Interview question international growth
Had an interview for a fund a few weeks back and want to check something. The question was (why) would you want to drive internationalisation for a single country company if the local market is big enough for the next X years, no problems with customer concentration etc. and you actually realize lower revenue and profit if you expand internationally.
Answer to the question was because you can drive a higher multiple in international businesses than local businesses because it'll lead to a more competitive auction. I get the theoretical point but is this actually true / do I look crazy if I bring it up as a value creation lever in interviews with other funds? I couldn't find much online and first time I had heard of it being used - was under the impression from deals I've been on that even very local deals have >10 funds bidding at the same time... or maybe those were an exception
Anyone please?
Rover-S TheBuellerBanker
If you have proof that your product does not only sell in the "home" country (or state in US), but also can be sold to international customers, the long term perspectives are way more attractive as an investor (addressable market multiplies). I've seen many companies in European countries that were true category leaders in their respective countries, but never "made it" in neighbouring countries.
By expanding internationally you also become less dependent on local circumstances (COVID lockdowns, local economies that are heavly dependent on oil industry, etc).
So valid argument imo.
Thanks, agree with the TAM and market/customer risk points, mentioned those and not what they were looking for. The point was specifically on multiple expansion through more competitive auction dynamics - any thoughts on that?
Agree on the fact that any business of $/€10m EBITDA and more (with ok market, product, finanicals, etc) will have >25 parties looking at it in Western Europe/US.
The aforementiond arguments however will lead to a higher multiple (diversified country risk, larger TAM, etc). Pure local plays will attract local PEs, while copmanies with pan-European potential for example will attract interst of a significant number of UK PEs.
Thanks, very helpful. Just to reiterate, sounds like the competitive auction argument in isolation is potentially a bit of moot point. However there are some real multiple expansion levers from international expansion, including higher TAM, lower concentration risk and meaningful assymetry for industry multiples between countries for select cases (response below)
I'll share my thoughts:
I work in Asia, where different markets trade at very different multiples. We were running a restaurant business, which had been acquired at around 9-10x EBITDA in its home country, which was more or less in line with comps. We looked at acquiring a business / expanding into India, where restaurants trade at 13-15x EBITDA, with the idea being that if we could get revenue / EBITDA contribution from India up to a meaningful level (30%+), then we could sell the entire business to a buyer in India or take it public there, thereby realizing substantial multiple expansion on the 9-10x business we had purchased originally. This idea was ultimately abandoned for other reasons, but it was a very serious conversation.
I'm not sure if it necessarily adds more buyers / potential buyers by doing this and in fact would argue the contrary. A lot of funds have a specific mandate in terms of region, so for example a SE Asia fund might not be able to invest in a business with 30% India revenues, and a domestic India fund might not be able to invest in a business with 70% international revenues. Most funds are focused on the "domestic consumption" story, so I think this could limit your buyer universe vs. expanding it.
Thanks - great response, much appreciated
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