GP Profile: IW Capital aims to support UK SMEs with dedicated debut fund

To date, the firm has been investing using capital contributions from a wide network of high net-worth individuals and family offices on a deal-by-deal basis. It is now aiming to launch its debut fund by the summer, Davis said. The firm has evolved to the point where it will have “a dedicated war chest of funds” to deploy alongside its current resources, he said.

Although an official marketing process has not kicked off, the GP is looking to raise GBP 25m-GBP 30m for the evergreen fund. The firm is already deploying GBP 30m-GBP 40m per year and the new vehicle will be “just a small dedicated fund to walk alongside us,” he added, noting that he would like to see the size of the fund grow to more than GBP 100m within the next three of years.

The new fund’s LP base is likely to expand to include more institutional investors versus those comprising the firm’s current network, he said.

The firm started 12 years ago with a format similar to that of an angel investor and although it operates as private equity, its strategy is closer to venture investing, deploying between GBP 2m-GBP 10m per deal into growing businesses with at least GBP 1m turnover, he said. It is seeking to gradually increase its equity ticket size and expects to invest about GBP 70m-GBP 80m annually over the next 12 months, following the fund’s launch. It is now typically investing GBP 2m-GBP 4m per month, focusing on six to eight companies per year.

Pipeline priorities
IW Capital’s investment thesis has so far been mostly agnostic with a varying deal structure, focusing on tax-efficient investments through the Enterprise Investment Scheme (EIS) to the value of GBP 1m-5m. The current strategy has been allowing private investors, predominantly based in the UK, to invest on a deal-by-deal basis, committing longer-term capital that IW invests across its portfolio. Through the new fund, though, it aims to target sustainable UK SMEs with a global potential, while growing the firm and developing a specific brand in the market, said Davis.

In addition to new investments the upcoming fund will be deploying capital into current portfolio companies, Davis said.

Looking ahead, the GP’s pipeline includes further investments in hospitality venues chain Rockwater. The transaction is set to be completed by the end of May, he said. The business, which is owned by Davis and has received investment from IW Capital in the past, operates restaurants and venues hosting lifestyle activities, ranging from live music to wellness activities. It is now close to securing additional institutional investment, he said, following IW Capital’s contribution to an initial fundraise for the first venue in Hove and a GBP 8.7m commitment in July 2022 to support its expansion with two more sites in Sandbanks and Branksome. It is currently generating GBP 8m-GBP 10m turnover which will increase to GBP 2m-GBP 30m after the opening of a new site in Poole.

Scaling SMEs
Targeting scalable SMEs with strong management teams, the GP is aiming to achieve meaningful changes via its investments. “We want to invest in companies that really make a difference, which sounds really cliche, but there are businesses with the potential to become life changing,” he said.

With Rockwater for example, the firm is seeking to create both job opportunities and a hospitality hub for the local communities in the towns where it operates, whilst attracting international visitors as well.

Looking ahead, amid widespread market uncertainty and the inflationary cost pressures most consumer businesses are confronted with, Davis has been observing increased hesitancy and scrutiny from investors, which is even more noticeable compared with the financial crash of 2008.

“This has really been the first time where we've actually seen a material difference in the amount of money being invested, and considering the sentiment from the consumer, there’s a trade drop between 25% to 30% in hospitality businesses we’re involved with,” he said.

However, the challenges observed towards the end of 2022 are gradually being reversed with the market turning around during January and February, he added.

Internally, IW Capital’s is looking to grow its 20 members team and is currently hiring, he said.

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