the leverage effect associated with global growth and low interest rates. It was fifteen years ago. Those times are over. There are still exceptions, but the fundamentals of the sector are sound.

How can private equity adapt to this new context of rising interest rates?

Decoupling between companies will also be accelerated. To support revenues with 10% financing costs, it is necessary to demonstrate significantly higher growth prospects, invest in promising sectors and companies that are leaders in their markets. On the contrary, it risks limiting financial opportunities for the least efficient companies.

Should we fear the risk of default with the rising cost of debt?

The famous “debt wall” fear is not the issue. There is plenty of capital available as needed to bolster balance sheets. The market has been on an accelerated learning curve since the 2008-2009 crisis, and I don’t see any signs of slowing down or worrying me. Above all, we must make sure that the fear of recession is not justified.

In this context, the credit policy of banks becomes stricter. How to cope?

This is not new. This has been the main trend since the 2008 crisis. Tightening capital constraints are affecting banks, which are now more comfortable financing CAC 40 or lending to companies rated A-AAA (investment grade or investable securities) than “leverage buys”. – came out [acquisition par emprunt, NDLR].

To overcome this shortfall, we can rely on private debt funds, which have taken off in full swing in recent years. And rising interest rates haven’t changed that. Specialized players are more flexible and easier to manage than a bank pool. The share of debt funds promises to grow even stronger.

The investment platform model of unlisted giants KKR, Blackstone and Carlyle is evident in this sector. Does it really meet the demands of investors?

Our business is evolving towards an asset management model, that’s right. We are increasingly becoming a multi-sector investment platform. This trend meets the demand of our clients who are investors of the funds we manage.

These investors have a global vision. Whether it’s sovereign wealth funds, pension funds, insurance companies or large endowment funds, they have plenty of money to invest.

To limit risks and not spread themselves too thin, they want to find a limited number of reliable partners who can meet their large investment needs. This explains why the unlisted industry has become highly structured in recent years.

In North America, Texas and other states have criticized private capital for doing too much on environmental, social and governance criteria. Does it hurt performance?

Make no mistake, everyone is looking for performance! The vast majority of investors also want long-term performance. The US market is very binary and positions can be 180 degrees from state to state. The environment is very volatile and we must constantly seek balance.

However, we should not be dependent on the changing positions of our customers, which evolve according to politics and geopolitics. We must maintain our values ​​and the long-term course of our investment priorities.

On the ESG front, you’ve been accused of not moving fast enough, in contrast, like the rest of the financial sector…

These critics want us to make a complete change by funding only renewables, but we won’t solve climate problems in five to ten years by limiting ourselves to that. This is not real.

The answer also involves financing the transition, especially as we want to move quickly and make an impact. This is fundamental and it does not prevent parallel “article 9” investments [les plus contraignants au sens de la réglementation européenne, NDLR] highly sought after. The answer is not binary.

But how do we ensure that the link isn’t actually greenwashed?

As with performance audits, additional financial data should be published to measure and prove impact. The challenge is that preparing an ESG report today is ten times more difficult than a financial report, especially since there is no global benchmark.

Thus, transparency requires both consistency and standardization of measurement. The same difficulty exists in measuring diversity, where the US has a very different approach and whose reporting requires data collection that is prohibited in Europe.