Kester Capital closes second fund on £90m

Kester Capital II was launched in January 2019 and held a first close in H1 2019, with a target of £75m. The hard-cap of £90m was set during the fundraise by the fund's investors.

Travers Smith provided legal advice on the fundraise, while Etienne Deshormes of Elm Capital acted as placement agent.

The firm is also seeking to hire a new investment partner to expand its team following the fundraise.

Kester's first fund was formed via a stapled secondary transaction when the firm span out from GCP Europe.

The firm also announced the refinancing of gardening products retailer YouGarden, backed by incumbent bank Santander, which also provided debt for the original buyout. YouGarden's EBITDA has doubled since Kester invested in October 2019 and the refinancing generated returns of 60% cost to the fund's investors.

Asked about the fundraising timeline for Kester Capital II, Adam Maidment, managing partner at Kester, told Unquote: "We started the real final close efforts in November 2019. Up until lockdown, we were seeing strong momentum with LPs, the vast majority of whom we had existing relationships with. The lower-mid-market and the focus on primary buyouts is attractive, and we have a well-established and experienced team. When lockdown hit, most LPs took the first two months to spend time looking at their existing portfolios with existing GPs."

However, interest picked up again during the course of lockdown, Maidment said: "Towards the end of May, LPs began to look again to deploy capital in new investment/fund opportunities outside their existing relationships. The fact that we had had good dialogue with them historically, and that our currently portfolio was trading really well, allowed us to move from being on pause with LPs to closing the fund relatively quickly."

Investors
"Our entire LP base is institutional LPs, and the majority are funds-of-funds," Maidment told Unquote. "Expanding our range of relationships is key for us – we had good support from existing investors, and more than 50% of commitments are from new investors."

The minimum commitment for the fund was £5m and the GP commitment was around 2%.

According to Unquote Data, LPs in the fund include Montana Capital Partners and BMO.

Investments
The fund will focus on UK-based SMEs, targeting businesses with enterprise values of £10-50m and deploying equity tickets of £5-25m. The vehicle will focus on the sectors of healthcare, business services, financial services and TMT, although it is not limited to these segments. The firm invests only in primary buyout opportunities.

The fund has made two investments so far: YouGarden, which Kester acquired in an MBO in October 2019; and Compliance Online, a digital gambling and payment sector regulatory compliance service.

"Covid-19 had a material effect on dealflow – but in the past eight weeks, we have seen a significant uptick in activity," Maidment told Unquote. "The bar has gone up in terms of the deals we want to do – we are looking for robust, resilient businesses with growth potential, and there is simply a smaller set of deals today than pre-Covid. For those good businesses that come to market, there is likely to be intense competition. We will stick with our strategy and we won't be investing in rescue deals. But the universe of potential deals in our focus area is still the largest and most liquid in the UK."

Asked about the fund's pipeline, Maidment said: "Ideally, we would like to complete a new investment before the end of the year, but we will be selective."

People
Kester Capital – Adam Maidment, Cameron Crockett (managing partners).

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