LP Profile: Connection Capital

Established in 2010, alternative assets investor Connection Capital initially focused on private equity deals, before expanding into private debt, commercial property and institutional alternative funds.

"We believe that private investors should be able to access the same quality and variety of alternative investments that larger institutional clients have access to," says managing director Bernard Dale. "Most institutional, quality alternative funds have minimum investments of at least £1m and often £10m, so they are usually inaccessible. Connection Capital provides access, as our clients can invest from £25,000."

The investments in both direct transactions and into funds come from the organisation's client base of 1,250 individual investors, in units of £25,000. "Our clients get to see an investment proposal paper that provides them with the information on which to base their investment decision. We work on a first-come-first-served basis, which makes for an efficient fundraise process on the terms we have set. They can invest as many £25,000 units as they want," Dale adds.

Clients are predominantly UK-based individuals who have generated their wealth through their own entrepreneurial activity or from professions.

"We have built up this client base over the past 10 years and they tell us that they particularly like the ability to pick and choose which investments to make, depending on personal preference and not having capital committed to a fund. This offers them the flexibility to vary their investment commitment depending on personal liquidity and general investment sentiment," says Dale.

Connection Capital generates revenue from a mix of the traditional arrangement and monitoring fees paid by the investee business or fund, plus carried interest from the profit made by the clients on their individual investments.

Mixed model
The organisation had invested 29% of its assets under management in funds, 55% in direct investments and the balance in commercial property as of March 2019.

On the fund investment side, Dale says Connection aims to offer a range of institutional-grade fund opportunities that are diversified by asset type, fund type, strategy, vintage year, sector, size and geographic region. "We consider market timing and where we are in the cycle for strategies, as well as client appetite and the likely returns timeline," he says.

Connection Capital targets net returns of around 1.5-2x money invested for illiquid funds, and around 12-15% IRR for liquid funds. The institutional alternative funds include investments in private equity, venture capital, mezzanine debt, special situations, real estate and specialist hedge funds.

Connection looks at a range of criteria when searching for alternative funds, Dale says. These include strong and balanced management teams, exceptional track record, proven investment discipline, consistency in investment strategy, and ability to create value. Other criteria include experience in all aspects of the proposed investment strategy, stability, and motivation to maximise value for investors.

"So far, four of the 21 funds we have supported are investing in private equity and venture capital," says Dale. "These funds will invest in a different part of the market to our direct private equity or private debt investments, in a bid to give our clients access to a different part of the alternative asset spectrum than what we access directly from our own led deals."

The list of funds Connection has backed supports the claim of diversity: on the PE/VC side these include Life Sciences Partners 6, DN Capital's Global Venture Capital III and IV funds, and Palatine Private Equity II. The organisation has also invested in debt funds including Beechbrook Mezzanine 2, and 17Capital's Fund 3 and Fund 4.

Direct investing
When it comes to its own deals, Connection focuses on direct investments in private UK-based companies in the lower-mid-market space. The GP targets net returns to clients of 2-4x total money invested per deal, across a period of three to five years.

"Our average private equity investment is around £25m turnover, £2.5m EBITDA, and it employs around 250 people. We target investments of £3-10m per transaction. Our current portfolio ranges from c£5m to c£60m in turnover," says Dale.

Connection transacts in a similar way to a traditional private equity or private debt fund. "Sometimes we find deals via corporate finance firms, sometimes directly. We then appraise and structure them using a traditional approach and manage them afterwards. So, from a company's perspective, we are similar to other private equity funds, we just happen to do the fundraising in a different way, on a deal-by-deal basis. The great thing for us is that we have no rules or restrictions on what we can and can't do, so we can be more flexible than others in the funding structures we can use."

The firm has completed 23 private equity investments so far, of which 13 are management buyouts. "Our PE portfolio is weighted towards management buyouts, but we have also invested in growth capital and cash-out investment," Dale says. Connection tends to be the sole investor in a deal but can do co-investments in select cases.

The firm does keep an eye on the responsible investing agenda, but does not have a set of environmental, social and governance (ESG) criteria. Says Dale: "A good management team will probably wish to operate in an ethical and environmentally friendly way as it is a route to low wastage; happy, well-trained staff; and a positive customer experience, which ultimately will show though in the results. Our client base has varying appetite for ESG investing and with our model they can set their own priorities and criteria when making their commitments."

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