Exit focus: Encore finds generalist success in a specialist market

In early July, Encore sold Pure360, a digital marketing company providing email and SMS marketing for client campaigns, to Scottish Equity Partners (SEP) in a £10.5m deal, reaping a 4x return on the original investment and a 47% IRR.

Prior to the original investment in 2009, the Encore partners were intrigued by digital marketing. "We saw that digital marketing was an up-and-coming sector," explains Khilan Dodhia, partner at Encore. "We could see how the market was growing in the US and from the experience of our portfolio companies. Our view was that a lot of marketing spend would be diverted to new digital forms over the coming years."

Encore's investment focus is on businesses of a certain size, believing that whatever the sector, growth companies on the verge of expansion but in need of guidance is where the team can build significant value. According to Dodhia, the difficulty was in avoiding businesses that were too high-tech, requiring a high level of sector expertise. "At that time the digital marketing sector was seeing lots of venture capital and corporate venture activity. It was a challenge to find a suitable business."

The Goldilocks principle
Fortunately, Pure360 represented just the right opportunity for Encore. "Pure360 wasn't super high-tech; its software offering did what was required but needed developing to remain market-leading," explains Dodhia.

Crucially, Pure360 was under-capitalised and had reached a point of critical mass. "It needed to be more serious, with a proper R&D division, more recruitment, a proper HR and finance function as well as an investment in sales," recalls Shirin Gandhi, partner at Encore who managed the investment and exit.

A key part of Encore's strategy in any investment is to strengthen the management team. "When we invest we always bring in a new chairman. In Pure360's case the situation was critical. We needed someone with an understanding of the market and who could get their hands dirty," says Gandhi.

Harry Meikle was chosen for the role. Having spent 15 years in the SaaS industry, Meikle earned his stripes building up software business QAS, boosting turnover from £247,000 to more than £50m and eventually selling to Experian in 2005 for £120m. "When we bring in a new chairman we encourage them to co-invest. What we're offering isn't just a job; it's a real opportunity to make a significant return," says Gandhi.

Meikle's first task was not an easy one. He asked the management team their thoughts on what Pure360 needed from a CEO, and whether the job could be done with someone from the existing team or if they should bring someone in. "This is often a very sensitive topic and we took a very open approach when speaking with management," explains Dodhia.

Talent teasing
Once it was decided that somebody new should be brought in, the Encore partners took control of the recruitment process. "We manage the process to allow senior management to focus on the business," says Gandhi.

When it comes to recruiting top talent into a small business, it is understandably challenging to convince top-level executives at large corporates to join a less established entity. Encore was determined to bring someone in with decent experience but who also fitted the company's culture. At the time of investment, Brighton-based Pure360, with only 30 employees – typically in their 20s and 30s and often sporting board shorts and flip-flops – had developed its own unique culture that was intrinsic to its overall service offering.

"It was a challenge to bring someone in from a large corporate background and convince them of the opportunity," recalls Dodhia. After one year of hunting and interviewing, Stuart Dawson, the former managing director of Iris Software's ABS division, took the helm.

Dawson, having already worked for private equity-backed Iris, which had received investment from HgCapital and Hellman & Friedman, was actively seeking a management buy-in opportunity. "The Encore partners, alongside Meikle, were instrumental to the recruitment process," he recalls. "By November 2009 we had negotiated terms and I participated in the equity through a ratchet agreement. The co-investment from all shareholders ensures everyone is closely aligned and working towards the same end result."

With the best people taking control of the company, Encore's next step was to upgrade offices. "We went from a tired office to a purpose-built 8,000 square foot property. This provided a significant boost to the entire staff's morale and improved operational efficiencies," says Gandhi.

Other key developments during the investment period were increasing staff numbers from 30 to 100 and bringing in new clients. "Strategically we knew the company wasn't set up to cater for very large corporations with huge legacy contact databases that would have taken years to integrate, requiring lots of man hours. We were focused on growing the SaaS model and so needed companies already exposed to digital marketing but looking for a better service provider," says Dodhia. With the support of Encore, Pure360 found new clients in high-profile companies including Innocent, Wiggle, Bauer Media and LA Fitness, to name a few. The influx of new customers saw revenues rocket from £2.5m to more than £7m.

Which way out
After four years developing Pure360 into a professional, well-managed business with a healthy balance sheet, the company needs had evolved and demanded more specialist ownership. With a decent opportunity to keep growing, management and Encore realised that a change was required to further develop Pure360's software and technological offering to become a serious competitor against larger entities in the space.

This left Encore and management with two options: to find a suitable trade buyer or another investor with experience and expertise in digital marketing software. Because of the management's belief in the company's growth opportunity, it was quickly agreed that finding another financial backer would be better suited than securing a trade buyer.

Encore brought in technology-focused GP Bullhound to advise on the sale. Despite presenting four eligible private equity buyers and some trade interest, according to Dodhia and Gandhi, Pure360 CEO Dawson and SEP's Gordon Beveridge hit it off straight away. "Maybe it was because they were both Scottish," wonders Gandhi. "Either way, we felt we had found the right partner to take the business to the next level."

The Pure360 deal typifies operational management at its best through solid partnership and a flexible approach. But what is striking about the investment is Encore's lack of sector expertise in a nascent technological space where most generalists would be running for the hills.

Encore's strength lies in the significant personal investments made into its evergreen fund by its partners – more than 30% of the fund is sourced in-house. This commitment sends a clear signal to investors and management teams. By bringing in senior management who co-invest in each portfolio company, Encore's promise of alignment is happily achieved. By investing in under-managed and under-capitalised businesses of a certain size, the partners can do what they're best at – bringing in top talent, building scale, professionalising operations and bringing in new clients – in an efficient and autonomous manner without the straightjacket of a traditional LP structure.

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• Topics
• UK / Ireland
• Exits
• Encore Capital
• United Kingdom