To have and to hold

Kimberly Romaine
14 October 2011

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Private equity prides itself on patience. But three-to-five year holds arenтt always enough to maximise value from companies. Kimberly Romaine reports.

The unquote" British Private Equity Awards last month highlighted that patience is a virtue: for our exit of the year categories, the shortest hold period was three years (bear in mind it was a turnaround); other winners were five and eight patient years.

But another really stood out for the sheer length of the hold period: YFM backed one business for 13 years before reaping 30x money earlier this year - and there is more to go, since that return was just for selling a third of the backer's stake to 3i. The business is UK specialist retailer Go Outdoors, founded more than 40 years ago in Sheffield.

"We prefer to stay with a target for as long as we see growth," explains YFM managing director David Hall.

The fund manager has realised or partially realised 30 investments since 2004 from its two VCTs with an aggregate cost of £13.5m, realised proceeds of £39.6m and an aggregate return multiple of 2.9x cost. This year's proceeds are already 13.6x. largely on the back of the success of Go Outdoors. But YFM is not a one-trick pony - it achieved 2.4-2.8x in the difficult years between 2008 and 2010.

This is down to YFM's patient approach, as previously mentioned, as well as its lack of leverage in deals. "As financiers, it is not our job to create financial risk in our portfolio businesses," Hall points out, adding that, on average, their portfolio companies have 1.5x debt to EBITA multiples. "Our businesses' management can consider ‘what is the best speed to expand' and ‘how can we achieve that' - rather than worrying, like their competitors, about ‘How do I preserve the business and make the monthly interest payments...'".

He points to the example of furniture business Harvey Jones, which was backed in a 2007 £8m buyout. The deal contained £2m of debt and has managed to double its number of outlets to 20 since the buyout. The net MBO bank debt has already been repaid, and the business, despite adverse market conditions, is just as profitable now as it was in 2007.

Investors are cottoning on to the merits of such investing. In addition to VCTs, YFM manages around £290m of LP money, £220m of which in closed-ended funds. Average ticket size stands at £5m, but this may go up. "Our investors are looking to increase their exposure," Hall says. "Firstly since it is a bit of an administrative burden for them to manage such ticket sizes. But also because there are not many opportunities to back small businesses undergoing transformational growth."

YFM was set up as a Yorkshire Enterprise Agency in 1982. The firm had its first external investors in 1986 from a Yorkshire pension fund. It later launched its British Smaller Companies VCTs. It now manages £350m for around 5,500 shareholders.