Duke Street seals first ‘deal-by-deal’ buyout

Duke Street Capital has acquired a UK funerals business from peer Sovereign Capital in its first attempt to raise and invest capital using the deal-by-deal method.

Mid-market private equity group Duke Street Capital has acquired the UK’s third largest funeral company from buy and build specialist Sovereign Capital in a £37.5 million (€45 million; $60 million) deal.

For Sovereign, the exit provides a return multiple of 3.4x. It is Sovereign's third sale of 2012, after the exits of the National Fostering Agency and Children First Fostering Agency.

The LM Funerals investment was made using Sovereign’s first vehicle, the 2001-vintage SCLP I fund which has returned a combined multiple of 4.7x cost and an IRR of 62 percent (realised investments) to investors, according to the firm. The fund, which closed on £125 million, has been fully invested and retains investments largely in healthcare companies in which Sovereign has specific expertise.

The LM Funerals acquisition is Duke Street’s first since it abandoned its efforts to raise a new fund and switched to a deal-by-deal fundraising model.

There is a gathering interest in committing to direct investments where the economics are tailored to the particular situation

Charlie Troup, Duke Street Capital

A deal-by-deal strategy differs from traditional fundraising in that the firm must seek out investment opportunities and then raise the capital to complete the deal. This mode of investment offers investors direct access to deal flow, but critics argue it is resource-intensive and makes an acquirer less attractive to a vendor because of the uncertainty over financing.

Duke Street partner Charlie Troup said in an interview with Private Equity International that the worsening of the euro zone crisis last year meant investment into European private equity funds had slowed down.

He said traditional fundraising was very intensive on senior partner time and that during this period Duke Street felt that focusing on standalone transactions would be a better use of resources, though he added that Duke Street would go back down the traditional fund raising route in the future.

“There were attractive deals out there that were good Duke Street deals so we decided to re-allocate our time on the premise that there would be investors out there,” he said.

“We thought there would be new investors out there who would be attracted to deal-by-deal and also investors who had historically invested with us, and this turned out to be the case.”

Troup said using a deal-by-deal method required a completely different approach to investment. “Your target audience will vary depending on how those variables change so you absolutely have to find enticing deals first,” he said.

Troup believes there is a market and interest from investors. He said that the LM Funeral deal, which was oversubscribed in terms of equity, has “given us encouragement that we will do more deals and that our judgement was correct.”

He said: “If you think about what LPs are seeing at the moment, including some of the regulatory changes, which make investing in 10 year blind pools less attractive for some investor classes, there is a gathering interest in committing to direct investments where the economics are tailored to the particular situation.”

LM Funerals has grown through acquisition and rollout to have more than 60 branches across the UK. The management team will remain the same save for the addition of Duke Street operating partner, Johanna Waterous, who joins the board as non-executive chairman. She will work alongside Sovereign-appointed chief executive Deborah Kemp.