Pockets full of cash

If you want to grow your business and need development capital, there’s lots available in 2004. Kim Benjamin talks to eight private equity houses and finds out where they are putting their money.


If you want to grow your business and need development capital, there’s lots available in 2004. Kim Benjamin talks to eight private equity houses and finds out where they are putting their money.

If you want to grow your business and need development capital, there’s lots available in 2004. Kim Benjamin talks to eight private equity houses and finds out where they are putting their money.

Development (or growth or expansion) capital, can be a more attractive and lower-risk option than debt finance. And, generally speaking, it’s for the long-term, enabling you to concentrate on expanding your business.

Although development capital deals have been few and far between in recent years – the volume of deal-flow has been steady but, as one venture capitalist has put it, the ‘quality has been distinctly lacking’ – there is tons of cash available. And it looks as if you may find it easier to raise such funds in 2004 than in the last three years.

‘I think the reality is that the last two to three years have been a slow time for putting money to work and realising investments. Things are picking up now, but slowly,’ opines Charles Ind, managing director at Sagitta Private Equity.

These deals don’t come easily
Development capital deals can be complex to arrange in terms of both time and structure.

‘Raising development capital is like going for a drink on Friday – one round leads to another and then the hangover sets in. There is an ongoing quarrel about what price you should be investing at – the management will always have a different view when it comes to valuing the company,’ reflects Mike Henebery, director at Gresham, which has recently raised a fund of £180 million, which it will be looking to invest in the next three years.

He adds that there is a whole range of issues to consider when it comes to raising development capital.

‘When you are investing in a buy-out or a buy-in, you are helping management to buy the business. With development capital, it is more of a combative field – the managers were there first as the owners, so it’s harder to foster a relationship. From our perspective it demands a high level of maintenance,’ he reflects.

Funds available: £250-£300 million
Average deal size: £5 million minimum

Executive director Chris Rowlands is looking to complete at least 20 deals this year, and recently completed a £20 million expansion capital deal with outsourcing specialist Williams Lea in early March.

‘I actually expect we’ll do more than 20. For us, the underlying fundamental is a business that has a significant opportunity for growth, whether organically or via acquisitions, and coupled with a quality management team,’ explains Rowlands.

3i does have a focus on certain sectors, such as oil and gas, food, manufacturing, media, and financial services, but is also opportunistic – it recently invested £15 million into high fashion retailer Republic.

‘We can be as flexible as we like. When it comes to development capital, most venture capitalists would only consider a controlling stake – we do in a buy-in/buy-out situation, but not for pure expansion capital – we are enthusiastic holders of minority investments. But we are hands-on – we always appoint a 3i executive to the board and alongside other shareholders, appoint a chairman to the board,’ enthuses Rowlands.

And what turns him off? ‘Unrealistic growth forecasts – as much as we might get turned on to start with, on closer inspection things start to unravel. It’s difficult to get overly excited about a “me-too” strategy.’

Close Brothers
Funds available: £360 million
Average deal size: not less than £5 million

According to Close Brothers’ partner Simon Wildig, many of their investments tend to be opportunistic ones and most of their development capital deals are for buy-and-build situations.

‘We are getting closer to businesses, rather than waiting for deals to come through advisers. If it’s a decent business that qualifies for development capital, there is a lot of competition out there and lots of capital to be invested,’ he affirms.

Wildig hints that Close Brothers has a good order book and will be investing around £100 million this year. Last year it invested a total of £65 million across three deals. Close Brothers tends to steer away from technology companies and size is also an issue.

‘We won’t invest in businesses that have a turnover of less than £15 million. The market position is also important. We would invest in businesses that were looking for market leadership, or are a strong second – we’re not interested in those that are number ten,’ emphasises Wildig.

Funds available: £180 million
Average deal size: £5 to £75 million

At Gresham, director Mike Henebery is looking for companies with a visible track record of profit and loss and a strong management team.

‘We use much of our own resources when it comes to sourcing deals – many are initiated proactively from our end rather than from advisers. We usually receive around 400 hundred proposals a year but I’d be amazed if we invested in more than four this year. We like to describe ourselves as interested but not intrusive,’ explains Henebery.

