Deal Mechanic: Baird Capital Partners Europe / Aston Carter

With the benefit of hindsight, buying a financial services recruitment business in April 2007 – just before the onset of a once-in-a-generation global financial crisis – should have been a recipe for unmitigated disaster. Recruiters always do badly in downturns, and this particular downturn hit the financial services industry harder than most.

However, despite these unfavourable market conditions, UK buyout group Baird Capital Partners Europe managed to make a big success of its investment in Aston Carter, a UK-based firm that hired into many of the City’s biggest investment banks (including the ill-fated Lehman Brothers). Within four years, Baird had sold the business to US trade buyer Allegis for a 2.5x return, having increased top-line revenues by 140 percent and almost doubled staff numbers in the interim. Here’s how it managed it.


1. Applying sector knowledge

This is an area that Baird knows well: it has completed 13 deals in the human capital sector, including UK niche recruiters Elan, Capital Consulting, SII and Nigel Wright. Its associated analyst arm (Baird is part of the US-headquartered Baird financial services group) is also very well regarded in this area: it was ranked as the top research firm by Greenwich Associates among small- and mid-cap fund managers.

This specific sector expertise was the main reason why Baird was invited to participate in the limited auction process being run for Aston Carter in 2007. “We prefer limited auctions, both from a procedural perspective and because it means the management team have put in the time and effort to understand our capabilities and our potential value-add,” says Baird portfolio director Dennis Hall. “That makes it easier for us to put resource behind it.”

Ultimately, it also helped to give the firm an edge over the two other private equity groups on the final shortlist. According to Baird, its offer was actually £5 million below that of the highest bidder – a substantial shortfall, given the firm’s eventual equity investment was only £13.1 million. However, the management team of Aston Carter clearly decided that Baird ‘s vision for improving the business outweighed the lower offer price. And its background in the sector was crucial both in informing that vision and establishing its credibility.

 
2. Backing a seasoned management team – and boosting it

That said, Baird ‘s initial investment thesis was – at least to some extent – overtaken rapidly by events.

The deal was signed in April 2007, for a total enterprise value of £42.5 million (Baird took a 51 percent stake, with management taking the balance). A few months later, over-leveraged lender Northern Rock had to be bailed out by the UK government. A year later came the collapse of Lehman Brothers.

In other words, Baird’s ownership of Aston Carter coincided with a period in which the financial services landscape went through a seismic change – one that very few people could have predicted back in the good old days of 2006/ early 2007.

Hall admits his firm had no real sense of the enormity of the upheaval to come: “There was a very positive outlook in 2007; the commercial due diligence was very positive.”

However, he insists Aston Carter was not totally unprepared. “The recruitment business is by nature cyclical; it tends to respond quickly both coming into and out of downturns. So we didn’t plan for a major recession, but we knew there would be cycles. That’s the nature of the business; you have to be able to cope with that.”

The experience of the management team turned out to be crucial, he says. “The good thing was that the management had been through a down cycle before, in the early part of the decade. So they had a good feel for the dynamics.” In other words, having experienced a difficult trading period before – albeit perhaps not on this scale – the senior team was better placed to manage its way out of this one.

That said, Baird was also quick to strengthen the management team. Chief executive (and founder) Sean Zimdahl – “a strong dynamic leader”, according to Hall – continued to run the business. But Baird wanted to build a better support structure around him. “We’re good at working with small to medium sized businesses that are entrepreneur-led and helping them grow,” says Hall. “And a typical part of what we try to do is build infrastructure around senior management. That helped Sean concentrate on the things that were most important to him as the business grew. Up to a certain size, an entrepreneur can do everything – but beyond that, you have to choose which bits you retain control of, and take a more strategic view in other areas.”

One key addition was that of John Hubert, a Baird operating partner and veteran of several previous Baird deals in this sector, who was brought in as chairman. “John was introduced to Sean as part of our pre-deal work and they got on well. He understands the sector, he understands how to deal with an entrepreneurial CEO, and he understands how private equity works,” says Hall (who also joined the board, along with Baird colleague and sector expert Chris Harper).

Another point to note is that Aston Carter used the buyout not only to crystallise some value for senior management, but also to widen equity ownership among the next level of management – thus ensuring more people would benefit from the company’s future growth. This was surely a critical factor in helping Aston Carter to keep key staff motivated and loyal during the tough trading conditions that followed.

