3 questions to smart minds

Crisis and ESG management at portfolio companies

For this 3 questions to Dr. Holger Kleingarn

H.I.G. Capi­tal
Photo: Dr. Holger Kleingarn
9. Novem­ber 2021

Corona and the asso­cia­ted econo­mic standstill in many indus­tries have taken a massive toll on medium-sized compa­nies — and the conse­quen­ces of the pande­mic conti­nue. But it is precis­ely phases with disrup­tive dyna­mics that offer enorm­ous oppor­tu­ni­ties for those inves­tors who have expe­ri­ence in special situa­tions and can master the asso­cia­ted chal­lenges. It does not matter whether we are talking about an epochal crisis, far-reaching trans­for­ma­ti­ons or even uphe­avals in regu­la­tion — keyword: ESG.

For this 3 ques­ti­ons to Dr. Holger Klein­garn, Mana­ging Direc­tor and Head of Germany at H.I.G. Capital

1. How do you feel about the new ESG standards?

Sustainable inves­t­ing is rightly in the spot­light in times of climate change and resource aware­ness. ESG — i.e. envi­ron­men­tal, social and corpo­rate gover­nance sustaina­bi­lity — is of great importance to H.I.G. Capi­tal. We are aware of our respon­si­bi­lity and actively address the issue. I think that private equity in parti­cu­lar can make a posi­tive and signi­fi­cant contri­bu­tion to society here. ESG alre­ady plays an important role in the due dili­gence process for corpo­rate acqui­si­ti­ons, and I believe it will become even more important in the future.

Compa­nies with a clear and posi­tive ESG profile achieve higher valua­tions on the market. This will offset or even exceed any addi­tio­nal costs, for exam­ple due to the intro­duc­tion of deman­ding ESG stan­dards. Another exam­ple: alre­ady today, some debt funds offer a reduc­tion in inte­rest margins for ESG-orien­ted compa­nies. At H.I.G. Capi­tal, we are convin­ced: ESG and attrac­tive returns are not mutually exclu­sive — on the contrary.

2. What consti­tu­tes good crisis manage­ment at a private equity firm?

Trans­pa­rent and fact-based coope­ra­tion with port­fo­lio compa­nies is important in highly dyna­mic phases. The aim is to actively address risks, but also to jointly seize market oppor­tu­ni­ties. These can be new custo­mer wins, company acqui­si­ti­ons or even the hiring of new employees.

Proac­tive exch­ange and the asso­cia­ted trans­pa­rency vis-à-vis rele­vant stake­hol­ders are at least as important. Think, for exam­ple, of the finan­cing banks, or even the inves­tors in a fund. Finally, decis­i­ons must be made consis­t­ently and commu­ni­ca­ted clearly to the manage­ment of the port­fo­lio compa­nies and also to the company’s own invest­ment team. Many have never expe­ri­en­ced such excep­tio­nal situa­tions them­sel­ves. — My current expe­ri­ence during the Corona crisis is that the corpo­rate manage­ments of the port­fo­lio compa­nies are abso­lut­ely crisis-proof and stron­gly posi­tio­ned. This applies both in inter­ac­tion with custo­mers and suppli­ers and, for exam­ple, in inter­nal commu­ni­ca­tion with mana­gers and employees. Many of our port­fo­lio compa­nies were able to make add-on acqui­si­ti­ons during the pande­mic and even achieve earnings growth. Inci­den­tally, I expect a simi­larly dyna­mic envi­ron­ment in 2022. And I am sure that various market oppor­tu­ni­ties will again arise in the port­fo­lio. The old maxim that in every crisis lies an oppor­tu­nity applies today more than ever.

3. What speci­fic oppor­tu­ni­ties do you see in the coming year?

There are a few — let me pick out two as examp­les. Firstly, the trend among compa­nies to focus and concen­trate on core acti­vi­ties is conti­nuing. Parti­cu­larly in the case of larger corpo­rate groups, non-core acti­vi­ties are incre­asingly being spun off and sold. It has been reco­gni­zed that these units in the Group often do not receive the atten­tion, free­dom and invest­ment they deserve. These so-called carve-out situa­tions are where we come in. We have gained expe­ri­ence over deca­des on how to streng­then, deve­lop and scale these acti­vi­ties. To this end, we draw not least on our exten­sive indus­try exper­tise and global presence. This is where we create real added value — for our inves­tors, of course, but above all for the company’s employees and custo­mers. This is a true win-win constellation.

The same applies — second chance — to succes­sion at many medium-sized compa­nies, which, by the way, often have an excel­lent posi­tion in their markets. But if the next gene­ra­tion does not see their future in the company, another solu­tion must be found. In this situa­tion, respect for the founder’s life’s work is important, as is respect for the culture of the company in ques­tion. That’s exactly what we bring to the table. This is because we combine local exper­tise and expe­ri­ence with the capa­bi­li­ties of a globally active company.

About Holger Kleingarn

Holger Klein­garn is Mana­ging Direc­tor and Head of Germany at H.I.G. and has been working in private equity for more than fifteen years. His focus is on buy-outs, growth invest­ments and turn­arounds of mid-sized compa­nies within Europe with a focus on the German spea­king count­ries. Prior to H.I.G., Holger was a Part­ner at London-based Pala­mon Capi­tal, a PE firm focu­sed on middle-market compa­nies in Europe. Previously, Holger led the MBO of a medium-sized soft­ware company as CEO. He star­ted his career at Bain & Company and Roland Berger, most recently as a part­ner and member of the Finan­cial Services manage­ment team.

H.I.G. is a leading private equity firm with over 38 billion euros of capi­tal under manage­ment and offices in the USA (Miami, Atlanta, Boston, Chicago, Dallas, Los Ange­les, New York and San Fran­cisco), Europe (Hamburg, London, Luxem­bourg, Madrid, Milan and Paris) and Latin America (Bogotá, Rio de Janeiro and São Paulo). We specia­lize in equity invest­ments in small and mid-sized compa­nies where we can play a signi­fi­cant role in unlo­cking the exis­ting value potential.

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