Deal Mechanic: Bridges works it out at The Gym

In 2006, Bridges Ventures noticed some inte-resting facts about the UK health and fitness market: only about 12 percent of the population were signed up to a gym, yet membership levels were already almost static. UK gyms also happened to be the most expensive in Europe. As a firm with a “social mission”, Bridges saw an opportunity to introduce a more affordable gym model to the UK, which could foster better health and wellbeing in underprivileged areas – while also generate great returns for the firm and its investors.

The Bridges team visited the US and Germany and found a lower-cost, 24/7 gym model; co-founder and managing partner Philip Newborough felt that this could (with a few changes) be adapted to suit the UK market.

The first branch of The Gym opened in Hounslow in 2008. By 2012, the chain had 37 branches – and with plenty more growth on the horizon, and Bridges decided to think about an exit. “The business plan for 2013-15 was to accelerate growth to 18 to 20 sites per year,” says Newborough. “That required finance beyond our means, so [it was] the right time to exit, at least partially.”

Bridges did so in June this year, selling The Gym Group to Phoenix Equity Partners for almost £100 million – representing a 50 percent IRR and a 3.7x multiple on its original investment. It then rolled £21 million of its equity back into the business, in order to retain a 25 percent stake. The group plans to roll out a further 85 to 90 sites in the next three years, turning it into what Newborough describes as “a very substantial business around the UK”.

So how did The Gym manage to bulk up so quickly?

1.
REFINING THE CONCEPT

As an investor, Bridges is focused on delivering social impact as well as financial returns. So one of its most important priorities for the new gym chain was to get the membership price right; after all, this is what had put other gyms beyond the reach of its under-served target market.

“We felt that a membership price of £15 a month made the model accessible even to students and those on benefits,” says Newborough. Of course, this placed a real strain on the rest of the model. “We found ourselves effectively reverse-engineering a business that could deliver financial returns at this aggressive price point.”

As well as removing elements from the US model that wouldn’t have worked in the UK – like mixed changing rooms and coin-operated showers – Bridges was also forced to strip out non-essential gym add-ons like swimming pools, creches and restaurants, focusing instead on providing quality gym equipment.

Its decision to ditch what Newborough describes as “restrictive inflexible contracts” also removed a common sticking point among potential customers, as did its pioneering approach to opening hours. “The 24-hour element is intrinsic to the product,” says Newborough. “In some locations, up to a quarter of the membership are using The Gym when other gyms are closed.”