GP Profile: Phoenix returns record amounts in last 12 months

Phoenix Equity Partners had a subdued 2020 in terms of realisations, concentrating instead on working with its portfolio amid the pandemic, but the GP came back to market with a vengeance in 2021, announcing four exits in Q2 alone. "We have returned more capital to our investors than in any previous 12-month period: more than GBP 300m was returned across these four exits over the past year," says managing partner David Burns. "We've now exited three businesses from our 2016 fund, which in aggregate have returned 4.5x cost."

This started with the sale of holiday park operator Bridge Leisure to trade player Park Holidays in April. In June, the GP sold nursery business Just Childcare to Dutch strategic Partou; that same month, Phoenix also sold ophthalmology company Rayner Surgical to CVC, reaping 4.3x money. This streak was capped off by the sale of drug discovery firm Sygnature Discovery to Five Arrows for a reported GBP 300m; Phoenix generated a return of more than 5x on the sale, as reported by Unquote at the time.

Two of these exits (Sygnature and Rayner) were from the Phoenix 2016 fund, which closed on GBP 415m in mid-2017, with Bridges and Just Childcare being portfolio companies of the previous vehicle, the Phoenix 2010 fund.

According to Burns, there was no specific driver behind these exits all coming together in quick succession, other than the companies' profiles and growth stories resonating with buyers. "Sygnature is a nice example of what we like to do, which is to target a specific sub-sector (pharma outsourcing in that case), understand it inside and out, and develop a strong partnership with the founder. It really worked in that case, with profits more than trebling and Sygnature becoming a much larger and more international business," he says.

"Rayner also illustrates the importance of backing big macro trends. In Rayner's case, it was the ageing of the UK population; the business manufactures interocular lenses used to support cataract surgery," says Burns. "The company was quite exposed early on in the pandemic, as people simply couldn't go to hospital, so these procedures dropped. But after that dip, it bounced back strongly, as that underlying demand didn't go anywhere, which is why we were able to sell the business so successfully."

Following that strong run, Burns anticipates that the last quarter should be quieter, with no other exits expected on this side of Christmas, although he foresees that inbound interest will continue into 2022.

Among the GP's longest-held portfolio companies is Global Freight Solutions. Phoenix backed the MBO of the logistics management business in early 2017, in what was the third investment from its 2016 fund. Burns notes that Global Freight Solutions is one of these businesses that benefited from a change in market trends once the pandemic hit, seeing a "significant" increase in demand.

The GP also still owns Capital Economics, a macroeconomic data and research company, via the 2016 fund – it bought the asset in early 2018 in a deal valued at GBP 95m, providing an exit for minority investor LDC.

Another older asset in the portfolio is Forest Holidays, a rural holiday accommodation company that Phoenix bought from LDC in 2017 for a reported GBP 100m. While it was obviously affected by the first lockdown in the UK, it then rebounded on the back of increased demand for staycations while international travel was restricted. "That business is now twice the size it was pre-pandemic, and that is not just down to the big boom in staycations over the past year – we and management continued to invest in the business and push forward with the roll-out plan," Burns says.

Onward and upward
Forest Holidays – but also Envisage Dental and Rayner Surgical – were some of the most impacted businesses in Phoenix's portfolio at first, simply because people could not get out of their homes in lockdown, Burns says. "But the CEOs and the boards were very confident that the underlying demand wouldn't go away, and indeed these three bounced back very strongly. All three are now larger than they were pre-pandemic."

According to Burns, while most businesses were unaffected in the end, the GP spent the first few weeks of the pandemic making sure that the portfolio could be insulated from the worst of the damage: "The most important thing we did was look after the portfolio, the people who run these businesses and work for them, and our own people as well. We worked really hard at the start of the pandemic to make available a number of resources (accounting, legal, debt advisory, HR, etc) for portfolio companies to tap into."

Once the initial adaptation to the pandemic was underway, Phoenix did return to deal-doing, ultimately inking three deals in the pandemic and exchanging on a fourth. In August last year, the GP acquired a majority stake in security company Spy Alarms, with debt provided by Crescent Capital. In March 2021, it secured a majority stake in Setfords Law, a UK-based legal network; that same month, it announced an MBO for Universally Speaking, a provider of quality assurance, localisation and audio services to the global video games industry. Finally, Phoenix exchanged contracts in August to invest in Ava Global, a specialist logistics provider, carving it out from a listed parent.

Burns notes that the market has become increasingly frothy along the sectors and business characteristics that Phoenix likes to target, making origination more complex. "Clearly, there is increased polarisation on technology, financial services, fintech, healthcare, and a handful of other specific segments that are probably attracting up to 75% of investor interest at the moment," he says. "This is good news if you're selling, and we are pretty happy from that perspective when we look at the portfolio. On the investment side, it further encourages us to be as proactive as possible to avoid big auction processes."

According to Burns, striking early relationships with management teams is key, with Phoenix knowing the team and maintaining a dialogue for three years ahead of a deal on average. "Our recent deals have all been off-market, working with founders ahead of time and ultimately buying at quite sensible multiples," Burns adds. "This has always been our origination approach – we are trying to get to know teams a long time before we invest, and identify the right time to propose an investment."

Next steps
The timing of deployment over the past year is pretty typical for Phoenix, which – barring 2020 – has generally done three or four investments a year on average. "There might be another investment coming this year, but there is no pressure on that front," says Burns.

Indeed, the Phoenix 2016 fund is "largely built out", Burns says, with 16 investments in the portfolio (including Ava once the deal completes). Three assets have already been realised – on top of the aforementioned Rayner Surgical and Sygnature Discovery, the GP sold holiday lettings marketing platform Travel Chapter in early 2019. Phoenix reaped a 3.6x multiple and 62% IRR on that exit.

The growth of Travel Chapter was significantly driven through bolt-ons. Two other companies in the 2016 fund are pursuing buy-and-build strategies, Burns notes: Envisage focuses on private-pay dentistry, while Spy Alarms is active in the electronic security and fire safety space. Both of these companies have remained acquisitive through the pandemic, he adds.

Beyond providing an update on the deployment status of the 2016 vehicle, Burns declined to comment on the timing of Phoenix's next fundraise. Whenever that comes, though, the GP will look to stick to its guns and continue the same strategy, in the same market segment. This will include pursuing the shift initiated with the 2016 fund towards a greater tech focus, even when looking at companies operating in traditional verticals. "Looking at the Phoenix 2016 portfolio, the much stronger focus on tech enabled us to implement really ambitious growth plans," Burns says. "Travel Chapter is a good example – we did 20 acquisitions after the initial buyout, and all these were designed to further build on the company's tech angle. This is the greatest contrast with the previous fund, and something that is now part of our unique value proposition."

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