Mine the gap

Established in November 2005, newly-launched UK private equity firm MST Capital has completed its first transaction with the acquisition of Contour Showers, a UK specialist shower equipment for the elderly and special-needs markets.
 

“Our combined focus will be to use our relative networks as well as Ken and Patrick’s knowledge of leveraged finance to do deals where there is a so-called equity gap, i.e. £5 million to £30 million.” Fred Mendelsohn, MST Capital

Founded in 1959, Contour designs and manufactures shower trays and enclosures for the specialist healthcare market. Contour’s customers are predominantly local authorities, the National Health Service, housing associations, building contractors and plumbers’ merchants.
 
MST Capital co-founder Fred Mendelsohn says in an interview with PEO that the Contour deal came about as a result of leveraging the firm’s network and contacts and “walking the streets and getting your name known”.
 
Although Mendelsohn declines to disclose pricing information for the Contour deal, he says that it is typical of the type of transaction the firm will look to make in the future.
 
“Lots of other firms looked at Contour, which fits the criteria of leveraged deals that we want to do, but had the added complexity of a set of directors who were retiring and therefore would take the form of a management buy-in.”
 
MST Capital was established last November by a team comprising Mendelsohn alongside ex-Doughty Hanson partners Patrick Smulders and Ken Terry. “Ken is a full-time partner at MST, while Patrick is a non-exec and provides more of an advisory role,” says Mendelsohn. Doughty deals that the pair has worked on in previous roles include LM Glasfiber, Geberit, Rank Hovis McDougall, Priory Hospitals, Dunlop Stan, Tag Heuer and Umbro.
 
Mendelsohn himself was a co-founder of Axiomlab, an early-stage technology and alternative energy investment fund that was established in 2000 and has since floated on AIM after more than 30 director and indirect investments in early-stage businesses. Mendelsohn is also chairman of the Creative Capital Fund, a £5 million quoted emtity focusing on early-stage investments in creative businesses.
 
“If Ken and Patrick are on the right side of the spectrum with big deals, then my prime experience is on the left,” says Mendelsohn. “Our combined focus will be to use our relative networks as well as Ken and Patrick’s knowledge of leveraged finance to do deals where there is a so-called equity gap, i.e. £5 million to £30 million.”
 

Mendelsohn: focusing on equity gap in UK and Europe

Mendelsohn says that MST Capital is unusual in that it is investing its own founders’ monies and, where necessary, with friends and family. He declines to disclose the amount of capital available for investments, but says that the firm expects to make three or four deals per year of up to £30 million.
 
While Mendelsohn would not rule out the possibility of raising external funds, he says that this is not currently on the agenda. “Setting up the firm gave us an opportunity to invest our own money,” he says. “We also can be differentiated because we are not looking for an exit to be able to raise our next fund. Also, entrepreneurs like dealing with people who are investing their own money.”
 
Mendelsohn says that the firm will be relatively sector-agnostic, but will utilise its founders’ knowledge of sectors from previous investments, including building products, construction services, healthcare, food manufacturing and some consumer goods.
 
The key, he says, is the focus on what he feels is an under-served ‘equity gap’: “As the smaller funds have gone on to make deals, their fund and deal sizes have gotten bigger and they have moved their focus away. We feel that this is a ripe opportunity to invest in mature businesses in the UK and Europe where there is an opportunity we can support.”
 
Having made its first deal, Mendelsohn is confident that there is more to come from MST Capital. And he is not concerned about competing for deals with other private equity firms. “We don’t know who we’ll be coming up against and competition in this sector is to be encouraged. I am sure in this segment that there are more than enough deals that can come out. Competition is not an issue – we just want to more exciting deals like Contour.”