Success on the fundraising trail – Know your institutional investor

Success on the fundraising trail is all about knowing what types of businesses fund managers are looking for, how well connected they are, and what they can offer you once the cash has been injected.

Growth Business talks to two leading investment players – Michael Queen at 3i and Peter Webb at Unicorn Asset Management.

Michael Queen, 3i

‘We have a keen interest in transformational cash injections’

‘I see my role as making sure that 3i is the private equity firm of choice in the UK’, is how Michael Queen views his new job at Britain’s leading venture capital firm. Queen, previously group finance director, recently took over as director of the investment behemoth’s Growth Capital division at the start of April.

It is a substantial role. For instance, while 3i’s Buy-Out fund is the largest (£2.29 billion), at the last accounting date its Growth Capital arm had a fund worth £1.49 billion. In the six months to September 2004 it generated gross proceeds of £133 million and made investments in growing businesses totalling £142 million. 3i’s smaller Venture Capital arm was equally busy, generating net proceeds of £82 million and backing young firms to the tune of £74 million.

To get the Growth Capital division interested, you should be a private business seeking anywhere in the region of £10 million to £100 million (although it does invest less than this on occasions). You need also be comfortable with a minority partner holding anything between ten and 40 per cent of your business.

But even if you’re happy with that, there are still significant hurdles to overcome.

Says Queen, ‘3i is unique. We invest our own money off our own balance sheet and we are very particular about who we back.’

Like many investment companies, Queen says 3i is looking for businesses with a great idea, an established business model and a great management team. But, above all of this, it must have scaleability. ‘We are looking for opportunities to significantly accelerate the growth of the underlying business. A business’ ability to achieve scale and compete nationally and (more importantly) internationally is key.’

Queen talks of his interest in 3i facilitating ‘transformational’ financial injections, holding up as an example its £20 million investment in business process outsourcing group Willliams Lea, which paved the way for Lea to complete a £100 million US acquisition last October.

He also flags up the many 3i-led syndicated deals, such as the recent £17 million BIMBO of Knight Banner Business Information Group in association with Royal Bank of Scotland, and ProStrakan Group’s £22 million expansion capital fundraising with LMS Capital in February. These attest to 3i’s financial pulling power in the market.

However, it’s not all about cash. Queen takes considerable pride in the ‘team of 30 sector specialists’ at his firm that have held ‘senior positions in those sectors’. When this is added to 3i’s network of ‘people, contacts and worldwide offices’ it all adds up to a ‘phenomenal resource’.

Moreover, money for organic or acquisitive growth isn’t the only item on the 3i menu. ‘There are many reasons to approach our firm. For instance, a CEO might have built a venture that is successful and has sufficient capital but would like to diversify his wealth by selling a portion of his shareholding. We are able to facilitate this.’

Another aspect of 3i’s business that people don’t pay enough attention to is its ability to act alone. Says Queen, ‘some executives aren’t aware that they can approach 3i for the entire investment amount they need in one go. We ourselves can put up £50 million alone for a minority stake. We could go even higher. But I’ve lost count of the times people have said to me, “I didn’t realise you did that.”’

And how do you go about getting on the 3i radar? Well, if you’re serious ‘just pick up the phone. Part of my job is to meet with CEOs to talk about the opportunities available,’ says Queen.

Peter Webb, Unicorn Asset Management

‘I always try to see the contrarian angle’

While 3i is searching for larger deals in the private sphere, many of the funds of Unicorn Asset Management, the Peter Webb-headed investment firm, are focused on smaller, publicly-listed companies – especially those on AIM. The usual investment level is £1-£2 million and above.

Unicorn was set up in 2000 by Webb and the established management team of Eaglet Investment Trust, Acorn Income Fund and Premier UK Investment Management. There are now a total of ten funds in the stable, worth a collective £400 million.

Says Webb, ‘Unicorn has a diverse range of funds chasing growth, income, smallcap and AIM opportunities. We are independent-minded, which I think appeals to many entrepreneurs in our space.

Webb believes his group has a ‘growing reputation’ in the market, with a lot of contacts with other similarly-focused fund managers (especially on the VCT side), which gives the companies it backs more opportunities to thrive and a bigger pool of investors to tap into.

He claims to favour ‘sensible businesses’ with ‘sensible management teams’, eschewing start-ups and concept stocks, where many aspects of the business and management are ‘unproven’.

‘We do not follow investment fashions. Despite our success it hasn’t changed my willingness to take the non-herd view; I always try to see the contrarian angle.’ Indeed, Webb is renowned for backing cyclical stocks when they are out of favour, relying on his stock-picking ability and the economic cycle ‘to unlock profits and growth’. This attitude explains his backing for firms such as Robert Walters, a recruitment venture, when the sector was truly in the economic doghouse.

While he looks for management with a ‘track record’, they must have a connection to the business. ‘I like management that has something at stake, that has taken personal risks. There are far too many jobsworths in smaller companies – those who are takers not givers.’

If the management team can pass muster, Webb, much like Queen, next contemplates the scale of opportunities in the particular sector and whether ‘we can really grow the venture’.

He has a penchant for businesses that can be ‘rolled out’, citing flooring retailers Topps Tiles and Floors 2 Go as perfect examples. Those that are acting as consolidators in their particular niche and those deploying ‘buy and build’ strategies are other ventures he is keen on.

‘I like businesses that anticipate change and are fully set up to exploit it – they can really surge.’ A perfect example of this would be online gambling venture Sportingbet, in which his Unicorn Free Spirit fund has a healthy stake and whose market value is now north of £1 billion.

As for his post-investment activity, Webb admits his firm doesn’t get involved in operational matters, offering instead ‘a friendly face, contacts and knowledge. We have a strong reputation in small caps. This always creates opportunities for those associated with us. But we have high expectations.’

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Leslie Copeland

Leslie Copeland

Leslie was made Editor for Growth Company Investor magazine in 2000, then headed up the launch of Business XL magazine, and then became Editorial Director in 2007 for the online and print publication portfolio...

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