Regional investors vital for economic recovery

Amy King
28 February 2012

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Regional devolution has been favoured by some private equity firms as a means of boosting dealflow. However, despite the merits of a regional presence, unquoteт data reveals that investments backed by regional players has fallen since 2005. Perhaps though, a regional focus represents a crucial means of rebuilding the national economy from the bottom-up. Amy King and Anneken Tappe report.

With four offices across Wales, a local presence is central to the strategy of regionally-focused private equity firm Finance Wales. In times of financial turmoil, the mid-market investment firm cites market proximity as a major benefit, since it facilitates quick reactions to any nascent trend.

"Being close to the market helps to better understand market dynamics and gives us early indications of what is happening," says Chris Griffiths, deputy fund manager at Finance Wales. "This allows us to address any issues as they arise on a region by region or even office by office basis" he adds.

Similarly, LDC has long been a believer in the devolved approach, with regional offices in eleven major cities in the UK. Once again, the private equity firm has dominated the volume tables for mid-market deals completed in 2011.

LDC completed 11 deals last year; double that of closest competitors Carlyle and ECI. Although the success of the firm is more likely attributable to boasting the backing of the UK's largest banking group than its regional approach, the latter appears a positive asset.

LDC investment director Jonathan Caswell told unquote" in an earlier interview, "the regional network is a key strength for LDC, and it is critical to the way we do business. In terms of deal origination, it enables us to identify strong companies in local markets, get close to those businesses, meet the individuals and understand what is important to them - often before the actual processes start."

In spite of the merits of the regional approach, unquote" data shows that investments by GPs with a regional focus have in fact declined in the last five years. The number of investments made in Europe by these GPs has reflected the general market curve since 2006. This falling volume reflects the falling number of investments made in total.

Investments backed by regional players have consistently represented an important part of the industry since 2005, but suffered the same downturn. However, deal numbers continued falling in 2011, a year which was overall slightly stronger than 2010 in terms of total buyouts.

Nevertheless, the regional focus is perhaps more important now than ever. A focus on local companies and a long-term investment strategy including follow-on rounds could help keep regions afloat that might otherwise be ignored by larger pan-European private equity firms in times of financial turmoil. Perhaps investment in these very companies will promote real, sustainable growth that allows local economies to ride out the recession.

"The model that we apply is very much a cradle to grave one", says Griffiths. He adds, "It's not just about the capital it's about the expertise. In the last financial year over 50% of our investments were follow-on rounds in our portfolio companies. That to me is an indicator that growth plans are long-term and often need more than one round."

What's more, working close to the ground allows private equity players to leverage their portfolio companies. "We have an extensive portfolio of SME clients now, there are some great opportunities to leverage those relationships to the benefit of both portfolio companies; they can start developing relationships and opportunities. I do not think you would necessarily get that if you had a more dispersed portfolio" Griffiths suggests.

Leveraging expertise and opportunity is one way of ensuring dynamism in a local market. For those without the veteran experience of large, well-established companies, the financial crisis can see relatively inexperienced entrepreneurs enter unchartered waters; The close-contact with portfolio companies afforded by a regional presence is perhaps a means of facilitating knowledge-transmission and providing expertise. In times of austerity, maybe such regionally-anchored private equity firms represent a means of bulwarking local economies and riding out the recession.