London Merchant Securities (LMS), the property and venture capital group, has sold a portfolio of interests and injected £21 million capital into mid-market private equity firm Inflexion in exchange for a stake of at least 53.7 percent. The £21 million funding comprises an open offer – of which LMS has subscribed for £6 million – and a deferred investment of a further £15 million.
Robert Rayne and Martin Pexton, the chief executive and director of corporate development respectively at LMS, will become non-executive directors of Inflexion following the deal. As part of the deal, Inflexion and LMS have signed an official ‘relationship agreement’, which aims to ensure the independence of Inflexion from its new majority shareholder by stipulating that “all transactions and relationships…will be conducted on arms’ length terms”.
The proposals, which are scheduled to complete within the next eight weeks, will see Inflexion’s net asset value (NAV) increase from £13.4 million to £45.8 million. Inflexion will then use its enlarged capital base to increase its commitment to its private equity Fund 2 from £7.5 million to at least £20 million.
Fund 2 achieved a first close of €50 million in July 2003 and has made one investment, the acquisition of the cinema assets of Ster Century for £22 million. Simon Turner, joint chief executive of Inflexion, said the capital that it would be channelling into Fund 2 from the public fundraising would constitute an interim closing, with a final closing of least €100 million expected in the first half of this year.
Turner said Inflexion had been inspired to raise cash from the public market “as well as the more normal LP route” by the successful public fundraisings of fellow UK private equity firms Candover and Graphite Capital. He said the firm was now of a comparable size with other mid-market investment trusts and that there was no pressure to raise any further capital “for a long time” once Fund 2 has been raised. He added that the firm’s new ‘firepower’ meant it would be able to lead larger deals rather than necessarily participate in syndicates. The firm has always had the ability to lead smaller deals.
As well as focusing on new investments in buyouts of UK-based medium-sized businesses in growth markets, Inflexion will also work to achieve exits of its new portfolio of minority interests acquired from LMS over the next 18 months to two years.
Turner said the portfolio included highly liquid assets that are “in the exit departure lounge” such as stakes in tea and coffee merchant Whittard of Chelsea and Bloomsbury Publishing, the publisher of Harry Potter books. For interests described as “less liquid” – i.e., those in health club chain Crown Sports, electronic monitoring firm DMATEK and financial services provider NMT Group – Inflexion has a put option with LMS.
This means that, should the investments not prove as liquid as hoped, Inflexion can require LMS to buy back the interests at 80 per cent original cost at any time up to 30 March 2005. “The situation does not arise very often in private equity where you are able to cap the downside,” said Turner.
Inflexion said the rationale for acquiring the portfolio was to achieve a greater balance between early-stage and more mature investments. At the end of September 2003, 90 percent of the firm’s assets were either awaiting investment or in early-stage deals. Following the deal, 26 percent of the assets will be in mature investments, affording “the opportunity of nearer term realisations and therefore greater potential for liquidity for future investments”.
The deal arose from an existing relationship between the two parties, which was formed when LMS became an investor in Inflexion’s Fund 2. “They wanted to put more capital into the smaller mid-market and this was a natural step,” said Turner. LMS is a FTSE 250 company with nearly £1 billion of assets in property and venture capital, of which around 80 percent is in property and 20 percent venture capital.
It invests venture capital from its own balance sheet as well as having interests in external funds including those managed by Boston Ventures, Scottish Equity Partners and Legal & General Ventures. “This is a good strategic step, which continues LMS’ history of collaborative partnerships in the UK and US,” said Robert Rayne, chief executive of LMS.
Inflexion, which completed an AIM listing in 2000, raised €100 million for its first fund, IPE Fund 1, which closed in 1999. As well as LMS, Fund 2 includes commitments from Martin Currie and Nordea Pension as well as the Inflexion management team.