Private equity thriving in north west England

Of the private equity-backed assets that have listed in the past 18 months, a quick glance at where they are based and their performance since floating tells a very interesting story.

"There has been a lot of IPO activity from north-west businesses coming out of private equity houses. We advised on Bargain Booze, which kicked off the current IPO run. Since then we have worked on DX Group and Flowtech," says Alexei Callender, director of corporate finance at Zeus Capital.

Indeed, ECI Partner's flotation of Crewe-based Bargain Booze saw the company's shares list at 100 pence – they are trading at 171 pence today. Arle's listing of Iver-based DX Group floated shares at 100 pence each, now priced at 140 pence. And Gresham Private Equity's IPO of Flowtech saw shares list at 100 pence apiece, now priced at 117.50.

Recent activity in the north west highlights region's strength

And it's not only on the exit side that the north west is leading the way for UK private equity: "We have completed five deals in the past 18 months, so we're ahead of our investment curve," says Andy Lees, a partner at Palatine Private Equity. "We have not deliberately forced this investment rate, it's just that we have worked hard and found good opportunities." Having closed its second fund on £150m in July last year, Palatine has already deployed more than £65m.

It is not all good news though: the heightened level of activity is causing an increase in pricing. "There is some evidence of prices increasing. But, on the flip side, this is also causing vendors to feel more confident," explains Lees.

Michael Reeves, joint managing partner of Clearwater Corporate Finance, agrees: "There will be a lot more businesses coming to market over the next 12 months; a good supply of quality businesses. But, because of the lack of supply of quality assets in recent months, that has pushed prices up."

Debt on board
A key driver behind the surging levels of deal activity in the north west has been the improved debt market. "Banks are showing signs of being more proactive and flexible," says Lees.

And this uptick in activity has attracted more lenders, with recent lower mid-market deals receiving alternative funding. Palatine's investment in Gusto was supported with a loan from a debt fund, with capex and working capital facilities provided by a bank. "It was a nice combination of traditional and alternative debt providers working together alongside ourselves to secure the best financing package for the business," says Lees.

Another strong signal of alternative lenders' growing appetite for smaller north west-based deals was Sovereign Capital's investment in Kindertons, which received a sub-£10m loan from a debt fund.

Says Reeves: "We are seeing debt funds move down into the lower mid-market. However, alternative providers still have a distribution issue in the north west - very few have offices here." Reeves even goes so far as to wonder if we will see the creation of a northern-focused debt fund.

Media moguls
Outside of a NorthEdge-style lower mid-market debt fund in the potential pipeline, the encouraging activity levels in the north west are set to continue thanks to the impressive level of investment flowing into the region. Most notably, Manchester's Media City is set to boost the inception of media- and technology-related businesses. "Media City will generate a lot of interest and will naturally create more tech businesses," says Reeves. Indeed, the local GPs have already taken notice, with LDC's recent investment in events business WRG.

But, according to Zeus' Callender, it will be some time yet before we see any serious media- or tech-related activity in the north west off the back of Media City: "There will be new businesses that feed off new activity, but it could be another five to 10 years down the line before we see any serious opportunities for private equity. Only when businesses have reached a certain scale will the asset class have any benefit."

Despite these reservations, Callender's take-home message is to highlight the entrepreneurial strength of the region: "The north west is an entrepreneurial location and it is cheaper to operate out of here – there is also a wealth of talented people coming out of Manchester University. In addition, the region benefits from a well-established advisory community and a strong private equity and banking presence seeking out new investment opportunities. The north west is a fertile place to establish a business."

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