Recent deals have included the £20 million expansion funding for debt purchase and debt collection agency 1st Credit and the £25 million MBO of Altair Filter Technology.

‘We stick to a tried and tested formula. The important thing to understand is that we are not an investor built on volume – we do a small number of high quality deals. A lot of our time is spent filtering out the deals we don’t want. We like to invest a lot of money in a company to help it acquire others.’

Lloyds Development Capital (LDC)
Funds available: £120 million
Average deal size: £8 million

There is plenty of money available for high-quality investments, says LDC’s managing director Darryl Eales.

‘Our focus is on backing high-quality management teams and working in partnership with them. I wouldn’t describe us as hands-on but more of an active participant/shareholder,’ muses Eales.

‘Our average investment is about £8.5 million, although we did several at the £15 million mark last year. This year we expect to invest £120 million in 12-15 transactions, and because of the way our funds are structured [from the bank], we are flexible about exit terms, as we don’t have the constraints of having external fund managers.’

Eales believes another of LDC’s strengths is its regional focus, with six principal offices nationwide and four satellite ones. He is also a great believer in sourcing deals from networks and ‘a friend of a friend’.

‘Development capital deals are harder to structure because of the psychology involved. Owner-managers will inevitably find the deal too expensive. We tend to focus on investing in companies that are acquisitive,’ he explains.

London Fund Managers
Available funds: £50 million
Average deal size: £250,000

London Fund Managers is part of a regional network of venture capital funds. Geoff Sankey, managing director at London Fund Managers, is looking for businesses with a management team that can show commitment on a financial level.

It has a higher conversion rate of proposals to investments (up to four per cent) than other VCs – and will invest in one to two companies a month, mainly because it will not invest more than £5 million in one deal.

‘We like to see a management team that has put a lot of its own money into the business, or made some other kind of financial sacrifice, such as having gone without a salary. A professional track record – individually and as a team – is also important.’

It describes itself as quite a hands-off VC, as none of the fund managers are appointed to the board – and it prides itself on being able to close deals within three months.

Northern Venture Managers
Funds available: £40 million
Average deal size: £5 million

Tim Levett, investment director at Northern Venture Managers, provides development capital but recently has been channelling it into MBOs and MBIs. NVM chooses roughly a dozen deals out of the 500 it receives every year – a conversion rate of roughly two and a half per cent.

Recent deals have been based on companies with a strong management team, a good record of profit and a good product range. Its two most recent development capital deals have been MBOs, where it backed companies to the tune of £2.75 million and just under £7 million.

Sagitta Private Equity
Funds available: £105 million
Average deal size: £3-£10 million

At Sagitta Private Equity, the majority of deal-flow is done through research rather than through advisers. Roughly half the deals it does are buy-outs, and the other half pure development capital. There are five sectors it will invest in: business services, healthcare, leisure, media and IT.

‘We will invest in companies with a compelling growth strategy – either organic or by acquisition. The management team has to have a proven track record in developing a business. Finally we look to back a business where we can bring more than capital to the table,’ emphasises Charles Ind, managing director at Sagitta Private Equity.

Some of its deals are sourced through networking and others are through approaching companies cold.

‘We’re more weighted towards doing our own research because of the sectors we invest in. We are very hands-on – we will take part in major business decisions, hire and fire situations and acquisitions,’ affirms Ind.

Sand Aire
Funds available: substantial
Average deal size: £2 to £10 million

Sand Aire’s commitment to a company is for the long term. As its remit is to invest mainly in family businesses, most of its deal pipeline stems from family business institutes. It typically takes a stake of between 20 and 40 per cent in a business and receives around 400 proposals a year.

‘We take a ten-year view with our investments and are more involved and supportive rather than hands-on. We like to think we back good management teams with an appropriate board, so we let them get on with it,’ claims Sand Aire’s managing director David Williams.

And what turns him off? ‘A lot of people perceive family businesses as lifestyle companies. We weed these out quite quickly, and those people who are in it for a quick buck, and who have no respect for their customers, employees or products. It gives us a flavour of how they will treat us as an investor,’ concludes Williams.