Q&A: Duke Street's Buchan Scott

Last week, Duke Street sold a 35% stake of itself to Paris-based investment firm Tikehau Group in an effort to boost the firm's deal-by-deal model. As part of the deal, Duke Street will use the fresh capital to launch a new fund focused on acquiring controlling stakes in the European mid-market.

How did the deal with Tikehau come about?
We had received interest from a variety of sources over the last couple of years.

Our relationship with Tikehau was initiated through Jean Garbois, who is one of our operating partners and also on an advisory committee with Tikehau. Furthermore, our French office has had an existing relationship with the business over the years.

It was reported a few months ago that you were looking to raise a new fund, does this latest deal mean that this has been achieved?
Tikehau's investment in Duke Street will effectively move into our new fund.

We're looking to invest around £500m over the next three years, in-line with our investment strategy, which is to acquire majority stakes in mid-market companies in western Europe across four sectors: consumer, business services, healthcare and financial services, and drive value creation through operational and strategic change and buy-and-build. The aim is to exploit the post-Lehman economic environment while sticking to Duke Street's core skills, so the remit of the fund is likely to be wide enough to allow the purchase, for example, of portfolios from other private equity funds.

This investment will come from two sources. First, from our committed fund, which we plan to raise around £100m for. Second, the balance will come from our deal-by-deal structure, where capital is raised from co-investors on each deal.

Duke Street made a bold decision last year to implement a deal-by-deal investment approach, why have you decided to now use a mixed approach?
We have been pursuing the deal-by-deal model for some time now and it is tough work. The issue isn't raising finance; rather, the difficulty is with execution. Without committed capital it is tough to move quickly enough in competitive processes.

The mixed model means that the existing fund will be used to underwrite deals in the first instance. With the Tikehau relationship, we now have the firepower to do deals within our target ranges. Once the deal is done we can then syndicate the initial investment with capital raised from co-investors and recycle a significant proportion of the first investment back into the fund.

This model will allow us to move quicker, widen the range of our targets and improve our competitiveness.

The agreement with Tikehau will surely make investing in France a lot easier. The asset class seems to have been struggling in this market over the last few months – how have you found it?
It has been a tough market for the deal-by-deal model. All of the deals we have done so far with this model have been in the UK. France isn't an easy marketplace at the moment. However, our new partnership with Tikehau will mean that we are better connected in the country and should open up more opportunities for us.

You're also aiding existing investors to sell on their holdings in your previous fund – can you update us on the process?
It is still very early days. We have invited a number of bidders to review holdings in our sixth fund. Potential secondary buyers are currently in the pricing stage and carrying out their due diligence.

Fact file – Tikehau Group

Established: June 2004

Headquartered: Paris

Assets under management: €1.5bn+

Staff: 30 professionals

Focus: To invest and manage long-term capital for institutional and private investors through various asset classes. In 2007 the firm launched Tikehau IM, an investment company focused on fixed-income products.

Ownership: Majority held by its managers alongside first-tier institutional partners including Crédit Mutuel Arkéa and Unicredit.

Tikehau is named after a coral atoll in the Palliser Islands, part of the Tuamotu Archipelago in French Polynesia.

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