England's northern PE players move upmarket

Tosca Debt Capital bolstered its team in September with the hiring of Polly Tames as assistant portfolio director. The appointment comes as the firm prepares the launch of its third debt fund, which will bring it close to its target of reaching £1bn in AUM by 2023. Shortly afterwards, NorthEdge Capital announced the launch of an artificial intelligence and data analytics platform to help it identify primary and bolt-on investment opportunities. The developments at the Manchester-based firms reflect the maturing and evolving investment landscape in north-west England.

Buyouts in the region have accounted for an increasing proportion of British aggregate deal value over the past five years, according to Unquote Data. In the 12-month period comprising H2 2017 and H1 2018, the north-west accounted for 13.7% of the UK total, up from 11.6% in the previous corresponding period, and 11.7%, 7.4% and 7.4% respectively in the three preceding years. Similarly - excluding outliers valued at £1bn or more - H2 2017 to H1 2018 saw the region’s highest aggregate value in absolute terms across the five-year period, at £2.12bn.

"In general, there is a lot of capital chasing too few deals in the region," says Tremayne Ducker, head of corporate finance at Zeus Capital. The view is reinforced by the fact that, while deal values are heading upwards, overall volume has dropped somewhat. The 20 buyouts in the 12 months to June 2018 represent the second lowest total across the five years, marginally more than the 18 between H2 2015 and H1 2016, but considerably fewer than the 27 completed between July 2013 and June 2014.

Many of our historical regional competitors have continued to raise increasingly bigger funds. So there are real opportunities out there" – Grant Berry, NorthEdge Capital

Yet locally based players are proving increasingly popular with institutional investors, and the fundraisings of NorthEdge and Manchester-based Palatine Private Equity are indicative of that. The former closed its sophomore flagship vehicle on £300m in 2016, a 33% increase on its maiden fund, while the latter closed its third flagship fund in 2015 on £220m, a 47% increase on its predecessor. More recently, ECI Partners – which has invested around £180m in the north-west since its inception – announced the first and final closing of its 11th buyout fund on £700m in July 2018, a 40% increase compared with its predecessor.

But Grant Berry, managing partner at NorthEdge, says activity trends in the north of England as a whole are primarily being driven by more drastic changes in investment theses at an increasing number of firms. "There is a range of high-growth businesses in the north that are currently making £500,000-2m in EBITDA, but only start hitting the radars of many of the larger private equity firms once they are making north of £5-10m," he says. "While there was an increase between our first and second funds, that is because we opened our Midlands office and have subsequently ramped up activity. But many of our historical regional competitors have continued to raise increasingly bigger funds. So there are real opportunities out there."

Doubling up
Indeed, the latest flagship vehicles raised by Livingbridge and Inflexion Private Equity - two of the more prominent GPs with a presence on the ground in Manchester - are respectively 83% and 92% larger compared with their predecessors. However, both firms have launched complementary funds that are able to write smaller equity cheques.

The north-west larger cap community also saw the arrival of Dutch GP Waterland Private Equity Investments in 2017. "For a respected pan-European house such as Waterland to choose Manchester for its UK headquarters can only be a good thing," one local private equity practitioner told Unquote.

Though developments in the north of England’s core- and upper-mid-markets are perhaps the most immediately apparent, activity in the small-cap space has also picked up slightly, according to Unquote Data. There were 50 buyouts valued at up to £25m in the three years to June 2018 across the north-west, north-east, Yorkshire and The Humber, compared with 45 in the preceding three-year period.

While the uptick is marginal, it is reasonable to assume that volume will pick up in the coming years, with a substantial amount of government-backed capital being mandated to GPs for the specific purpose of regional equity investments. Maven Capital Partners has picked up many of these responsibilities. Since the start of 2017, the GP has been appointed to manage the £27m North East Development Capital Fund, a £57.5m Northern Power House Investment Fund and the £20m Finance Durham fund.

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