Ares Management handed keys to two-thirds of UK sponsor’s portfolio

Midlothian Capital Partners, a relatively under-the-radar private equity firm founded in 2015, strode onto the UK’s leveraged buyout scene the following year, when it led a consortium takeover of Dobbies, one of the country’s biggest garden-centre retailers. Midlothian joined forces with Hattington Capital but took a driving-seat role on the deal. 

Ares, the world’s largest direct lender, backed Midlothian’s GBP 217m leveraged buyout of Dobbies from UK-listed supermarket chain Tesco with a GBP 105m unitranche that funded in July 2016 and carried a margin of 700bps. 

Over the three years that followed the carve-out, Ares continued to support Dobbies’ acquisition strategy by providing the company with hundreds of millions of pounds in additional direct loans.

The private credit facilities provided by Ares enabled Midlothian to grow Dobbies into the UK’s largest garden-centre operator in April 2019, when it acquired 31 centres from Wyevale, lifting its annual sales to more than GBP 300m. 

But earlier this year, Midlothian’s investment in Dobbies unravelled following a prolonged period of pandemic-induced pain that saw the retailer’s losses exceed GBP 30m in 2021, before narrowing to GBP 24.4m in 2022. Dobbies tripped its covenants, prompting a transfer of control from Midlothian to Ares. 

In February, Ares was announced as the new owner of Dobbies. Subsequently, the three Midlothian partners – Andrew Bracey, Neil Currie and Aiden Clegg – and two partners from Hattington Capital – David Burgess and Frederick Goltz – who led the 2016 buyout of Dobbies were ousted from its board, filings show. 

As is customary in key-taking procedures, Dobbies sought to frame the deal as a run-of-the-mill acquisition rather than a restructuring. In a statement, Dobbies said that Ares-owned funds “have been lenders and shareholders since the business was acquired from Tesco in 2016. With the support of Ares’ funds, we will continue to execute on our strategy to drive the long-term growth of Dobbies.” 

As of 28 February 2022, Dobbies had nearly GBP 225m of loans from Ares outstanding, while annual financing costs, including interest payments, totalled more than GBP 40m, Companies House filings show. Dobbies’ 2023 accounts have not yet been filed. 

In July, Dobbies’ former chief executive officer Graeme Jenkins was replaced by David Robinson, who joined from UK-based retailer Pets at Home. That same month, Dobbies’ chief financial officer, Anthony Grace, left the business after being in the post for just over a year, Companies House filings show. 

Lenders of leisure
After acquiring Dobbies in 2016, the following year Midlothian executed its second deal – a management buyout of Park Leisure, the UK-based holiday-park operator. To part-fund the GBP 103m leveraged buyout, Ares provided a GBP 52.5m unitranche with an effective margin of 876bps – marking its second direct loan to a Midlothian-backed, consumer-facing business. 

Park Leisure is a peculiar case. After capitalising on a staycation boom that helped Midlothian to more than double Park Leisure’s EBITDA over its five-year tenure, the business was acquired last year by US-listed REIT Sun Communities. The reported enterprise value was GBP 182m, representing a return for Midlothian that left the sponsor with more than enough money to repay Ares at par. 

This transaction is peculiar because Ares, according to Companies House filings, is the owner of Park Leisure. As the majority shareholder, Ares holds the “right to appoint and remove directors” from its board, on which two Sun Communities executives sit. Given the business traded hands last year, how this is possible is a valid question that perplexed numerous corporate lawyers with whom Debtwire spoke. “I have never before seen anything like this, and I don’t have a proper explanation,” one lawyer said. 

Debtwire contacted Companies House to obtain an explanation, but the corporate registry refused to comment on individual companies. It did, however, point this publication to Park Leisure’s ‘persons of significant control’, which are Ares Management Limited and Ares Management LP. According to current filings, the entities own 75% or more of Park Leisure’s shares and possess “significant influence or control”.

When contacted for comment, a spokesperson for Ares said: “Ares does not, and has never, had majority ownership of Park Leisure Group. Responsibility for updating Companies House filings sits with the new owners [Sun Communities].” 

Karen Dearing, a Sun Communities senior executive who sits on the board of Park Leisure, did not return an emailed request for comment. 

Learning the hard way
Midlothian’s third, final and most recent leveraged buyout came in late 2018 when it acquired educational activity provider PGL from Indian-listed travel operator Cox & Kings. Once again, it was Ares that provided debt financing for the GBP 467m takeover in the form of a GBP 237m direct loan, which is reflected in the parent company’s filings. 

Things took a turn for the worse, though, roughly 15 months later, when the Covid-19 pandemic shuttered schools and other educational facilities in most countries. Inevitably, PGL suffered a severe blow to its balance sheet. Filings for Aldgate Education Midco 2, through which PGL is owned, show that in the year ended 31 August 2020, the company’s revenue almost halved year-on-year to GBP 65.6m, with losses totalling GBP 177m. That year, the business’ EBITDA was underwater, at negative GBP 13.1m. 

In 2021, when Ares took the keys to PGL, revenue fell further to GBP 54.9m, while the group’s losses narrowed to GBP 57m. In November of that year, Ares provided a capital infusion of GBP 35m to PGL, which in turn agreed to several conditions, namely an amendment and extension of its EBITDA and liquidity covenants, filings show. The amended covenants include a minimum liquidity level and, as of October 2022, a minimum year-to-date EBITDA level. 

Midlothian partners Bracey, Currie and Clegg saw their directorships of PGL terminated in November 2021 – less than two years after they orchestrated its leveraged buyout. Ares now controls PGL’s board, with one seat held by the asset manager’s Co-Head of European Credit, Michael Dennis, and another by Managing Director Alex Jones, filings show. PGL’s Chief Financial Officer, Luke Creighton, is listed as the third and final director. Ares was a shareholder in – not just a lender to – PGL from the outset. This is reflected by Dennis’ directorship, which he has held since the time of Midlothian’s takeover in December 2018.

Concentration risk
In the space of just three years, between 2016 and 2019, Ares provided more than GBP 500m to three Midlothian-backed companies, then proceeded to take the keys to two of them. The only investment on which Midlothian appears to have generated a return is Park Leisure. 

Midlothian, whose “patient capital approach” focuses on the consumer, retail and education sectors, claims to have offices in London and Connecticut but only employs a total of four staff, according to its LinkedIn page. The listed employees are Bracey, Currie, Clegg and executive assistant Anna Margot. 

According to his LinkedIn profile, Bracey worked at Barclays from 2003 to 2008. Ares partners Dennis and Jones also worked at Barclays, from 1997 to 2007 and 2006 to 2010, respectively. Bracey, Currie and Clegg all worked in investment banking at UBS for overlapping periods of time before taking up other corporate finance roles, according to their LinkedIn profiles. 

Midlothian continues to trade, according to Companies House filings, which show that shareholder funds totalled GBP 234,689 as of 31 March 2022. Bracey, Currie and Clegg are listed as Midlothian’s directors and shareholders. 

According to a media report, in the last two quarters of 2022, the non-accrual rate — the percentage of companies that missed payments — in Ares’s portfolio was 1.7%, less than the firm’s 10-year average of 2.4%. And even when a default occurred during that decade, Ares managed to recover about 90% of principal.

Midlothian did not respond to four requests for comment sent via its website and LinkedIn. 

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