On the record

PEI: How does operational value creation fit into ECI’s overall investment strategy?

Whelan: Our primary objective is to ensure that any of our portfolio company boards has the best resources available to it. We felt the main constraints for any management team was bandwidth – the amount of time managers have – and we wanted to increase this by providing some of our own resources for them. So over the last  four years, we have hired in two ex-consultants, Lewis Bantin and Caroline Dent, to form our Commercial Team. They’ll be joined by a third member in March this year.

At what stage of the investment process do they get involved?

They get involved with companies pre-deal, working alongside our investment team and helping them to understand markets. They then continue their involvement in that company after we have invested, helping to develop operational plans and sourcing M&A targets. Our team is therefore able to work alongside them in a much more credible way.

What kind of areas are they likely to focus on?

One example of what we do for our businesses is to help them think about international growth. So when a company has experienced success in the UK, we would look outside to see where the international opportunities might lie.

If you take our recent investment in Wireless Logic, we backed that business in August last year and it has grown rapidly. It is in a market that is growing at 20 percent plus, the business itself is growing at a rate of 40 percent.

Our investment was very much focused on the UK – but we saw there was a great opportunity in the overseas market. Since we invested, the business has developed plans for expanding in Germany, France and Spain. If a business is proving successful in the domestic market, we often feel there could be a lot more value generated in international markets too.

Is it not difficult for your Commercial Team, as outsiders, to influence strategy at a portfolio company level?

A key differentiator is that the team members are partner-level strategy consultants, who can speak directly with senior executives and senior management teams. The fact they are fully integrated and involved pre-deal means that their credibility is well-established from an early stage, so there is very little resistance to their involvement.

What prompted this focus on operational value creation? Did the financial crisis of 2008–09 play a part?

It has really been a gradual evolution over the past five years. When we looked at it over time, we found the main area where we could add value was in providing extra resources to our investments. We have a well established Chairman who adds experience to the board and complements management teams. The issue is not coming up with new ideas, but the time that managers had to do things. So we created a function within ECI – our Commercial Team – to provide that resource.

It wasn’t a knee-jerk reaction to the financial downturn in 2009. ECI has always been a growth-focused investor; we’ve relied on returns from growing businesses. Of the last six deals we’ve done, the average revenue growth rate of those businesses over the last 12 months has been over 20 percent per annum, while profit growth has been around 30 percent per annum.

We do use leverage, but it is not the primary driver of returns. So we do everything we can to help our businesses grow.