 
3. Improving systems and controls

As far as the executive team was concerned, however, the most important change was the appointment of a new CFO (the incumbent FD’s role was changed so he could focus on operations and compliance – an area on which he was spending an increasing amount of time as the company grew.) An interim CFO was brought in initially, and then Baird appointed Stephen Segel on a permanent basis in late 2008. This was a crucial step in improving the firm’s financial and operational controls and reporting, which until that point had developed in a fairly unsophisticated way (i.e. largely based on Microsoft Excel).

Under the new regime, Aston Carter developed both its front-end systems – automated time-sheets for contractors, and so on – and its back-end systems, to improve its financial reporting. There was also a much greater focus on cash flow and working capital management. “It gave the business the information it needed as it grew,” says Hall. This meant that when trading conditions deteriorated, management were better informed than in previous down-cycles. “Their financial information systems were much better this time round, and that enabled decision making because management would know what was going on around the business.”

One important development on the financial side was the renegotiation of the company’s lending covenants. The original deal had included a £16 million senior debt package from Barclays (plus a £7 million working capital facility). But like many private equity-backed businesses that borrowed money in 2007 in the expectation of a certain growth rate, the scale of the downturn left Aston Carter behind plan and in danger of breaching its covenants. Thanks to its new financial early warning systems, Baird was able to see this problem coming, and proactively sought to renegotiate terms with Barclays. This process that was successfully concluded in August 2009.

 
4. Plotting an exit route early

An obvious corollary of these changes was that it made Aston Carter a more attractive proposition to potential buyers – because they’d have much more confidence in the company’s financial numbers and controls.

In fact, an interesting aspect of this deal was that Baird was effectively planning for an exit even before it bought the company. As part of its initial pitch to management, the firm had to present a full investment thesis – including potential exit routes. Indeed, this exit plan helped to inform the strategy: for instance, having decided (based on its own knowledge of the market and that of its advisers) that the most likely acquirer was a generalist US recruitment firm, Baird chose not to try and explore US expansion, to avoid any potential overlap.

It also made it more important to get the company’s systems and process in order as quickly as possible. “We thought a lot about what a corporate buyer would want in four years time, and we had a clear strategy of what the business should look like – financially, physically and in terms of systems and infrastructure,” says Hall.

 
5. Changing the customer base

Baird clearly played a very active role in Aston Carter from day one. To some extent it was forced to, given the circumstances. But according to Hall, this is standard procedure. “We’re not the kind of firm that writes cheques and then sits back for five years. We’re operationally focused – and we have a global infrastructure. That’s very different to other UK mid-market houses.”

Under Baird’s ownership, Aston Carter was able to remodel its customer base, making the business less reliant on the UK market and mitigating the worst effects of the credit crunch. “The crisis hit different geographies at different times: the US first, then the UK very shortly after; then there was a bit of a lag before it hit Europe, then another lag before it hit Asia. So we were able to ride that ‘wave’ and spread our quality people across the business.”

By opening new offices in places like the Netherlands, Hong Kong and Singapore, and persuading some of its best UK-based people to move there, Aston Carter was able to avoid large-scale redundancies. “There was some headcount change: we had some natural wastage, some under-performers left and we eased off on recruitment. But there was no cull, especially compared with some of our competitors.”

But it wasn’t just about switching resource overseas. The business also started selling slightly different things to slightly different customers. “We expanded our scope – we were focused on financial services and the investment banks, and the latter were particularly hard hit. So we moved into other tangential areas that were less impacted, like IT consulting, operations and HR.” In Europe, the firm found itself placing more candidates with large corporates (who were still hiring) than with large financial institutions (who weren’t).

The net result of all this was that Aston Carter became a much more international business. Previously about 85 percent of its fee income had come from the UK, and the remaining 15 percent from Europe. By the time of Baird’s exit, 67 percent of fee income came from the UK, 23 percent from Europe, and the rest from Asia.


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It’s true that Baird sold Aston Carter at a good time. In late 2010/ early 2011, the worst seemed to be over and markets were starting to regain confidence (the business actually managed to beat its target for the financial year 2010-11, and fared pretty well in the subsequent year) – only for conditions to deteriorate again in the second half of 2011.

However, it’s hard to deny that Baird turned Aston Carter into a better, more resilient business – with a broader client base, better systems and controls, and a platform for growth in Asia. New owner Allegis should be able to reap the rewards of this as and when the market picks up.