A piece of artwork adorns a boardroom wall at Graphite Capital's Berkeley Square headquarters in the heart of London's exclusive Mayfair district. It's a striking piece that appears open to many different interpretations. But when Graphite senior partner David Williams enters the room, he points out that the meaning is in fact surprisingly specific. What you see, he explains, is a visual representation of the emotional ups and downs of a management buyout. At the heart of the piece – a reassuring presence amid the apparent chaos around it – is a sturdy strip of graphite. Suddenly the meaning becomes clear.

Somewhat less evident is the extent to which Graphite's calm-inducing credentials will be put to the test by market conditions. In the UK upper mid-market where the firm plies its trade, opinions about current and future prospects have perhaps never been more divided. Anecdotal evidence in the form of various discussions PEI has had with mid-market operators in recent months find some bullish, others downbeat. A recent survey of 100 UK private equity practitioners by financial services firm Grant Thornton found 90 percent predicting deal volumes would hold or increase over the next 12 months. The author of the report noted that he considered such confidence “somewhat surprising”.

He's not the only one. Rod Richards, Graphite managing partner, says: “We've been calling the top of the cycle for ages, but this feels like it.” His opinion carries weight. A veteran of the UK mid-market, Richards joined Foreign & Colonial Ventures in 1986, eventually going on to lead the management buyout of the firm from investment group Foreign & Colonial in 2001 – at which point it adopted the Graphite Capital moniker. As someone who has been operating on the industry frontline for more than 20 years – including through the dotcom boom and bust, when F&CV notably declined to join mid-market rivals in flirting with technology investments – Richards knows that when people start entertaining the idea that good times can last forever, it's best to exercise extreme caution. He and senior colleagues at Graphite firmly believe that what goes up must eventually come down.

We have been backing retail rollouts for the last 15 years, which may allow us to understand better than others what makes a rollout successful and when we have an opportunity to create something that fits the template

Markus Golser

Williams lists a number of reasons why it's safe to assume that choppy waters will soon be lapping at UK private equity's bows. Among them: five interest rate rises over the last year (which are “yet to show their teeth”); the “sub-prime virus spreading into the debt markets”; and raw material increases that have not yet been felt all the way through the supply chain, but eventually will (“retailers will try and keep their prices down, but something will have to give”). As an aside, one might add to that list the widespread summer floods and outbreak of foot and mouth disease as unsettling developments for British businesses and consumers alike.

Williams believes “there is always a time lag before the pain is felt”. This is an important point. He and his colleagues are of the opinion that the only reason why bullishness persists in the UK mid-market is that the enemy has not yet shown its face. Unaware of impending danger, some rival firms are sleepwalking towards the edge of a cliff. “Vendors are still holding out for high prices, and some people are still bidding those prices,” says Williams.

Graphite, by contrast, has been keeping its powder relatively dry. Having made eight investments last year, the firm completed only its third in 2007 shortly after this interview was conducted. The £22 million (€32 million; $45 million) buyout of The Third Space Group, a chain of health and fitness clubs, followed earlier investments in Dominion Technology, a Scottish supplier of speciality gases, and Landscove and Riviera Bay holiday parks, an add-on acquisition for portfolio company Park Holidays.

The firm's tight grip on its wallet is all the more notable given that its coffers are bulging. In May this year, the firm raised £555 million in total, comprising the £475 million Graphite Capital Partners VII main fund and an £80 million co-investment fund. Graphite turned down the opportunity to raise considerably more. It was a decision that caused a few problems. “The difficulty was that the fund was not going to be much bigger than our previous fund [a £375 million vehicle that closed in 2003], so it was difficult to offer increased allocations to some but not others. In some cases we had to give investors a mere 20 percent of what they wanted,” says Richards.

Further to this, restricting yourself to a modest increase in fund size mitigates against diversification of the investor base: something that most private equity firms are keen to do in a benign fundraising market. “Diversity of investors is important in terms of the next funding round – you're more protected if the fundraising environment is more difficult in some geographies than in others. For instance, in 2003 it was very difficult to raise money in the US,” he points out.

Rather like a sports coach whose selection problem stems from an abundance of talent, accommodating rampant demand is a headache for Graphite that others would, of course, love to have. After all, fundraising successes in the UK mid-market have not been recorded across the board. While popular funds such as Graphite have enjoyed swift and relatively painless processes, others have struggled: a polarisation, in other words, between the haves and the have-nots.

So how did Graphite secure its favoured status? One answer to that question is simple. Given the resource constraints at many limited partner groups, a solid long-term track record together with headline-grabbing returns on individual deals can go a long way towards pushing you up the priority list. From around 100 investments made since 1991, Graphite has since realised approximately two-thirds of them at a multiple of 3.5 times cost and an annual return of over 40 percent. In addition, the firm has wracked up some impressive homeruns, among them a 10x cash return from the sale of restaurant chain Wagamama, 9.6x from electronic goods retailer Maplin, and 6x from door manufacturer LS Group.

We've been calling the top of the cycle for ages, but this feels like it

Rod Richards

It is perhaps no coincidence that all three of these businesses received investments from Graphite around the period when dotcom businesses were the main focus of attention. It was also, after all, a period when traditional, ‘old economy’ companies were not only seen as hopelessly old-fashioned but were also relatively under-valued. “In the dotcom boom lower price opportunities were available in more traditional industry sectors,” acknowledges Williams.

