LMS to halt LP fund investments

This week LMS Capital completed a deal that chief executive Glenn Payne says is an exemplar for the firm’s strategy going forward: backing a growth-positive business with a strong management team in place. It will no longer make fund commitments as it has also done in the past, he said.

The London Stock Exchange-listed firm used all equity to purchase a majority stake in Nationwide Energy Partners, giving the company a $23 million enterprise value. The Ohio-based utility services company provides services aimed at helping property developers and management companies to cut costs via smart meters and other measures.

Glenn Payne

“This is an illustration of the type of deal LMS believes it will be able to do serially going forward,” Payne told PEO. He noted the family-run company had built up a regionally leading business over the past decade, and LMS was able to help facilitate the differing needs of the father-and-son duo behind the company – it bought out the retiring founder and offered both capital and expertise to help the company's remaining management grow the business. In addition to the stake purchase, it will provide up to $15 million to National Energy Partners for further development.

While my focus going forward is to do direct investments and no longer funds, we are at the backside of the fund lifecycle and so … we are going to be receiving a material amount of dollars in the next five or six years … which affords us the ability to become very active in the direct positioning. Glenn Payne

The deal is the first LMS has completed since Payne joined from First Reserve as part of a planned succession transition at the evergreen-funded LMS. Payne replaced long-time chief executive Robert Rayne, who became the firm’s chairman. Rayne, who helped established LMS Capital’s investment activities in the early 1980s as London Merchant Securities, succeeded Jonathan Agnew.

In the 10 weeks since Payne took the helm, one key decision made was to no longer purchase interests in other private equity funds, which at present make up about half the firm’s net assets, Payne said.

“In the last 10 years, in venture capital the average return has effectively been 0% IRR,” he said, speaking broadly of industry statistics. “To me, I’d argue, that’s not a very good use of my money. As with everything, averages disguise the best in breed, and there are a couple that have done okay. But a good diversification of VC is by definition going to drag you back to zero,” he explained. “The buyout model has returned better numbers but the LBO model is, I think, challenged going forward.”

LMS’ lower mid-market focus means it is less reliant on credit markets to finance deals, he said. “There are still opportunities to do acquisitions – ever since Adam bought a business there’s been takeovers going on,” he quipped. “So if you do the right ones and you know what you’re doing, which is all about doing them in the industries [you know well], I think you can always generate north of 15% IRRs and we don’t have to have leakage upon leakage where we invest in a [general partner’s fund] and they take their 2-and-20.”

According to sister data provider Private Equity Connect, LMS has backed venture firms including Madrona Capital and Boston Ventures as well as private equity firms like Amadeus, Inflexion and Spectrum Energy Investors. Those investments are poised to return a good deal of cash in coming years, Payne said.

“While my focus going forward is to do direct investments and no longer funds, we are at the backside of the fund lifecycle and so … we are going to be receiving a material amount of dollars in the next five or six years … which affords us the ability to become very active in the direct positioning.”