Buyouts in the blood

Sandwiched between bustling Regent Street and the vibrant mix of bars and ad agencies that constitutes London’s Soho, Bridgepoint’s London headquarters has an interesting view. Directly opposite the firm’s East-facing meeting rooms is the achingly cool “rock star hotel”, Sanctum Soho. Views of the hotel’s infamous roof garden, and its perhaps more infamous hot tub, have provided – one can only assume – an intriguing distraction from many an investment committee meeting.

PEI visited the mid-market firm twice in March to meet William Jackson, who has been at the firm’s helm since 2001 as managing partner. Jackson is in jovial spirits for our first meeting over croissants and coffee, but perhaps a little distracted. It is not the antics of the neighbourhood rock stars playing on his mind (a tasteful screen around the aforementioned hot tub has recently been erected at Bridgepoint’s request). His attention is more likely on the £423 million (€467 million; $643 million) bid Bridgepoint is launching for listed healthcare provider Care UK.

William Jackson

“Care UK has been on our wish-list for probably five years,” Jackson says the next day, when we meet in his office, “but it has just been too expensive, trading consistently at a multiple of 14 or 15 times earnings. In the downturn this has come off significantly.” Bridgepoint’s bid values the healthcare firm at around eight times EBITDA.

If the bid is successful, Care UK would be Bridgepoint’s second deal of 2010, having already acquired chemical testing group LGC for £257 million in a secondary buyout in February. It would take the firm’s €4.8 billion fourth fund to around 20 percent invested.

What looks like a tin of dog food sitting on Jackson’s office shelf serves as a reminder that Bridgepoint has been at the centre of some of Europe’s notable transactions in the last few months. Foremost among these was the sale of UK retail chain Pets at Home to Kohlberg Kravis Roberts agreed in January. At £955 million, the sale was understood to represent an 11.3 EBITDA multiple based on Pets at Home’s projected 2010 earnings of £84 million. “That’s a high multiple for retail by any measure,” said one source close to the deal at the time.

The investment generated a total return of eight times Bridgepoint’s original investment: something for LPs to celebrate. Indeed, Jackson picks up with some delight the can of dog food, which is in fact an invitation to the Pets at Home exit party. Printed on the side of the “Pets at Home” tin, listed under “ingredients”, are the event details.

PRICE POINT

While Bridgepoint was happy to be on the right side of what could be considered an expensive transaction in Pets at Home, how does Jackson feel about putting capital to work in a market where prices, in spite of the downturn, appear to be as high – or perhaps even higher – than ever? Market participants, while always quick to praise the Bridgepoint franchise, suggest the firm does not shy away from paying high prices.

“Yes, we get involved in auctions and we will pay good prices for good businesses with prospects. Most things are competitive, but we make sure that we are taking intelligent decisions,” says Jackson, pointing out that at the time £230 million was regarded as a high price for Pets at Home.

Bridgepoint invests in companies with an enterprise value of between €200 million and €500 million and is currently deploying its €4.8 billion fourth fund, which surpassed its €4 billion target in November 2008. The firm targets businesses in six sectors: media and technology, business services, consumer, financial services, healthcare and industrials.

Jackson plays down the notion that the amount of committed capital – estimated to be in the region of $490 billion – yet to be invested by private equity firms around the globe, will have a dramatic structural effect on the industry. “I think there is always too much money with competitors,” he says with a wry smile. “And the question of whether there is too much money in the system has been asked every year for the last 20 years. At every point in the cycle people say that there is far too much money chasing too few deals, and I think to some extent this is right.” Access to deals and the ability to get them done is, says Jackson, what sets the best firms apart rather than the prices paid for assets. “We, alongside several others, have set ourselves up to have better access to transactions than our competitors.”

The question of whether there is too much money in the system has been asked every year for the last 20 years.

Jackson points to Bridgepoint’s geographical spread – the firm has offices in eight European countries – as a way of avoiding overheated markets: “Our strategy is to have a really good understanding of the middle-market across Europe and to look at where the interesting countries are to be at any point in time. We try to stand outside some of those overheating markets – where there is an overhang of capital – and look across our six sectors at where the smart places to deploy capital in our space at any particular point in the cycle.”

While it is now a pan-European enterprise, Bridgepoint’s roots lie in the UK, where the group started life as the captive direct investment team of NatWest bank. It really “got going” as a buyout team in the mid-‘80s, says Jackson, with a couple of notable privatisation deals during the Thatcher years: the National Freight Corporation in 1982, and VT Group, then known as Vosper Thornycroft, in 1985. By 1990, the bank decided that some geographic diversity among its investments was necessary and began to establish European offices. By 1998 NatWest Equity Partners, as it was known, had raised £1 billion in external capital.

AN EARLY SECONDARY

In May 2000, Bridgepoint was born from a spin-out in what, says Jackson, was at that time the world’s largest secondaries deal at £670 million, with the financial backing of Lexington Partners, Coller Capital and Hamilton Lane. “This deal was one of the foundations for Jeremy [Coller]’s growth. It was a big winner for him,” says Jackson.

It was Coller’s first major transaction with a bank. “In the end we came up with a highly tailored solution, including a total return swap on some elements of the portfolio,” Jeremy Coller tells PEI. “It’s true to say that it was a very successful transaction, both as an investment and a liquidity solution.”  It turned out that, in order to complete such a large transaction, the secondaries backers had syndicated a lot of the equity out to a group of their LPs, which had the happy effect of bestowing on Bridgepoint an instant LP base including such heavyweights as the $200 billion California Public Employees’ Retirement System.

