Regional UK players closing the gap on London market

For institutional investors seeking exposure to the UK, it may often seem as if there is little life outside of the capital. However, a sharp improvement in regional business has been reflected in more recent findings. Lloyds TSB's England Regional Purchasing Managers' Index (PMI) for May saw Yorkshire and the Humber recording an index of 57.6, beating London's score of 56.4. (An index reading above 50 signals an increase on the previous month. The greater the divergence from 50, the greater the rate of change indicated.) More importantly, higher levels of new work were reported in the regions, with Yorkshire and the Humber leading the way again, with a score of 57.4, followed by the West Midlands on 57.3, with London in third place on 56.9.

Gary Tipper, managing partner of regional-focused investor Palatine Private Equity, is upbeat on investing in the regions: "Looking at the UK private equity industry as a whole, 60% of deals are done outside London and the south east." For buyout houses targeting the large-cap market, London is the place to be, but for the plethora of firms focusing on the UK's lower- to mid-market, origination teams must look to the regions for the bulk of fresh opportunities.

Grant Berry, managing partner at NorthEdge Capital, a fund focused exclusively on investing in northern businesses and comprised of a handful of former LDC professionals, has a very convincing view of market size: "The UK northern market alone is two-thirds the size of the entire German market, two-thirds of the French market and a very similar size to the Nordic market. When seen in this light it is a decent-sized market, but with only a handful of players operating within it." The capacity of the regional market set against the number of active investors means sourcing off-market opportunities is practically child's play.

unquote" assesses opportunities in regional investing (two-part series)

"Of the five deals NVM has done over the last year, none have been in a competitive process," points out Peter Hodson of NVM Private Equity, a regional UK investor. "The reason for that could be because we have people on the ground in the regional market meeting with management teams, lawyers, banks and intermediaries on a daily basis. We are part of a local network," he says. When it comes to accessing off-market deals, London cannot compare to opportunities found in the regions. Beyond that, proprietary deals that remain exclusive throughout the buying process are almost unimaginable for origination teams competing for the scarce number of quality assets on offer in the capital.

For the love of LPs
The wealth of opportunities offered to regional investors has not gone unnoticed by LPs. Despite embarking on a road trip during one of the most challenging fundraising climates, NorthEdge's debut vehicle, which exclusively targets lower mid-market businesses in the north, closed £25m above target on £225m in April this year.

According to Berry, the message of a fund focused exclusively on investing in the north of England was something that resonated well with new investors: "Over the past 20-25 years, the regions have been developing their own private equity industry." Indeed, highly visible brands including 3i and LDC have made names for themselves by taking advantage of the opportunities on offer in the regions.

"NorthEdge decided to take that concept to the next level by focusing exclusively on the north, rather than having a central base in London with satellite offices in the regions," explains Berry. "The case for pursuing this strategy was made stronger on the basis that the NorthEdge partners have operated for 20 years or more in the north." Berry also explains that LPs are increasingly interested in the lower mid-market thanks to prospects of high and consistent returns generated by this segment. "LPs wanted exposure to lower mid-market investors with a niche focus."

"The regional message is received very positively by investors," agrees Hodson. "They are increasingly excited about backing SMEs as the economy improves and there is a strong recognition by investors that SMEs are found nationally."

One genuinely exciting aspect of NorthEdge's recent fund close was the interest from overseas investors, with 42% of commitments coming from across the pond. "This wasn't a case of US investors having a better understanding of regional investing," clarifies Berry. "Rather, when LPs left their preconceptions behind and looked at our proposition in a clear and unbiased manner, compared to other global markets it was as attractive in terms of the risk/reward profile. The north is a mature market with a consistent track record. When people look at it objectively, they can see the opportunity."

For houses investing the lower and mid-market, the case for the regions is clear: a compelling investment strategy that is popular with LPs, a higher volume of proprietary SME opportunities, and, crucially, plenty of foreign interest for fundraising.

Look out for the second installment: 'The challenges', tomorrow.

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• Topics
• UK / Ireland
• Palatine Private Equity
• NVM Private Equity
• LDC
• 3i
• United Kingdom
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