GP Profile: Beechbrook Capital

"The view we had post-financial-crisis was that there was going to be a changed lending landscape in Europe and we wanted to be a part of that," says Beechbrook Capital co-founder and managing partner Nick Fenn. "The perception was that banks would continue to provide capital to SMEs but would be constrained, creating opportunities for non-bank lenders."

The financial crisis gave Europe and Beechbrook the impetus to follow in the footsteps of the US, and more specifically, to be a new type of lender to SMEs, explains Fenn. As an industry, appetite for borrowing did recover but not to previous levels for smaller companies. This created a gap in the market, which Beechbrook was founded to fill.

What started as a single-pronged strategy has now bifurcated. When the lender started up in 2008, it provided loan capital to companies with revenues of €10-100m in northern Europe and usually only those that were private-equity-backed, explains Fenn. 

The split is not 2% and 20% unfortunately, as the target returns are lower in the private debt market but we are at the PE end of the spectrum as far as debt funds go

We established a sponsorless fund because we had a lot of businesses coming to us and we were restricted by our original fund's parameters, so couldn't help them" – Paul Shea, Beechbrook Capital

The first fund, Beechbrook Private Debt I closed in 2010 on €100m, including add-ons, and is now 100% deployed. Investors have had 1.2x money back to date. Private Debt II closed in 2013 with more than €150m in commitments; it has returned 0.3x to date and is fully deployed.

The lender is currently on the fundraising trail for Private Debt III, with €125m in commitments already secured towards a €200-250m target. The fund has made five investments already, including growth financing to support H2 Equity Partners' investment in Netherlands-based flight simulation manufacturer Multi Pilot Simulations; a mezzanine loan for LDC's luxury restaurant group D&D London; and a mezzanine loan to part-refinance senior debt and provide operational finance for Lonsdale Capital's Scotland-based engineering services business Nucore Group.

On the back of inverse enquiries, Beechbrook launched its sponsorless strategy for UK-headquartered companies in 2015. UK SME Credit I fund made a final close on £151m in January 2017 and is more than 50% deployed in 10 transactions to date. The most recent were for the specialist provider of executive search services Wilton & Bain and underfloor heating products supplier Nu-Heat.

The intention is to start marketing UK SME Credit II later this year.

"We established a sponsorless fund because we had a lot of businesses coming to us and we were restricted by our original fund's parameters, so couldn't help them," says co-founder and managing partner, Paul Shea. "We hired Jon Herbert to run the new business and set about raising a separate fund," he says, adding that there are different routes to market and nuances regarding corporate governance, meriting a separate fund. "Particularly in terms of portfolio management, we have to be much closer to the company."

Structuring
The debt fund is structured with a typical GP/LP set-up and an eight-year fund life, though target returns are lower.

"The split is not 2% and 20%, unfortunately, as the target returns are lower in the private debt market, but we are at the private equity end of the spectrum as far as debt funds go," says Fenn. "Our target net returns are similar to mezzanine funds at roughly 9%."

To date, Beechbrook's LPs are mainly European insurance and pension funds, though the lender did receive funding from the British Business Bank and European Investment Fund in its second vehicle.

"I would say we offer higher returns than private debt in general – especially than in the upper-mid-market where returns are coming down," says Fenn.

Beechbrook also has a co-investment programme, along the same lines as a GP fund, though since Beechbrook's investments are at the smaller end of the spectrum – €8-9m for the private-equity-backed strategy and £8m for the sponsorless one – a co-investment is not always appropriate. However, where the lender needs a top-up they will ask their LPs, especially since there is no leverage in the fund.

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