GP Profile: Baird positive on UK dealflow despite valuation inflation

Although US-based sponsor Baird Capital has the flexibility to deploy its USD 340m Global Fund II in the US and Asia, two of the four investments made by the fund are based in the UK, namely aircraft disassembly group eCube and pharma strategy consultancy Prescient Healthcare Group, in which the sponsor reinvested with a minority stakeholder after selling the business to Bridgepoint Development Capital.

"The UK economy has bounced back quickly from the pandemic and continues to generate attractive investment opportunities for our funds, particularly in the [sub-sectors] we focus on, for example pharma services, education and financial services where the UK is a global leader," says Baird partner Andrew Ferguson.

The fund, which typically targets businesses generating USD 5m-10m in EBITDA, is expected to be deployed across 12-14 platform companies over its three-to-four-year investment period, Ferguson says.

Market heats up
Baird has so far exited three businesses from its first fund, taking advantage of what it sees is a strong M&A market. Says Ferguson: "The exit environment is good at the moment. The market is receptive to good quality assets."

Its latest exits include UK luminaires manufacturer Collingwood Lighting, which was sold to Italian sustainability investor Ambienta.

As a sign that the market might be heating up, many vendors are expecting a premium for businesses that have traded well throughout the pandemic, Ferguson says, noting that this is especially the case for tech-enabled businesses with recurring revenues, like those afforded by software-as-a-service models.

However, Baird is also increasingly seeing frothiness in the market – even "super frothy" valuations in certain sectors, Ferguson says, pointing to the pharma services space, where current multiples are trading at levels "unheard of" prior to the health crisis.

The sponsor has been introduced to businesses positioned at valuation multiples that were once reserved for companies three to four times their size, with some generating only single-digit million-dollar revenues, he says.

Post-pandemic thesis
Baird's upbeat note on the UK contrasts to its Asia strategy, where dealflow in Hong Kong, Malaysia, Thailand, Vietnam and Singapore has been impacted by the ongoing Covid-19 restrictions. The political backdrop in China, where the GP previously invested in sectors ranging from online marketplaces to services and industrials, adds an additional challenge to investing there, Ferguson added.

The sponsor has had a penchant for UK assets since its USD 310m Global Fund I, which launched the year of the Brexit referendum. According to Ferguson, it was an opportune timing when asset valuations dropped and when the pound was favourable from the perspective of a US dollar fund.

The firm is not veering off from its global investment strategy, says Ferguson, but the theme behind its investments has changed. "In a post-pandemic environment, digitalisation, automation, remote working, and sustainability, among other factors, have become bigger themes that can be applied to businesses. I don't think you can apply the same themes in 2021-2023 that you applied in 2016-2017."

These themes are being reflected in its current pipeline. In the UK, it is looking at an energy servicing company specialising in renewables such as offshore wind and solar, which fits into the growing concern over sustainability, he says.

In Hong Kong, Investindustrial is in exclusive negotiations to acquire a logistics software group that helps optimise supply chains for perishable goods. Ferguson notes that pandemic disruptions highlighted how supply chains are becoming ever more complex and localised.

In the US, the GP is looking closely at a data company, says Ferguson. As the world continues to "go digital", the amount of data generated has expanded exponentially, with this particular business providing enterprises with a more consolidated view of gathered data, enabling them to take informed decisions.

Baird's UK and US dealflow primarily comes from the intermediaries, ranging from one-man-band advisory firms, regional accountancy practices, national accounting practices, corporate finance teams, all the way to investment banks. In Asia, most of its deals are sourced off-market, he added.

The sponsor does not transact with its larger investment banking arm, Robert W Baird. While acknowledging that its neighbouring colleagues are often a useful source of knowledge and experience within the confines of compliance, they also work on deals that are typically larger than those the fund can take on, he says.

"It's a question I've usually been asked by other intermediaries who may think that we are given all the best deals by our own bankers," says Ferguson. "We don't do that."

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