Away from the City, Patrick Reeve can be found at archaeological excavations around Kent, trowel in hand, scraping at the mud to try and find a Roman relic or two.
Unearthing hidden value is a skill he’s also applied to venture capital for over two decades. In an industry where reputations are notoriously ephemeral, Reeve continues to command respect. ‘He is bloody good at what he does,’ I’m told by one of his fellow VCs.
At the start of 2009, Reeve led a management buy-out of Close Ventures, acquiring the business from parent group Close Brothers to create Albion Ventures.
Reeve explains that he felt that Close Brothers, a blue-blooded merchant bank, was concentrating less on venture capital and more on wealth management and private banking. He says, ‘I had been scratching my head for a while, wondering whether it really was the best route to be captive in a bank.’
Such organisations, he argues, tend to make it harder to attract and keep good staff, ‘especially because people within venture capital tend to be more entrepreneurial’. He continues, ‘I was at Close for 20 years and it was a great place to work, but for many very sound reasons I think the organisation was becoming increasingly centralised. So I sat down with the group chief exec last April and told him that I thought a change was required.’ The buy-out was sealed nine months later for an undisclosed sum and Close retains a stake in the business.
VCTs as investment vehicles
At present, Albion manages seven venture capital trusts (VCTs) investing in a range of businesses from pubs to biotech spin-outs. It has funds under management of £200 million and recently won the Investor AllStars VCT of the Year award. These funds are stock market-listed investment trusts that invest in a range of companies that have traditionally fallen foul of the equity gap (see June issue). Not only do they provide capital for growing businesses, but measures like 30 per cent upfront income tax relief make VCTs attractive investment vehicles, which explains why £3.5 billion has been raised from investors since 1995.
Three years ago the European Commission changed the rules for VCTs so that they can only invest in companies with a maximum of 50 full-time employees, and the money invested in a company couldn’t exceed £2 million in any one year. Crucially, the gross assets of a company are capped at £7 million immediately before a VCT makes its investment, and £8 million thereafter. However, it’s worth noting that funds raised before these changes were introduced can still invest according to the old rules.
It is no secret that many VCTs have struggled to raise funds since the rules were changed. Reeve argues that although the model has, in essence, usurped the function of the now defunct venture capital arm of 3i, the full potential of these investment vehicles has yet to be realised.
The government has given its backing to a number of schemes and initiatives of late to support growing companies, but for Reeve, the emphasis should be on nurturing programmes already in existence, rather than complicating the already bureaucratic and confusing area of growth funding.
With regard to VCTs, Reeve says there are two things that could be done to improve their effectiveness. ‘There is an argument that VCTs ought to sharpen their focus by concentrating on innovative, growth companies, which is not unreasonable. That makes it harder to invest in businesses like pubs, which is fine – I can fully understand the reasoning there.’
In return for that further restriction on eligible companies, Reeve argues that the government should introduce inheritance tax relief on VCTs to make it easier for them to entice investors. ‘To me, VCTs are a fantastic substitute for pensions, and they are a long-term proposition. For one set of tax breaks the money turns over multiple times in the life of a VCT. Therefore, anything that goes towards increasing that life has to be good for the government.’
Eye for innovation
Albion currently has 55 companies in its portfolio. While some are predictable, lower-risk concerns such as pubs and cinemas, a good proportion are ventures with genuine growth potential. Reeve cites Dexela, which has pioneered a new method of screening for breast cancer through three-dimensional imaging, and drug development testing company Xceleron as examples of businesses that are pushing boundaries in their relative fields.
‘The economy has been difficult, but what I find interesting is that the consumer, in certain sectors, has been much more resilient than I was expecting. For innovative companies, because they are in markets that have huge natural growth, we haven’t seen any major issues there either,’ he says.
‘I hate it when people are broad-brush and inaccurate’
Of course, portfolio companies have needed help as markets change and exit strategies formulated in better times become unworkable. At Xceleron, for instance, it was decided that the York-based company should attack the US. ‘In order to exploit the US market we helped them set up a whole new plant, and then it became clear that we didn’t have the right team to manage an international business. We hired a new chief exec who was English but knew the US.’
