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Fuelling the engine of growth

Private equity has been called ‘the engine of growth’ and it’s fair to say that the North West is using this source of funding to accelerate.

In its 2016 Autumn report, the British Private Equity and Venture Capital Association (BVCA), reported that the industry had a strong year with global investment by its members increasing from £13.4billion to £17bn.

Lizzie Ryan is an investment manager at Foresight Group, and is well placed to reflect on how private equity has changed the regional corporate marketplace.

Foresight Group was founded more than 30 years ago and is a leading independent infrastructure and private equity investment manager with over £2 billion of assets under management. It has offices in London, Nottingham and Manchester.

Lizzie explained: “We typically invest one to five million pounds in established, growing UK companies through a number of structures including development capital, buyins, buy-outs and equity release.

“Typically we take two seats on the board of those businesses we are supporting; a Foresight representative and a non-exec chair with very relevant skills.

“This brings a huge amount of added value and helps to professionalise a business. We provide ongoing support to our portfolio companies including commercial and strategic support; identification and appointment of key employees; strengthening of business structure; future acquisition support; and succession planning, amongst others.”

Richard Robinson, Head of Corporate at Napthens, can see a definite future for the private equity route, but only if a business finds the right investment partner.

He said: “Private equity hasn’t always been a preferred option for SME, family-owned businesses in Lancashire, Cumbria and Merseyside but we have seen and continue to see a real appetite for PE deals in our region.

“Through a growing number of deals we have seen how, with the right partner, the deal outcomes can work extremely well for shareholders, management and employees creating value, jobs and driving growth.

“With the right advisers and the selection of the right PE house we think private equity can continue to provide a great alternative to other forms of funding or exit planning and with an increasing number of funds looking at smaller equity cheques, private equity is not only the preserve of the larger business.”

Chris Summerscales is a director at Seneca Partners, a North West-focused private equity firm with a track record of investing in successful businesses across a broad spectrum of industries but particularly in technology.

Recently its investments have reflected the growth in the region’s ‘traditional’ sectors: advising on the £22million management buy-out of a brick supply business, Brick-Ability; and helping to sell Clarke & Clarke, a fabric design and supply business, for £42.5million.

Chris agrees that private equity has an important role to play in the region’s growth, and highlights the importance of a hands-on approach.

He said: “We like to keep our focus in the north west, and slightly wider into the West Midlands and Yorkshire. The reason is simple, we like to have input into the businesses we invest in, above and beyond the purely financial. “The closer they are to us, the easier this is for us, but of course if there is a good opportunity elsewhere then we will travel if the investment fits.”

But a strong economy does present its own challenges. Chris added: “We can see an excess of capital in the private equity market, with available liquid funds. “So the biggest challenge is finding quality investment opportunities; companies to place those funds with. Then you find that with the real quality businesses there is such a high level of competition that values are being pushed up to numbers you might not have seen pre 2008, for instance.”

Looking at the issue from the other side, what should a business planning for growth look for in a private equity partner?

Paul Cocker is a partner and cofounder of True Capital, a retail and consumer sector specialist private equity house that invests between £10-£40m in businesses which the firm believes have a business model that is fit for the future of a rapidly evolving sector.

The firm is headquartered in London but Paul grew up in the North West and partly as a result of that, True Capital has built up a significant portfolio of rapidly growing businesses in the region, in addition to operating its own retail innovation hub, TrueStart.

One of these businesses was the parent company of respected retailer Ribble Cycles, which True Capital acquired in late 2015.

True Capital spotted the potential in Ribble Cycles, which operated in a growing marketplace, seeing increasing participation by consumers, along with changes in the way these consumers approach their health-related activities.

All these factors ticked some important boxes for True Capital, and a partnership was born. Paul Cocker explained: “It was all about us being able to demonstrate to the business’ owners that we had an ecosystem and a network in place that would help drive the company forward day-to-day.

“We put a whole new management team in to the business to work alongside James Dove, the managing director. This included Jon Owen, previously group retail director at Shop Direct, which is a best-inclass e-commerce businesses and it was a great coup to be able to bring somebody with Jon’s talent and experience on board as CEO of what was then a relatively small business.”

So for a business ready to grow, what are the steps that should be taken to get ready for an investment? Paul has some tips: “I would encourage entrepreneurs and management teams – if they are looking to be a part of the next stage of the journey – to get to really understand what the private equity firm brings to the table in addition to the cash. Despite how it may seem, not all cash is equal.

“Investors need to understand the sector intimately, understand how the business can scale, and as a result, be able offer management teams genuine strategic insight.”

Jon Pickering, head of Manchester at regional private equity firm North Edge Capital, describes investment from his business as ‘finance with added value’ and focuses on active participation rather than simply cash.

He says businesses should look for experience, locality, track record and personality, describing a business relationship as just that – a relationship.

He explained: “You have to go into it with your eyes open. It could typically be a five-year journey with PE, sometimes shorter, sometimes longer. Like a job interview scenario, you have to work with your chosen partner through the good and the bad.

“You’ll want to know how your chosen investor behaves, so we would always recommend getting a reference, and information will be needed to judge whether they have the firepower to even achieve the business’ ambitions.

“In the real world, you need to operate at pace. Local investors often make the right partner for regional businesses, as they’ll prefer a partner who can be with you in 45 minutes. That can be an important choice.”

Lizzie Ryan of Foresight Group explains that private equity investment often provides shareholders with two chances of returns while simultaneously de-risking their positions.

But to get to this stage there are certain steps that a business can take to attract a potential investment suitor.

She said: “We typically look for UK based companies in non-cyclical markets with a sustainable competitive advantage.

Understanding what makes the product or service unique is key to our investment thesis. “In order to prepare for investment, it’s all about data capture and in particular, having accurate monthly management accounts. We also need to see that management have a clear vision for growth.”

Paul Cocker of True Capital says there is much that a business can do in the run-up to investment to help the process go smoothly.

“Businesses should have a trusted advisor close to them, an accountant or lawyer, to make sure the monthly financial management information is up-to-speed, and that proper corporate governance is in place. “Then the key is to build a good relationship with potential investors.

Spend time getting to know the relevant community of investors, even if a business isn’t quite ready yet. There’s a much better chance of a successful investment if they develop these relationships early on.

Paul explains that he looks for several factors in a business, to see if it has the characteristics that leading businesses in the sector will increasingly require:

  • Is the business digitally led?
  • Does the business have a direct relationship with its customers?
  • Ultimately, is there a reason for the business to exist in an increasingly competitive market?

“Ribble Cycles was a prime example. It owns its own brand, which has fantastic heritage, and operates a direct to consumer model in an industry that is typically wholesale and retail-led.”

But what of the future? Foresight’s Lizzie Ryan reports that sectors including software and technology have been particularly resilient, with childcare and e-commerce also doing well. For True Capital the focus is retail.

But whatever the target market, Jon Pickering sees private equity continuing to drive growth in the region: “There are many entrepreneurs in the North.

We’ve backed many within our existing portfolio, and now have more than half a billion pounds under management. It’s a vibrant and exciting part of the UK to do business, and we believe it has a bright future.”

Richard Robinson, Head Corporate Lawyer