UK lower mid-market fundraising: Making the leap

Over the past two years, a number of British mid-market private equity firms have been on the fundraising trail. The lower-mid-market – comprising firms that typically make buyout and expansion deals with enterprise values of £10-50m – has seen numerous houses raising strikingly larger vehicles. Of particular note, Livingbridge held a final close for its latest fund on £660m in September – almost double the £360m raised for its like-for-like 2012-vintage predecessor.

"There’s always a natural evolution of players in the market," says Janet Brooks, a partner at placement agent Monument Group. "There are a few names who have done particularly well in their recent performances and they’re taking advantage of that by raising substantially larger vehicles. But, equally, there are some of the more mature, well-known names who probably aren’t going up substantially from their last fundraising."

From a total of 10 lower-mid-market firms to have both launched and held final closes for funds since Q3 2014, nine enjoyed an uplift compared with the amounts committed to their preceding vehicles, according to unquote" data. Indeed, across all 10 firms combined, the average fund size has increased from £261m to £435m. With LP appetite evidently strong, it now falls on the GPs in question to successfully put that capital to work.

The kind of process that is run, the level of proprietary diligence you need to undertake on your own and the pressure you are put under to make quick decisions is far more enhanced in that larger deal space" – Andy Currie, Catalyst Corporate Finance

While it is natural for firms to evolve as they mature, transitions into larger segments of the market call into question how well equipped GPs are to source and manage larger assets – particularly given the number of firms doing so. "The process of buying a business at £100-150m is quite different to the way you buy a business at £30m," says Catalyst Corporate Finance managing partner Andy Currie. "The kind of process that is run, the level of proprietary diligence you need to undertake on your own and the pressure you are put under to make quick decisions is far more enhanced in that larger deal space. You need a different character set, a different approach to diligence and a deeper understanding of the sector niches you want to invest in."

However, Monument’s Brooks argues that, while it is natural to ask questions of firms moving into new markets, many of the current players doing so are well aware of the challenges and have prepared accordingly. "A lot of these firms have added substantially to their teams," she says. "They are taking on board that they require more levers they can pull, in terms of helping performance once they’ve invested. But we’ve seen many firms successfully move into slightly larger markets in the past and some of them do it very successfully."

Brooks says the extent to which firms equip themselves with the required additional skillsets is particularly important given the higher multiples in the core mid-market. As a result of these higher multiples, there is a need for GPs to employ a team with the expertise and experience to significantly improve the structures and profitability of companies in order to generate strong returns.

One size does not fit all
It is certainly the case that the trend for increasingly large fundraises is less obvious when it comes to the more mature, traditionally larger mid-market players, as Brooks argues. Indeed the £459m raised by CBPE Capital for its ninth fund, which closed in August 2016, is only modestly higher than the £405m raised by its predecessor. Similarly, Phoenix Equity Partners’ 2015-vintage vehicle, which held its first close in March, is targeting £500m while its predecessor raised £450m.

There are also GPs at the lower end of the mid-market that have decided not to step up into making significantly larger deals. NorthEdge Capital, which closed its second fund on £300m – £75m higher than its maiden vehicle – is one such firm. The northern-England-focused GP typically made investments of £10-25m from its maiden fund. The successor vehicle will, at most, write cheques of £35m, according to managing partner Grant Berry. "For us there is more risk to re-inventing ourselves," he says. "We want to be doing the same thing in 20 years’ time – with nothing much changing strategy-wise."

Another firm to have retained its focus on the lower-mid-market is Synova Capital, though the £250m raised by its latest vehicle, launched in January 2016, was more than double the £110m raised by its predecessor. Yet, managing partner Philip Shapiro explains the firm raised Synova Capital Fund III in just two months and says it could have significantly raised the hard-cap had it wished to do so. Instead, the GP persisted with its initial plans as it wanted to retain its focus on the lower end of the market.

As the core mid-market space becomes more populated – not just by buyout houses but increasingly by credit funds – questions will undoubtedly arise as to whether there are sufficient investment opportunities to satisfy the level of available capital. This is likely to be exacerbated by lower dealflow between 2009 and 2013, and hence a shortage of secondary buyout opportunities. Over the past 10 years, secondary buyouts have accounted for 47% of all deals in the £100-250m buyout space, according to unquote” data.

"There is definitely more capital than opportunity at the moment," says Catalyst’s Currie. "If you take the average £100m UK private equity deal now, relatively few of those are primary deals. That end of the market is partly reliant on the secondary buyout model. Less has been put in the pipe at the beginning, so as those 2010-2013 vintage deals come to exit there are going to be fewer opportunities coming out at the other end."

In tomorrow's instalment of our series, unquote" will look at the threats of LP fatigue and increased multiples in the UK core mid-market.

 

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• Topics
• GPs
• UK / Ireland
• United Kingdom
• Monument Group
• Living Bridge
• NorthEdge Capital
• Close Brothers Private Equity (CBPE)
• Phoenix Equity Partners
• Synova Capital
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