Interview: Tim Smallbone, Partner at Inflexion Private Equity Partners

The partner explains how the firm values companies, why some deals fail and how businesses are like Premier League footballers and teams.

Since being founded in 1999 by Simon Turner and John Hartz (who continue to lead the firm) Inflexion private equity has grown its business since raising £38.3 million (€50 million at the time) for its first fund in 2003. From its offices in London and Manchester the mid-market firm raised a huge £2.25 billion for its private equity Buyout Fund V and Inflexion Partnership Capital Fund II in 2018 and has invested in Mountain Warehouse, On the Beach Group and Virgin Experience Days.

How does Inflexion value companies?

This is the million-dollar question! There are of course financial indicators we look at, for example private equity pays a lot of attention to EBITDA. But it’s not just the raw numbers – how they’re derived is important, too. Before a deal we will conduct due diligence on how the revenues are comprised. Ideally they will be diversified, from a number of customers and in a few different areas, so that a shock doesn’t necessarily mean all revenues dry up. We may also speak to some of their main clients before doing a deal to understand what their customer base thinks of them. This gives us comfort they rate the business in terms of quality – important given price can change fairly quickly.

But these numbers are a snapshot of where the company is; we are also, of course, interested in where it is going, and this is much harder to measure. In fact you can’t really; it comes down to getting to know the people that run the business and truly understanding what their drivers are. To this end, we like to develop relationships with management teams in advance of making any investment This gives both sides comfort: for us, comfort that the team is cohesive, strong and ambitious to push further; and for them, comfort that we are worthy of taking on a meaningful stake in the business they’ve built and to guide them on the next stage of their journey.

What’s the difference between Inflexion’s method of private equity funding and venture capital?

In many ways we are similar – we both look for ambitious teams looking to scale their businesses by channelling their ambition into growing quickly. We, like venture capital (VCs), bring capital to support this as well as our expertise and networks gleaned over our two decades’ experience. The real difference is the stage of a business when the backer invests. VC tends to be interested in early-stage businesses, often before a company is profitable and sometimes before it even has revenues. VC is thus riskier than the growth and buyout funding we provide. We look at more established companies, and then, depending on their appetite for funding, will provide capital for a minority stake, or take a majority stake for a buyout.

VC and private equity both provide more than just capital; we provide expertise to help grow. For example, we recently backed a pet supplements business called Lintbells. Even before we invested, we travelled to the US to research the prospects for the Hertfordshire-based company. We had a plan to expand the business before we signed the deal, which gave management confidence we were serious about working together.

Further reading on private equity

Why do you some private equity deals fail?

There are lots of reasons this might happen. Think of it like footballers. Some scouts will take on young players, as young as six or seven, to train in academies where their ability and progress is assessed over the years. These young people show talent and promise, but their youth means loads of variables remain on the horizon. These are kind of like VC deals, with a large number failing to make the cut down the line. Older players, say late-teens, are more established and have been through most of their coaching and development and so know what they can and cannot comfortably handle.

From a private equity point of view, this tends to be the growth capital area, where minority deals or buyouts of small businesses take place. The metrics check out and you have confidence the business you partner with will succeed and that you can help them to thrive. They usually do, and some really break the net. Some, however, may encounter career-limiting injuries, such as an external macro shock or consumer shifts, which may impact their business adversely. This is why diligence before signing a deal is so crucial, and why we monitor companies’ performance via our board seats. We are often able to help companies that encounter such headwinds, though that is down to our experience and network, and not all backers are equally adept at this. Like footballers who need nurturing, these businesses can usually thrive if given the right support.

For larger, more established businesses, they are like your Thierry Henry or Zlatan Ibrahimovic or David Beckham going to the US on the dawn of their retirements – they’ve got a lot going for them, and an excellent brand and track record. Here you need to be really careful. For some of these PE deals, it may be that the track record and financials seem conducive to layering on too much debt. It seems okay at first, but soon the interest repayments may become onerous and so management become focussed on paying down the debt rather than growing. Some undergo a refinancing and come out the other side, while others get buried. These are the sad stories of big brands we all know, and don’t like to see in the headlines for the wrong reasons.

Think of Arsenal – they spent a huge amount of money on their Emirates stadium, and subsequently had less capital available for buying players. We are seeing this with Tottenham Hotspur now, too, it seems. And consider Arsene Wenger at the end of his Arsenal career – once a brilliant coach renowned for nurturing talent and winning silverware – he became someone unable to nail much at the end, despite much talent on his book (possibly owing to the huge expenditure on the stadium I just mentioned). There were rumours he was too concerned with shareholders.

Management of businesses – whether football clubs or toy businesses or electronics retailers – need to be comfortable to grow, not just service debt.

What’s the future of private equity investments and where will the next stage of growth be seen?

As ever, private equity will be looking to sign the stars of tomorrow. There will be a lot more money looking for a good home, so choosing wisely is crucial. Private equity will seek out an established track record of success as well as ambition in the leadership of businesses.

“This recipe can come from a number of sectors, with key elements for growth including international expansion and digital enhancement”

We are working with a number of businesses on these fronts, one being Virgin Experience Days. This cracking business was already successful, but we’re helping to turbo-charge its growth by digital transformation of its online offering. It’s already paying off, with higher conversion rates. Businesses looking for backers will need to think carefully about the best partner for their ambitions – the relationship goes beyond capital and will last for years.

Inflexion is a mid-market private equity firm, investing in high growth, entrepreneurial businesses with ambitious management teams and working in partnership with them to accelerate growth. Inflexion’s approach allows it to back both majority and minority investments, typically investing £10 million to £200 million of equity in each deal.

Michael Somerville

Michael Somerville

Michael was senior reporter for from 2018 to 2019.