Smooth exit

Two years ago, Richard Morley of NBGI Private Equity backed Superglass in a deal that has delivered a return of almost 11 times on his investment.

Two years ago, Richard Morley of NBGI Private Equity backed Superglass in a deal that has delivered a return of almost 11 times on his investment.

Richard Morley is popular among NBGI Private Equity’s investors. His reputation grew after managing the disposal of insulation specialist Superglass when it joined the London Stock Exchange – the firm’s most profitable exit since it was established in 2000.

The IPO produced a return of almost 11 times NBGI’s initial £5.5 million investment, but incredibly the exit was staged less than two years after it bought a majority shareholding in the company.

NBGI took a 51 per cent stake in the Stirling-based company when it supported managing director John Smellie’s £40 million buy-out from insulation specialist Encon in August 2005.

Superglass, which manufactures glass wool insulation products primarily for the residential market, was valued at £135 million when it joined the Official List in July this year. The IPO gave NBGI a return of some £60 million and an Internal Rate of Return (IRR) of 244 per cent.

“We originally saw the investment holding period as around three years then an exit through a trade sale or flotation,” Morley said. “The reality is that we actually sold Superglass within two years in what has been our most spectacular exit so far.”

Fast money

One of the reasons for this premature and profitable exit was NBGI’s continuing investment in Superglass. In the 22 months that the firm was a shareholder, Superglass invested more than £5 million in its production facilities.

The funding was used to increase Superglass’ production capacity by 50 per cent, which led to a ten per cent rise in staff numbers at its Stirling site.

Morley said part of NBGI’s brief is to provide further funding to help its portfolio companies develop and Superglass was no different. “The basic plan was to back management to achieve organic growth through investing in its production process to drive sales and improve profits.”

But success for the business came sooner than anticipated, with Superglass’ EBITDA for this year expecting to reach £13.2 million, up from £5.6 million in the year preceding NBGI’s investment.

But Morley is too modest to take all of the credit for the increase in Superglass’ profits, claiming that when he looked at the deal he saw a potential increase in demand for its products due to the green agenda. “I believed that there would be a rising interest in insulation products that would help us to sell at a higher multiple than at the point of investment and that proved very much to be the case.”

With the increase in Superglass’ profits and the buoyancy of the stock market, Morley saw it as an ideal opportunity to realise NBGI’s investment. “There was no reason to delay the flotation as the business became ready for exit earlier that we expected. The stock markets at the time had an appetite for new listings and we thought it was right to take advantage of that.”

Under the hammer

Morley was introduced to the management buy-out by an old friend, Adrian Pritchard of Nash Fitzsimmons. Pritchard had agreed to project manage the deal for NBGI and approached investment backer Rothschild to enter the auction that it was handling for the vendors.

Morley said he was interested in the deal due to the rising demand for insulation products increasing Superglass’ sales as well as the price of its products. “Insulation is probably the most cost-effective means of creating energy-efficient savings. We saw a considerable growth in demand in a market where the only major suppliers were Superglass and two other UK manufacturers.”

NBGI won the right to back the deal after it tendered the highest bid, which, according to Morley, it was more than happy to do. “We did a good job in terms of understanding the dynamics of the business and the likely hidden prognoses of its market. We saw a substantial upside opportunity from the investment.”

But it was not just about money, with Morley putting some of the firm’s success in winning the deal down to developing relationships with the management team and the vendor.

Going public

Once a decision was made to float Superglass, Brewin Dolphin was chosen as the broker to lead the IPO, following a beauty parade of advisers. The deal was the sixth exit from NBGI’s first fund and the fourth this year. Other investments that have been realised in 2007 are Wraith Accommodation, Brambles Foods and Mountain Warehouse. NBGI’s exits to date have achieved an average multiple of almost seven times.

“The good thing is that the first fund has been very successful,” Morley said. “We have exited nearly half our investments to date and achieved an average IRR of 76 per cent, which is clearly spectacular.”

Morley puts NBGI’s disposal success down to the quality and experience of its directors, who have all spent time working in industry, so they take a commercial view of potential investments.

“We pride ourselves on using strong judgement to assess investment opportunities, structuring the deal in the right way and helping the management develop the business.”

He also puts its success down to not only investing astutely but also adding value to assist management teams develop the business before exiting at the right time.

“We will work harder than many of our competitors to mould an investment opportunity into something attractive. Sometimes we invest in less straightforward business opportunities, but we pride ourselves on being able to see angles that many others don’t.”

Second coming

Now that NBGI has invested its inaugural fund, it is looking forward to working on its £100 million second fund.

“We are growing a team with the ambition of investing this new fund over the next three to four years and developing the business further from there,” Morley said. “Our track record from the first fund makes us well placed to attract new investors and develop the business while generating impressive returns.”

It’s not just investing that is part of the firm’s plans. It has established a second office away from its City headquarters. “We have just set up a new office in Manchester and recruited a new director, Joseph Bergen, to manage it. This is an example of how we want to grow our business.

“Manchester is an area where we have attracted less deal flow historically than in the south and the Midlands,” he added. “The solution was to have someone on the ground to find those opportunities.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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