Two years ago, when a venture capitalist urged Harold Sharon to take a look at Harveys Furnishings, a British furniture and rug chain, his reaction was "Harveys who?" Indeed, Harveys appeared to be "a prosaic, marginally profitable company," recalls Sharon, co-manager and chief international stock-picker for the Warburg Pincus Global Post-Venture Capital Fund. But a different story emerged when Sharon started digging. He learned that Harveys' top guns were being replaced by new managers who planned to shake up the stodgy retailer and go for growth. Convinced the stock was undervalued, Sharon bought in. As the rest of the market cottoned to the new Harveys, its stock soared, enabling the fund to notch a 50% gain on the stock when it sold out 12 months later.
In the two years since the fund's inception, its three managers--Sharon, Elizabeth Dater, and Stephen Lurito--have made a name for themselves by getting in on the ground floor of big movers such as Harveys. Up nearly 50% last year, the tiny Warburg Pincus fund--its assets are $5 million--was the top-performing global mutual fund of 1997, according to Standard & Poor's Micropal. With a gain of about 19% so far this year, the fund shows little sign of losing its momentum.
The fund invests in U.S. companies, too. It has, for instance, a holding in Premier Parks, owner of the Six Flags amusement parks and the fastest-growing regional theme-park operator in the world. But most of its pizzazz comes from the revolution sweeping European markets these days. Deregulation and the birth of the euro are breeding a rash of privatizations, initial public offerings, and corporate restructurings. The trends are drawing venture capital from around the globe--and providing fertile ground for the type of companies the Warburg Pincus fund favors.
With 35% of its assets in Europe, the fund invests in companies that private investors have bought out, restructured, or taken public in the past decade. Managers of these companies typically own large stakes and, as a result, "have a lot of incentive to run the business well," Dater says. In fact, most of the 65 companies the fund owns expect earnings to grow a tidy 30% in 1998.
Occasionally, the fund invests alongside venture capitalists. It joined in the June privatization of Seat, Italy's leading phone-directory publisher, for example. The deal was Europe's biggest leveraged buyout ever, with venture capitalists buying 70% of the company for $3 billion and an additional $1 billion going in through an initial public offering. The Warburg Pincus managers put some 4% of their fund's assets into the IPO. They're betting that, while the venture capitalists will bear most of the cost of restructuring the notoriously inefficient publisher, outside investors will make money if the makeover works.
PRECISE PICK. One Continental turnaround stock the fund has already profited from is Mettler-Toledo International, a Swiss maker of precision instruments. Venture capitalists bought the company from the former Ciba-Geigy two years ago. They installed new management, cut costs, paid off their acquisition debt--and reported a 100% increase in first-quarter earnings. With annual earnings growth of more than 20%, the $800 million company looks reasonably valued at 16 times estimated 1999 earnings, Sharon says.
Another favorite is Hays, a British company restructured in the late 1980s. Hays, which supplies business services such as warehousing, private mail, and temporary help, now has a market value of $7 billion and is expanding internationally. It has been one of the fund's biggest winners, up 150% since the fall of 1996.
With the deals in Europe expected to continue at breakneck pace, venture capitalists are likely to keep turning up deals for Warburg Pincus. "Global Post-Venture Capital" may be a mouthful. But shareholders certainly aren't complaining.