However, we're told there's more to success in private equity than simply buying low and selling high. In an interview on page 44, City grandee Sir David Walker speaks of the ‘magic’ of private equity and its ability to create pearls from oysters. From where, we wondered, does Graphite summon its stardust? Does it perhaps stem from the contrarian approach to investing the firm demonstrated during the late 90s and early years of the new millennium? Rather than a contrarian investor, says senior partner Markus Golser, “We are more of a fundamentals investor. We want to look beyond short term trends in trading. It's not just about the numbers. People often overestimate short-term profit opportunities and under-estimate the long-term competitive advantages of certain business models.”

Golser suggests that the firm's analytical approach stems in part from the backgrounds of senior team members. While Golser began his career with Bain and Company, Richards once worked for McKinsey & Co, and Williams was an economics graduate. “Our backgrounds can help us gain an understanding of how markets operate, what the competition is, and whether margins are sustainable. I would describe our pre-investment approach as holistic.”

Golser says it's an approach that enables the firm to identify market trends that others may fail to detect. As an example, he points to Sk:n, the non-surgical cosmetic procedures business backed by Graphite in a buyin/ management buyout in January last year. Notably, a large proportion of the business's clients are male. He says: “A few years ago, we wouldn't have invested in Sk:n. But we conducted an analysis of the changing attitudes of British males towards cosmetic procedures and discovered that there was much more willingness than there used to be to seek them out.”

Ski:n was an attractive proposition because, in Graphite's eyes, it was eminently scalable and would enable the firm to carry out a rollout of centres across the UK. Graphite has developed a specialisation in retail sector rollouts over the years – Wagamama and Maplin being notable examples – and is constantly on the lookout for opportunities to replicate the strategy. “We have been backing retail rollouts for the last 15 years, which may allow us to understand better than others what makes a rollout successful and when we have an opportunity to create something that fits the template,” says Golser. “We can pay a higher price because the rollout opportunity justifies it.”

It often reaches a point where the validity of the concept suddenly becomes self-evident, there's a buzz in the room and a sense of ‘let's do this’. When you don't feel that kind of electricity, it raises questions in your mind

David Williams

An important part of the plan is assembling the right management team. Prima facie, Graphite doesn't appear to shy away from some bold judgement calls. With Skin, for example, a whole new team was drafted in, with retail veterans Neil McCausland (ex TJ Hughes, Kurt Geiger and Marks and Spencer) and Andy Randall (ex Staples, Virgin Group and Boots Opticians) at the helm. Also to be found in the team was a reminder of Graphite's consulting bias in the form of Nigel Darwin, the former head of OC&C's retail practice, who became commercial director.

But while there is always an element of chance in hiring a team, Graphite attempts to leave no stone unturned in its efforts to identify suitable candidates. This may be a relatively straightforward process: no easier than in the case of Optimum Care, a care home start-up led by the same management team that Graphite had backed at Avery Health (Optimum took on the running of the five Avery homes that were not part of the deal when most of the Avery portfolio was sold to Southern Cross in April this year). But where Graphite needs to source a team from scratch, Williams says it regularly makes use of psychologists and psychometric testing techniques.

But for all the intellectual rigour his firm brings to the process, Williams acknowledges that the role of intuition in choosing the right management cannot be overlooked. This includes sensing whether the vision for the business is embraced – almost to the point indeed, where a kind of evangelical zeal emerges. Says Williams: “We want to work with people who understand what we've done in the past, are keen on the model, and buy into the rollout. It often reaches a point where the validity of the concept suddenly becomes self-evident, there's a buzz in the room and a sense of ‘let's do this’. When you don't feel that kind of electricity, it raises questions in your mind.”

At a time when private equity's image is labouring to recover from the relentless bombardment of its critics, Williams' identification of “mutual enjoyment” as the bedrock of a successful relationship between manager and investor is disarming. He says Graphite's development of good relationships with its managers is fostered from the outset by the existence of an internal investment committee – the manager is effectively pitching to the Graphite team members alone, and can rely on swifter decision making than would likely be the case where there is external input. Any LP concerns about the absence of checks and balances at the initial investment stage are countered, he says, simply by reference to the firm's out-performance.

Graphite also seeks to support portfolio companies on an ongoing basis by appointing independent non-executive directors and chairmen to their boards (notably, an embrace of corporate governance that goes further than the recommendations of the Walker report, which offered the view that independent directors were not required by the private equity model). Golser says they act “as a sounding board, advise on and execute changes to the management team, comment on investment decisions and general strategy”. It's a way of overcoming a malaise that he labels the “the loneliness of the CEO”.

Given the volatility sweeping global financial markets and the suddenly less-than-benign trading conditions with which managers are confronted, this malaise may be spreading fast. Nothing, after all, makes a CEO feel more lonely or vulnerable than the threat of a downturn.


Founded: 1981 as Foreign & Colonial Ventures (became Graphite Capital in 2001)

Office: London

Typical deal: MBO, MBI, replacement capital and development capital transactions worth between £20m and £200m

Sector interests: Retail and consumer; manufacturing; services and distribution; financial services; healthcare; leisure and property

Key personnel: Rod Richards (managing partner); Stephen Cavell (senior partner); William Eccles (senior partner); Simon ffitch (senior partner); Markus Golser (senior partner); Jeremy Gough (senior partner); Andy Gray (senior partner); David Williams (senior partner)

Most recent fund: £475m Graphite Capital Partners VII (plus £80m co-investment fund for larger deals), closed May 2007

Realised investments include: Computacenter (IT hardware reseller); Go Plant (provider of road sweepers); Jane Norman (women's fashion retailer); Sealine (luxury motor cruisers); Sodastream (drinks manufacturer)

Current portfolio includes: Golden Tulip (three and four star hotels); Groucho Club (private club operator); Huntress (recruitment business); Park Holidays (holiday homes and caravan parks); Tileco (ceramic tile distributor)