On the exit front, Reeve and his team disposed of its 49 per cent stake in occupational health services provider Grosvenor Health Group last June. The business was sold to international services group Serco for £17.8 million, allowing Albion (then Close Ventures) to realise a profit of £6.4 million on its total investment of £4.7 million. Reeve says the biggest exit his team worked on came from a £1 million investment in Active Hotels, which generated a £10.5 million return after it was sold to a US company in 2004 for £90 million.
Patrick Reeve’s basic investment principles
Over the years, Reeve has applied simple rules when assessing potential investments. ‘There is only ever any point in investing if you’re convinced that there is an interesting market opportunity, not to mention a management team able to take advantage of it. It’s very easy to get one of those two things wrong. If you are right on both, it doesn’t really matter what happens as you are always going to make money at the end of the day.’
It’s a well-worn credo among VCs to talk up the virtue of a good management team. Reeve does not break this mould, stating that ‘it’s always tricky, but if the right management is there it just makes life so much easier’. He sheds light on why it’s so important when he says that being misled by an executive team is a real source of frustration.
Taking an Alan Sugar-like stance, albeit with the accent of an English gent, he says, ‘Bullshit really annoys me. I just hate it when people are broad-brush and inaccurate when they’re describing what they do because they’re trying to flannel you. They just exaggerate to attract our money and then continue to be selective. We see our companies as being like partners of ours, and partnerships need to be open.’
Days in the City
Given that Reeve’s father worked as a stockbroker in the heart of London, it’s no surprise that he himself took a similar route and now has offices a stone’s throw from the Bank of England. His mother worked as a researcher for Agnew’s, the art dealer, and his family also had interests in Kenya. ‘My father had shares in a coffee estate and Nairobi’s only gun shop, called Kenya Gun.’
Before studying French and Spanish at Oxford University, Reeve spent nine months in the army on a short-service limited commission (the equivalent of a gap year in the military). ‘After three weeks at Sandhurst, you could ride around in tanks. I was based in Germany and Canada and it was great for me, although I’m not sure it was so great for the army,’ he concedes.
After graduating, he qualified as an accountant with Coopers & Lybrand (now PricewaterhouseCoopers) before getting hands-on experience of corporate finance at Cazenove. ‘The bit I really enjoyed there was venture capital rather than M&A,’ he reflects. That interest led him to Close Brothers Private Equity in 1989 and, seven years later, he started Close Ventures.
The evolution of private equity
Since then, the industry has matured considerably. ‘When I joined Close Brothers Private Equity, they probably had only £60 million of funds under management and they were doing small deals. But back then they wouldn’t have dreamed of doing the kind of investments we do now, such as in healthcare. They would have been deemed too high risk. Making money was extremely difficult.
‘So there is a much greater appetite for risk taking these days at the bottom end of the market and more firepower at the top end. The actual volume of money around is now just so much larger.’
For entrepreneurial businesses, he observes that international markets are often vital for success and more accessible than they used to be. ‘It’s easier to make money because technologies and markets evolve so much more quickly nowadays,’ he comments.
As for attractive areas for VC investment, Reeve notes that a rising, ageing population will continue to make healthcare an interesting sector, along with companies tackling climate change and the environment. He adds that security and data capture are also growing areas as governments, under the guise of fighting terrorism, want to know more about their citizens. ‘We have to think about ways that we can profit from an otherwise unfortunate trend,’ he says.
Reeve admits to being rather gloomy about the macroeconomic environment, but he does expect plenty of niche areas to perform strongly. Again, he insists that the quality of the executive teams will make a significant difference to how a company fares. ‘When you have a management team that isn’t quite good enough, these markets are much less forgiving as you’re not going to be bailed out by any lucky breaks.
‘A recession does show which teams aren’t as good as they should be, whereas in a bull market it can be harder to differentiate between those teams that are really good and the ones that have had the odd bit of luck.’