Too small to fail?

This summer saw another clear winner emerge in this topsy-turvy fundraising market: UK lower mid-market firm Synova Capital racked up £110 million in less than three months, beating its £100 million target with ease. 

In fact, one fundraising market source suggested the firm could have raised twice as much if it had chosen to (though Synova would only say that it was ‘significantly oversubscribed’).

So what was it about Synova’s proposition that resonated with LPs? According to managing partner David Menton, it was a question of focusing on differentiating factors. “It’s about the way we find businesses – a significant proportion of the team focus on direct origination. It’s about the size of deals we target; we think there’s less competition at the smaller-cap, higher-growth end of the market. And it’s about how we help businesses drive sales – by introducing them to new customers, and by targeting specific growth areas.”

It also didn’t hurt that Synova secured an impressive first exit in April, selling dental support services company dbg to The Carlyle Group and Palamon Capital Partners for a 5.8x return after just three years of ownership.

The level of demand allowed Synova to fulfil one of its key aims ahead of the process: to expand its investor base from its debut fund (a £50 million 2007-vintage). “We focused on getting a broad mix of investors – family offices, insurers, pension funds, endowments, funds of funds – across different geographies.”

Menton said his firm didn’t see any signs of unease about investing in Europe – although that may be largely a reflection of the good work of its placement agent (First Point Equity ran the process).

Was Synova not tempted to take more capital, if it was on offer? Menton insists it was their own choice not to. “We want to deliver market-leading returns, and we felt the opportunity to deliver the strongest possible returns 
was around the £100 million mark. We want to maintain the same focus we’ve had for the last five or six years – so investing in companies in a similar size range and with similar market dynamics.” (Although it’s worth pointing out that this fund is more than twice the size of its predecessor, so the size and/or pacing of its investments will clearly have to change to some extent).

Of course, this was a relatively small fund where most of the existing investors were re-upping – so it wasn’t looking for huge cheques. “We already had a strong LP base in place, so by targeting the right investors it became a relatively small gap to fill,” Menton says. “We’re pleased, but we’re not getting carried away.”

Nonetheless, a success story like this ought to give similar-sized groups heart. Not everyone will have an equally convincing story to tell about origination and value creation. But there’s clearly no shortage of investor appetite for this segment, both in Europe and beyond.

As for Synova, Menton says it’s going to be more of the same from here on in. And there’s no shortage of opportunities, he suggests. “I think vendors are a bit more realistic now – they see there’s going to be a relatively slow recovery, if at all, so how long do they really want to hold on? If they’re coming up to retirement age, are they really going to wait around for another four or five years to see if things really get better?”