Now more than ever, it's who you know

In the last 12 months, all of Graphite's work has been with those they know and trust - be they teams they've backed before in new businesses, or backing bolt-ons for existing portfolio companies. In fact in the last year the team has done one development capital deal with a team it had previously backed, one buyout of a team it had previously backed and two bolt-ons.

"Working with teams we know means better access to attractively priced deals. It also means you can be sure you're getting a team that understands the industry and, as a result, may fare better in a downturn," says Graphite senior partner Markus Golser.

Even some of Graphite's consumer-facing businesses - the industry deemed most problematic right now by many - are actually faring better than may have been expected. Kurt Geiger, for example, could be a company in distress, given its upper-end-priced ladies footwear. "In fact it has increased market share on the back of its strong product offering and the demise of certain competitors," Golser says. They backed the business in early 2008, after the onset of the crunch, in a £95m buyout expecting to grow primarily through internationalisation. Within a few months, Shoe Studio Group, a competitor ultimately owned by a now defunct Icelandic investor, went into administration, allowing Kurt Geiger to take over a number of attractive distribution contracts with large department stores and to increase market share.

Micheldever Tyres, which Graphite backed in early 2006, has also benefited from a "mend and make do" attitude by people that opt to hang onto their cars longer in the downturn, rather than trading them in for shinier new versions. As such, earlier this year Graphite backed two further bolt-ons, bringing the number of sites added since the initial deal to 22.

The weak pound is also helping out: Caravan operator Park Holidays, which underwent a £130m BIMBO in January 2006, is enjoying a strong year as would-be sun-seekers choose the UK's south coast over Spain's Costa Brava when it comes to purchasing a holiday home. Graphite has made three bolt-on acquisitions since the original deal.

Of course, Graphite head of direct investments Simon ffitch points out that such success stories gloss over the fact it is a very tough market for new transactions. For example the firm backed upmarket fitness club The Third Space in August 2007 in a £22m MBO with plans to expand through follow-on acquisitions. Fast forward two years and, while The Third Space "continues to perform well" according to Graphite, no acquisitions have been completed as the prices for suitable targets remain too high.

What does Graphite think the future holds? "People are holding IMs back until the autumn, but I still don't think a lot will come even then," ffitch says. He expects the true upturn to come in the spring.

And as for exits, they're probably just as far off. "We've taken a view to hold on to our investments," ffitch says. He explains that the firm has done well before with tails of funds, sometimes expecting only to recoup cost, but holding on and ultimately making 2-3x money. As an example of such an extended hold period he cites specialist vehicle hire business GoPlant, which underwent a 10-year holding period before it was sold in September 2007 to a private investor, yielding Graphite 4.2x its total investment.

It is believed that Graphite is soon expected to have a first closing of a second top-up fund. This will invest in companies at the larger end of its target range and capitalise on opportunities arising from the economic downturn. It will also mean its main fund does not become over-committed to any one transaction.

With that and its seventh fund, which raised a total of £555m between a traditional fund and a top-up co-invest fund, only around 20% invested, Graphite is well placed to pounce on opportunities as and when they arise.

What others say about Graphite Capital

What the LPs say...

"We are in two of their funds, so have a lot of visibility, and regard them very highly"

"Only did a handful of deals in the last 18 months or more and all show they are clever"

"Kurt Geiger, despite being in retail, is doing very well. They bought a recession-resilient care homes business and Alexander Mann, which is just about the only recruiter set up to profit from the downturn, and is paying down its debt at an impressive pace"

"They are working hard on their 2003 portfolio though and that might pull their track record down"

What the advisers say...

"There is a consensus that they massively overpaid for recruitment firm Alexander Mann (£100m) at the top of the market. However, they also exited Huntress Group, another recruitment player, to Nomura really well just before the market turned"

"With the house track record over the last decade, they have a right to be smug".

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• UK / Ireland