Happy to have missed target

When the managing partner of a GP tells you that his firm has ended up wi th the “right number” for its fund at two-thirds of the amount originally targeted, it should automatically activate a journalist's spin filter. And yet it's hard to argue against the theory put forward by Neil MacDougall that the €665 million raised by London-based European mid-market investor Silverfleet Capital for its first fund as an independent entity is not only a good number per se amid a dire fundraising market, it's also more suited to a pared-down new deal arena than €1 billion would have been.

After all, the €665 million is available in its entirety – in contrast to many other fund closings, not a penny of the capital raised has yet been invested. Given the remaining investment period of three-and-a-half years, Silverfleet will be looking to put around €200 million of capital to work per year. According to MacDougall, this is “consistent with our long-term historic investment rate”. With only eight companies in its portfolio, he adds that the firm will have the time to invest in new deals as well as the money.

The €1 billion “aspiration” (as MacDougall describes it) was arrived at when Silverfleet first began talking to investors around the beginning of 2008 – a time when LP appetite may have been on the wane, but was nonetheless much stronger than it is in the first half of 2009. Reflecting on the current challenges to completing new deals, MacDougall says: “We would be worried if we actually had to invest €1 billion in this market.”

Known since formation in 1986 as PPM Ventures, which acted as the private equity arm of UK financial services giant Prudential, the management team bought itself out in November 2007 – though the new name was not unveiled until the following May. Until now, Silverfleet has focused on managing around €700 million of existing private equity investments on behalf of Prudential's UK Life fund.

Statistics produced by Silverfleet suggest that, in many cases, it has done so successfully. For example, it has generated €2.4 billion in proceeds from its last 15 exits, representing 2.9 times cost and a gross realised IRR of 34 percent. Highlights include realising a 6.1 times cash multiple from the sale of Dutch administration outsourcing firm TMF to Doughty Hanson in July last year, and 3.1 times from the sale of Jost World, a German vehicle component manufacturer, to Cinven in June 2008.

Despite this, Silverfleet struggled towards the latter stages of its fundraising campaign. MacDougall relates: “The market was tough. We had potential investors keen to commit who went all the way through to the legal stages – and then December valuations came through for their investment portfolios and they ended up completely sunk by the denominator effect.”

There are eight to ten potential deals we either are working on or know we will be, and pricing is several turns of EBITDA lower

Neil MacDougall

This meant LPs that thought they had headroom to make new private equity allocations suddenly found themselves unable to do so – and Silverfleet was among the unfortunate firms on the fundraising trail bound to suffer as a result. Furthermore, MacDougall adds that certain investor groups were simply off-limits. He says: “There are no endowments in the fund. In general, that source of capital currently has quite a few challenges so we are not unhappy about the outcome.”

However, the fundraising – in which Silverfleet was advised by placement agent Helix Associates – did succeed in attracting 16 new investors alongside Prudential, which committed “around half” of the total. MacDougall says 76 percent of the capital came from UK institutions (including Prudential's substantial commitment), 13 percent from institutions based elsewhere in Europe, and 11 percent from investors in the rest of the world (including Australia and the Middle East).

MacDougall acknowledges that any fundraising today will probably have to seek out sources of capital in new and unexpected places. “It's more fruitful to target state-sponsored entities or newer pension arrangements where they are still receiving strong cash flows and are growing. The Australian Supers [superannuation funds] are in that position, although the Australian dollar has devalued considerably so they're arguably less inclined to invest internationally. It's hard to generalise at the moment.”

The fundraising may have been tough, but MacDougall is optimistic that market conditions over the next few years will mean that the effort was worthwhile. He cites the sale of Jost World as evidence of how price expectations were holding up towards the end of last year, even as the global financial system was threatened with collapse. The sale, which delivered Silverfleet a 47 percent IRR, was completed in October – two weeks after Lehman Brothers went bust. MacDougall also mentions two unspecified deals that the firm competed for but lost – it stepped aside for trade buyers on both occasions after concluding that the price had gone too high.

Fast forward to the present, and MacDougall believes the balance of power has shifted markedly from seller to buyer. “There are eight to ten potential deals we either are working on or know we will be, and pricing is several turns of EBITDA lower,” says MacDougall. “When we sold TMF the debt market was at six times LTM [last 12 months] EBITDA. The new norm is around three times.” Faced with the declining value of comparable companies, MacDougall believes sellers have finally started to acknowledge that “life has changed”.

This, of course, makes no difference if no-one is prepared to sell. However, MacDougall believes that many parent companies will soon find themselves being forced to sell. “We are also seeking to identify assets that are held by distressed parents, acquire them and put capital into them to develop them. It's the same strategy we successfully employed in the early 90s when companies were going through a similar point in the economic cycle.”

In many cases, the strategy will take the form of the “buy-and-build” – a Silverfleet speciality. The firm took this to an extreme in the case of TMF, which completed 55 acquisitions during Silverfleet's period of ownership (between 2004 and the middle of last year). Numerous industry sources have pointed out to PEI recently that adding companies to an existing well-performing platform with a trusted management team has the advantage of offering nervous lenders a high degree of comfort.

If so, this makes Silverfleet well placed to simply carry on doing what it has traditionally done. Plus, it now has a large pile of dry powder – and if that pile could have ended up taller still, no-one at Silverfleet's New Fetter Lane HQ appears to feel hard done by.

Founded: 1986 (as PPM Ventures)

Offices: London, Paris, Munich, Chicago

Total investment professionals: 23

Managing partner: Neil MacDougall

Partners: Kay Ashton (London); James Barton (London); Keith Haslett (London); Geraldine Kennell (London); Ian Oxley (London); Jean-Lou Rihon (London); Gareth Whiley (London); Adrian Yurkwich (London); Maïré Deslandes (Paris); Sebastian Kern (Munich); Guido May (Munich); Guy Petrelli (Chicago)

Target deal size: businesses with an enterprise value of £75 million to £500 million

Target geographies: UK, French-speaking, German-speaking, Nordic, US (in cases where business has substantial European operation)

Target strategies: ‘buy-and-build’; organic growth through roll-out of facilities/stores; geographic expansion

Portfolio: Mueller & Weygandt (dental product distribution); Histoire d'Or (jewellery retailer); Paramount Restaurants (restaurants); TJ Hughes (discount department stores); Azzurri Communications (voice and data services); Sterigenics International (contract sterilisation and ionisation services); Orizon (temporary staffing agency); SUSPA (automotive components)