This is how CIM Capital realizes the potential in distressed companies

Erik Verkest and his partners at CIM Capital have developed a unique proposition for the Belgian private equity sector. They search for companies with lots of potential that have run into problems somewhere along the way. The next steps are analyzing the root causes of a company’s issues, developing a clear vision for change, and assembling the right team to execute that vision.

Things are busy at the moment at CIM Capital, a Belgian investor focused on distressed companies that need restructuring. In between assisting the management teams at the portfolio companies and screening new files, partner Erik Verkest found time for a conversation with MandA.be. “It’s quite busy indeed”, he begins. “We currently have five companies in our portfolio, so there is of course a lot of follow-up. The companies are each in different phases of their cycle. For some, the restructuring has already been completed, for others we are still in the middle of it. We are very hands-on, so we put quite a bit of energy and time into that.”

Added to that is the fact that these are troubled times for many businesses. In the past year, there were challenges with energy prices and inflation. Verkest notes an increase in businesses seeking assistance due to financial difficulties over the past 4-5 months, a trend he attributes to the depletion of reserves and accumulation of debts during the pandemic despite government support measures. While the influx of struggling companies spans various sectors, labor intense sectors are particularly affected by inflation-related issues such as wage increases, resulting in difficulties passing costs onto customers.

A unique proposition in the Belgian private equity landscape
CIM Capital was founded in 2015/2016 with the original aim of advising and guiding companies in difficulties, ranging from judicial reorganizations to repositionings and management changes. This gradually evolved into investing in troubled companies, culminating in the acquisition of the Veritas chain at the end of 2019, a pivotal moment for CIM Capital that put the firm on the map. The subsequent Covid pandemic in 2020 reinforced the need for capital and operational support for struggling businesses. This led to the transformation of CIM Capital into a private equity fund, with 65 million euros in capital raised, aimed at investing in companies that need restructuring or transformation to become future-proof, due to disruptive events or other difficult situations. In addition to the fund, there is also an entity called CIM Ventures, which focuses on smaller dossiers.

Restructuring of fashion retail chain Veritas Group
CIM Capital’s first significant investment in 2019 was the acquisition of fashion Veritas, which faced challenges due to COVID-19 necessitating the closure of 120 stores shortly after their investment. However, leveraging their restructuring plan from late 2019, they swiftly navigated through these difficulties, achieving an annual increase in EBITDA since 2019 despite the pandemic disruptions, reaching over 10 million euros by the end of last year with a debt-free balance sheet. Their management team’s efforts led to a remarkable turnaround for Veritas, positioning it for future growth. This success was attributed to revisiting Veritas’s strategy, refocusing on its core market and product range, optimizing its supply chain by sourcing products within Europe, and implementing a robust omni-channel strategy. CIM Capital’s role as a restructuring partner for Veritas is deemed fulfilled, marking a successful transformation and paving the way for potential expansion into the Netherlands from a strengthened foundation.

Different sectors, different strategies
In April 2021, CIM purchased remnants of Neckerman, a travel agency, swiftly reopening in May 2021, expanding travel offerings and prioritizing digitalization. They also acquired an industrial company specializing in industrial laundry equipment, addressing challenges from the hospitality sector’s downturn during COVID-19. Despite positive signals, restructuring efforts continue. Additionally, CIM ventured into signage company Sign & Facade, purchasing it alongside another entrepreneur to create a market leader in Belgium. This partnership strategy aims to merge a struggling company with a successful one, facilitating faster expertise integration. Finally, they acquired Tsume Art, a niche high-end collectibles company in Luxembourg that makes manga and anime figurines, facing supply chain issues exacerbated by COVID-19 and disruptions in the Chinese market. “Manga is really becoming a hype. Not only in Europe, but throughout the world”, says Verkest. “The growth is enormous, so we’re definitely in the good segment there.”

The CIM Capital approach to turnarounds
Verkest emphasizes the importance of understanding the root causes of a company’s issues, developing a clear vision for change, and assembling the right team to execute that vision. “While we take a hands-on approach, we underscore the necessity for each company to have its own professional management team”, says Verkest. “Identifying strong management capable of implementing change is a key criterion for our investments. Our greatest challenge is being involved on time with companies that are struggling. People often wait too long to call for external help. And yes, sometimes it is simply too late to turn things around.”

Verkest and his fellow investors make their judgment calls on which companies have potential based on their experience. “You always want to invest in companies that are good in themselves, that are in a good market, but that for one reason or another have run into problems along the way. Perhaps an investment that went wrong. A change in the market that was not seen in time. The costs that have risen too high. A debt that got out of control. So the problems can be very different. But the key question is always… Is there potential in this company and how can we get that potential out? What is needed for this? We are an investment fund, so ultimately we must be able to justify to our investors that we can get a good return from investing in a company.”

Starting over with a clean balance sheet
With over 25 years of experience in the financial sector, predominantly in investment banking, including roles such as head of corporate finance at Petercam and later at Degroof Petercam, Erik Verkest has acquired a wealth of knowledge in M&A, financing, and deal negotiations. Additionally, his entrepreneurial background and experience as an investor in private equity has provided him with a broad understanding of various sectors and business challenges. As an M&A advisor, he is well-versed in negotiating and structuring deals, from initial negotiations to exit strategies. Moreover, his extensive network of industry experts allows for quick access to insights when needed.

In terms of financing, CIM Capital’s investment approach differs from typical private equity firms. “We often prioritize reducing leverage when entering investments, preferring to invest capital directly into companies through equity injections”, explains Verkest. “While we occasionally utilize leverage in certain transactions, it depends on the specific circumstances of each deal. Convincing banks to provide financing, especially when companies are struggling, can be challenging, so we carefully evaluate each situation to determine feasibility. Maintaining a balanced approach to the company’s financial structure upon entry is crucial for us, ensuring that we do not burden the company with excessive debt from the outset, which could impede its growth potential. This approach sets us apart from traditional private equity models, which often rely heavily on leverage.”

2024 brings plenty of opportunities in the distressed M&A space
“The outlook for the M&A market and private equity in 2024 appears challenging due to considerable uncertainty and sectors operating with caution”, concludes Verkest. “However, despite economic difficulties, there are opportunities for companies to succeed with the right strategies. Historically, funds raised and invested during economic downturns have often yielded better returns, suggesting that there may be opportunities for successful investments in the current climate. CIM Capital is well positioned to profit from these opportunities.”

Read also: Financing in M&A: challenges and opportunities for 2024