In Profile: Phoenix Equity Partners

"We are absolutely and resolutely UK-focused, although a number of our businesses are international in what they do," says Phoenix managing partner Richard Daw, in response to the obligatory Brexit impact question. "Less than 5% of revenues from our [current] portfolio are from Europe, so we are relatively protected."

Now on its fourth fund, Phoenix tweaks its investment strategy when needed. For example, after perfectly good retail investments from the 2006 fund in the likes of shoe retailer LK Bennett, branded technical sportswear group Musto and handbag seller Radley, the firm decided to change its strategy when deploying its 2010 fund.

"We have been successful investors in retail, in fact we were the very first investors in Jimmy Choo. In 2010, though, we became much more sub-sector focused," Daw explains.

Ebbs and flows
"As retail doesn't fit [our key] criteria, it became less of a focus," Daw says, alluding to drivers of demand that are not correlated to UK GDP and industry structures where they can be confident of driving growth themselves. "They are businesses that can take on the economic ebbs and flows."

Examples include Phoenix's investment in retirement and care homes, children's day nurseries and niche travel groups. Essentially, people will keep getting old, keep having children and certain pockets of society will continue to have holidays no matter what the prevailing socioeconomic climate.

Initial deployment for Phoenix's 2016 fund is a case in point. The GP acquired UK holiday lettings group The Travel Chapter in March this year in an estimated £30m buyout. The business manages 2,200 self-catering holiday properties throughout the UK and expects to deliver 55,000 bookings this year. The flagship brand is Holidaycottages.co.uk. "People will always want to go on holiday and increasingly want to stay in the UK," says Daw.

With around 25 LPs in the 2010 fund, nearly half come from Europe and the other half from North America. The GP's 2016 fund held a first close on £250m in March and has a £500m target. The firm declined to comment on fundraising matters.

Click here to view the list of LPs invested in Phoenix's 2010 fund

When it comes to financing its transactions, Phoenix has a self-confessed conservative attitude towards debt and leverage multiples – the 2010 portfolio averages 2x compared to 2.6x on entry. But the GP is not averse to branching out to the alternative lending community to support its deals. Sweden-based debt fund Proventus stumped up financing for the buyouts of niche cruise operator Riviera as well as for The Gym Group, while direct lender Ares did the same for Bridge Leisure.

"Flexibility is what pushed us towards the direct lenders," says Daw. "The ability to draw down funds to make acquisitions, and yes, some typical debt structures with traditional covenants don't lend themselves as well to a buy-and-build or roll-out strategy."

String of exits
On the exit front, Phoenix made its third divestment in the space of 12 months in May with the £163m sale of Palletways to Imperial. In Daw's own words, the investment was a resounding success, mainly because the GP managed to roll it out across 20 countries in continental Europe. By the end of Phoenix's stint, EBITDA for the group was £16m – roughly a third in euros – from a modest £3m on entry in 2014, via the delivery of 8 million pallets a day from roughly 2 million a day at the time of the buyout. And despite the 12-year wait, the investment generated a 4.3x return on cost for the GP.

But the managing partner is keen to stress that the extended investment period is not commonplace. "Within those 12 years we delivered a particularly ambitious plan, and there was obviously a deep financial crisis," he says.

Only a month before, Phoenix announced the sale of UK headquartered testing, inspection, certification and consulting services business Edif Group to Italian trade buyer Rina. The transaction generated £70m of total proceeds for Phoenix's 2010 fund, representing an exit multiple of 2.3x after five years. During this time, Edif made 11 bolt-on acquisitions.

And prior to this, last November, Phoenix managed to quench the appetite of The Gym Group's management to run a listed company – no mean feat and a relative rarity in the mid-market space. Profits for the low-cost gym operator more than doubled during Phoenix's period of ownership, prior to the IPO.

"When we did our research we saw the low-cost gym model had boomed in Germany and in the US, it was really a revolutionary concept there," says Daw.

And the UK seemed to follow suit with the implied market capitalisation of The Gym Group at admission to trading on the LSE at £250m. Phoenix acquired the group in June 2013 for a total transaction value of £90m. The realised and unrealised return on listing – Phoenix retained a stake – was overall more than a 2.5x return on investment cost.

But the fact that none of these businesses remained in private equity hands does not signal a slowdown in private equity activity, Daw underlines. In the 15 years since inception, almost 50% of Phoenix's investments have continued under sponsor ownership.

"Private equity doesn't really seem to be on hold, it is just the nature of those businesses lending themselves to trade," Daw says.

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