Global Economics

GCI: Investing in the Distressed


Private equity group GCI sees opportunity where others see failure, and its string of successes has landed it near the top of our Hot Growth list

German sewing machine maker Pfaff looked like yet another European victim of Asian competition in 2005, doomed to extinction. Slammed by low-cost Chinese rivals, mounting losses, and crushing debt, the 145-year-old company had been driven close to insolvency. That's when Munich-based private equity group GCI Management (GCIG.DE) intervened, snapping up control and quickly shifting Pfaff's low-end manufacturing to China while restructuring high-tech production in Kaiserslautern, Germany. "We invest in companies and markets where no one else sees the upside," says GCI Partner Albert Wahl.

Risky bets like Pfaff (P8FG.DE) have helped power GCI's growth to the top of the charts and earned it the No. 2 slot in this year's European Hot Growth ranking. Its 2006 revenues were up nearly eightfold from 2004, to €131 million ($188 million), and GCI's net profit rose fivefold in the same period, to €18 million ($26 million). The group's target is troubled, midsize German companies, but unlike most investors GCI sends its own management experts to run the company and ensure a speedy turnaround.

Robust and Reliable ROI

So far, GCI's team is proving worthy of the challenge. In two years at Pfaff, GCI has slashed losses, filled the product pipeline, built a new German factory, and relisted the company. But GCI's results can be a roller-coaster ride, as big investments, sales, and acquisitions distort its revenues and earnings from year to year. In the first half of 2007, for instance, GCI's revenues fell 31%, reflecting the sale of some holdings incorporated on its balance sheet and the restructuring of its portfolio.

The more telling figure is GCI's long-term internal rate of return on investment, which has notched 45% annually since the company was founded in 1991. "GCI has never been healthier," says Wahl, adding that 2007 is a year of investment. "We are seeding the next big exits."

One divestiture in progress is Berlin-based real estate company Windsor (WIRG.DE), which GCI acquired in 2003 after it was zapped by plummeting property prices. Wahl and his partners were dazzled by the gap between prices in Berlin—just €600 to €700 per square meter—and those of other major European cities, often five to six times higher. They were also convinced Berlin's real estate market would bounce back relatively quickly, and by 2004 prices per square meter in Berlin had indeed doubled. "It was only a matter of time," says Wall.

Founded by three partners long on expertise and short on capital, GCI has evolved into a management consultancy and private equity group with its own bank and a team of 50 corporate doctors. It targets companies between €20 million and €500 million in revenues, and is now aiming to double its net assets over the next 12 to 15 months. "We do the due diligence ourselves and make fast decisions—much faster than big funds," Wahl says. "That gives us a competitive edge."

Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau .

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