From the days of the spin-out Bridgepoint has grown to a team of 75 investment professionals across Europe. As one of the “English veterans” of the group, Jackson is in the 25 percent minority fluent in only one language.

Last year the firm expanded its franchise by taking over the direct investment business of Hermes Private Equity. Via its fund of funds platform, Hermes was already a Bridgepoint LP. In taking the business over, Bridgepoint assumed management of two development capital funds, including Hermes’ £300 million Fund III, of which only £56 million has been invested. It took over a team of 10 Hermes investment professionals and instantly gained the wherewithal to move into the lower mid-market for the first time. It was a logical progression, says Jackson: “If you cover the healthcare market, you don’t just look at businesses of €200 million in value and nothing below. You study the whole market. So we always had a pretty good deal flow from the lower mid-market.”

Yes, we get involved in auctions and we will pay good prices for good businesses with prospects

As a former part of Hermes, Bridgepoint Development Capital currently has one sole LP, the BT pension scheme, and is not currently considering bringing in new investors into a separate development capital fund. “We will probably selectively add capital over the next two to three years as we need it,” says Jackson, “but we won’t do a classic fundraise for it.” Interest from LPs has been strong, he adds, because they often find it hard work to access this segment of the market on a meaningful scale. “There is no one that really covers it on a pan-European basis,” he says.

SHAKE-UP

Of the 10 professionals who originally joined from Hermes at the time of the deal, only three remain at Bridgepoint Development Capital. Jackson is diplomatic about the shake-up: “They had a good team, but the question is: what is right for Bridgepoint?” The new division operates as a completely separate business from Bridgepoint but shares the infrastructure and many of the back office resources of its parent. It is headed up by 20-year Bridgepoint veteran Kevin Reynolds and Rod Selkirk, Hermes Private Equity founder and, in a previous incarnation, Bridgepoint’s UK regional head. BDC’s headcount will be up to 14 by the end of the first quarter.

When pressed on the topic of team stability, Jackson is pragmatic. “The downside of team stability is that markets and industries change and that people who were ripe and fit for purpose 10 years ago are not necessarily ripe and fit for purpose in 2010,” he says. “We need to be careful that our resourcing strategy follows our investment strategy and not the other way round.” That said, Jackson points with pride to the retention among the firm’s senior ranks. “We have never lost a partner to a competitor,” he says before touching the wooden table for fear of tempting fate. “And I can’t think when we last lost a director.”

Jackson has buyouts in the blood. His father was in industry and worked for a paper packaging business, Jefferson Smurfit, before acquiring his own business via a buyout in the early 1980s. He subsequently sold this on to energy services firm Hunting. He worked up until his death in his late ‘70s. “I wouldn’t say he was a workaholic, but he had a passion for business,” says Jackson, who, when asked, puts himself in the same category. During his years studying geography at Oxford University, Jackson spent some vacation time working for an industrial coatings firm owned by what has now become CVC Capital Partners. He worked on basic jobs for the finance director, but soon came to realise that it was when CVC visited that the agenda was set. “I’d always thought I wanted to go into industry, but after this I realised I wanted to be on the other side of the table.”

A look around Jackson’s office reveals more than simply a workaholic. Alongside the dog food tin invitation in his office sits a neatly folded blue- and white-striped scarf, which leads to discussions of one of his lifelong passions – Manchester City Football Club – and their prospects for qualification for the European Champions league. Elsewhere, next to the mandatory copy of PEI’s Annual Review and a photograph of his three daughters, sits a mug bearing the lone star of the State of Texas. “It reminds me where some of the money comes from,” says Jackson with a smile.

YOUNG BLOOD

The rapid development of the private equity industry since Bridgepoint’s genesis has changed the way young executives perceive and approach the industry, says Jackson. “I wouldn’t get into private equity today,” he reflects, citing the intensely high academic standards – with Wharton MBAs as standard – of those now joining the industry. Nevertheless Jackson stresses that “private equity is not an academic exercise” and experience matters.

“One thing that worries me in this business is an investment executive in his or her mid-30s with a couple of big winners under their belt,” he says. Did Jackson ever fit into this category? “Definitely yes, but fortunately I had also had a couple of losers under my belt too.” Jackson qualifies this by adding that in those days, with smaller concentrations of equity in individual deals, losses were not disastrous. That does not mean, however, that they didn’t hurt. “When you have a big win – especially with a ‘quick flip’ – you often don’t really know why it was so successful. But when it goes wrong, you really know what went wrong.”

Experience will be crucial for private equity firms and their portfolios as we enter the next stage of the economic cycle. “My formative years were in the boom of the ‘80s and the crashes of the ‘90s,” says Jackson, who cites lessons learned about both about the use and misuse of leverage and the danger of overtrading: when – on emerging from a recession – businesses find they have insufficient working capital to finance increased trading: “As the economy comes back up, this is a real danger”.

Aside from the economic obstacles on the road ahead Jackson has faith that private equity as an asset class has not been endangered by the global financial crisis, likening the current situation to the downturns of previous cycles. “We made a lot of money as a house on the Lawson boom [the UK’s economic boom of the 1980s] and then everything crashed. People started saying that the private equity model was dead.” But while the model survives, complacency must be avoided at all costs. The over-riding message, to which Jackson keeps returning, is that private equity is, above all, “not an easy business”. He likens it to farming crocodiles: you have some very valuable assets, but be sure to handle them with due care and respect.