Private equity firm Connection Capital has completed a £6.4m investment in the MBO of one of the UK’s leading TV and film set design businesses, Cardiff-based 4Wood TV and Film.
The film set designer and builder is used by Netflix, Disney+, BBC, HBO and others.
Capacity in the South Wales studio market is expected to grow significantly in the next two years, as international production companies continue to invest in the region.
The UK market value for filmmaking and high-end TV was £5.6bn in 2021, up from £3.6bn in 2019.
The deal is part of up to £100m worth of investments the private equity platform is looking to make in 2022.
Connection Capital was founded in 2010 and is an active investor in the sub-institutional UK SME market. The platform provides growth capital, MBO funding and equity restructuring to established businesses.
For SMEs, it writes cheques of between £3m and £10m, with its “sweet spot” being between £5m and £8m.
“We very much work alongside the management teams we back,” managing partner Claire Madden says. “With the businesses we deal with, this is typically their first experience taking institutional capital and they are at an inflection point – whether that’s a growth inflection point or a transition of ownership – so we help them navigate that, which can be a rocky ride, particularly in the first year.
“We go into a partnership-type relationship because the choice of who backs that transaction is down to the management team. It’s not just down to price and deliverability but how you’re going to get on with each other in this journey for three to five years.”
“We can be very flexible and patient. There is no rigid investment period like traditional funds” – Claire Madden
From a client’s point of view, Connection Capital looks and acts like a typical private equity institution but business owners benefit from the experience of Connection Capital’s investors.
“We don’t run a traditional fund model,” Madden explains. “We do our fundraising on a transaction-by-transaction basis from our client base – typically entrepreneurs who have built up businesses or have sold out. They understand the challenges of growing an SME in the UK and how lucrative that can be but aren’t naïve to the challenges.
“And because we don’t run a fund, we’re not hemmed in by fund rules. That comes into play in two ways: we can be very flexible in the way we structure things and we’re able to be patient. There is no rigid investment period like traditional funds.”
It is this model that contributed to Connection Capital’s biggest success story with Virgin Wines, which was listed in March 2021.
“We held that investment for about six years and we were thinking about an exit, but we were really quite happy with how the business was performing and weren’t in a big rush,” Madden says. “Then Covid hit, people started buying their wine in a very different way and their trading went through the roof.
“We did an IPO and got at least two-times the return than if we had gone for an exit earlier along the lines of a traditional maximum five-year hold.
“Because we were patient, it was better for our investors, better for us, the management team and the business.”
The London-based firm is generalist in its investments but there are certain pointers that pique the team’s interest.
“Visibility, contracted income and growth potential,” Madden explains. “Things that have proved relatively resilient through Covid and anything unlikely to be affected by recession, but then everyone’s looking for those businesses. We’re great believers that any market environment creates opportunity.”
What Connection Capital looks for in founders:
#1 – People: “We understand the businesses we back at their stage of development are not going to be the full dream team. It’s about the willingness to bring in talent and work together.”
#2 – Clear vision: “Clear vision of where you want to go and ambition. By this time I want to have had a liquidity event, for example. Then you need that vision as to how to get there.”
#3 – Quality of earnings: “It’s very tricky for a business and makes investors nervous if you’ve got a company that at the start of the financial year is at zero.”