The challenges of regional investing

The benefits of leaving London for the fresh air and multitude of deals on offer in the relatively underserved regions are alluring, as explored in yesterday's story. However, as to be expected from any opportunity, there are of course barriers to entry.

The first hurdle is building a name and reputation. Track records and a high degree of visibility are vital components for investing outside of London. "If you have operated in a particular geography for a long period of time, you do build up a network. As regional markets are smaller in size, you will encounter the same people and in the long term these relationships really do count," asserts Grant Berry, managing partner of NorthEdge Capital.

Malcolm Kpedekpo, investment partner at Panoramic Growth Equity, agrees with this sentiment: "There is a lot of stock placed on spending time in your region and getting to know the companies and the advisers. Management teams need to know that you will spend time with them and they will speak to their advisers to find out how often you are really there."

Not only is an active presence in the region crucial to securing deals, but post-investment it is just as important to be readily available to the portfolio company. "Being on the doorstep means that we can spend more time with management teams and get to know companies much more easily and quickly," says Gary Tipper, managing partner of Palatine Private Equity. "The companies that we spend more time with receive a greater input from us, which typically results in better and faster-growing firms."

NVM Private Equity's Peter Hodson echoes this point: "If you are located close to the company it is much easier to spend more time with the team and the business. You really get to know them and how everything works. If you're based in London or far away then you are more reliant on phone calls and emails, which suffice, but face-to-face is a much higher and productive form of communication – it really helps the relationship and the ability to work together."

Natural selection
But before a local presence and network can be developed, the first obstacle to tackle is deciding which region to invest in. "Understanding the nuances of each market is vital," stresses Berry. "That is why we have an office in Manchester and in Leeds. They are both very interesting markets but also very different markets. Also, we use each office as a springboard into neighbouring markets such as Preston, Sheffield, Doncaster and Liverpool. If you know one market really well then you will know who to speak to in the next, and who the key players are."

For Panoramic, with offices in London and Glasgow and only three investing partners, selecting the most opportune geographies is one of the biggest challenges. Kpedekpo explains that the selection process factors in the types of companies they want to target: "We have a specific turnover bracket and although we invest across a range of sectors, we tend to find more traditional companies in the regions we target." Another major factor is the amount of investors already operating in that region. "This is an important consideration; as we are not local, it is much harder to break into the market if it is already well-served."

On a day-to-day basis, the "time spent on the ground" theme comes into play again: "After selecting the geographies, we commit lots of time to the area," says Kpedekpo. "We spend plenty of time meeting the advisers and attending events. You need to put your face in front of a range of people and companies. This builds momentum, but you must take a longer-term view," he warns.

Finally, the issue that has plagued the European asset class in recent years regardless of geography or market focus, is not absent in the regions either: access to debt.

According to Tipper, the regional branches of the major banks are still lending, but it can often be a laborious and expensive way to finance a deal – much as in London. However, a new trend could bring about major change. "Recently we have seen debt funds coming into the regions and boosting their presence beyond the capital," observes Tipper. "The debt funds have clearly seen an opportunity and are keen to develop relationships outside of London."

Furthermore, asset-based lending (ABL) has been more prominent in the regions than in the capital, perhaps because it naturally lends itself to lower mid-market deals, which make up a large number of buyouts outside London. For example, ABL lender Centric Commercial Finance has offices in Croydon, Birmingham, Manchester, Leeds and Cardiff in an effort to be an active member of each local community.

With alternative forms of lending now stepping up activity in the regions, the real challenge to investing outside of London comes down to experience, track record, local network, time spent on the ground building relationships and working closely with management teams. These are issues faced universally by private equity, and when contrasted with what the regions have to offer the asset class, the benefits clearly prove the vibrancy, opportunities and longevity of regional investment.

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• Topics
• UK / Ireland
• NVM Private Equity
• Palatine Private Equity
• United Kingdom