GP Profile: Soho Square pushes 'dequity' model in UK, eyes dealflow uptick

The London-based firm targets mid-market, owner-managed businesses in the UK, injecting capital into the senior part of the debt while taking small slices of equity – often less than 10%.

"The way that we operate dilutes owners quite a lot less than traditional private equity and offers more flexibility than pure credit," Fakhry told Unquote. "We are looking for high-conviction owners that believe in their business plans and want to create significant value."

While Soho Square is, in essence, a lender, it behaves like a sponsor – in that it brings the value-add of capital, resources, portfolio support, governance support and help when the founder does want to exit, Fakhry said.

The model is becoming increasingly attractive to founders, he added, because banks are retrenching their capital, private equity adds leverage and a predefined exit while removing controls, and private credit funds typically need a sponsor in the equity structure before investing.

Testing the model

The fund has seen a recent uptick in deployment, putting in around six offers in the past seven weeks, although it typically makes three to four investments a year, Fakhry added. Soho Square targets companies with an enterprise value north of GBP 50m and is sector agnostic, depending on the economic cycle and its ESG considerations.

Soho Square is currently deploying from its third fund, which closed in 2021 and was recently refinanced, meaning it has dry powder in excess of GBP 100m to make approximately five more deals. 

"We have quite a bit of capital left to deploy before we will really consider actively going out to raise our next fund," he said.

Soho Square's financing product is well known in the US, which helps to bring in LPs from that market, but is less understood among LPs in the European market, he said, adding that Soho Square is one of the first firms to test the model outside of North America.

Advisors, too, are becoming more familiar with the product and are starting to promote it to their clients as another form of capital, arguing that it is perhaps more attractive to vendors at a time when there is tension between buyer-seller price expectations, he added. 

While Soho Square is competing with private equity funds to make these primary deals, Fahkry is unfazed by the risk that they, too, could start to develop these types of strategies. "Many would find it too hard," he said." "It's not what they've been used to and the scale that they are at is too large. The mid-market is too focused on control and delivering exits." 

Debtxits

The GP's most recent exit came via Alpine Fire Engineers, with mid-market private equity fund Westbridge investing GBP 18.7m for a majority stake. Soho said in a statement that the company's EBITDA and turnover had grown fourfold, from GBP 2m and GBP 14m respectively, since its first investment in 2018

Indeed, many of Soho's investments are considered to be pre-private equity, but it generally does not push for an exit where the majority shareholder is not ready.

"We do have power in terms of the capital stack as there is a predetermined time frame to repay the loan notes that refinance over the lifetime of three to five years," said Fakhry. 

"We also sit on the board of our portfolio companies and there is some level of influence that we exercise extremely carefully. On the equity side, we are generally going to be aligned with the timeline of the owners, which could be two, four or even eight years. There are no set timelines."


[Editor's note: Subsequent to publication, the article has been amended to clarify that Soho's EBITDA and turnover had grown fourfold, to GBP 2m and GBP 14m respectively, since its first investment in 2018.]

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