A number of UK lower mid-market firms have done well on the fundraising trail in recent months: the likes of August Equity, Dunedin and Synova Capital have all successfully raised capital.
But not all firms have had it easy. Last year, Gresham Private Equity decided to push back fundraising to 2014. The firm, which started to speak to investors in April 2012, initially planned to target £300 million, a source told PEI last July. However, after speaking to LPs, Gresham decided that investors needed to see a few more exits before they would consider re-upping.
In January, it emerged that Gresham intends to target between £150 million and £200 million for its next fund. It has also reduced its partner base from 13 to seven over the last year. Former managing partner Paul Marson-Smith was among those to leave the firm, despite only moving to the role of chairman six months ago, when Simon Inchley took over as managing partner. This follows a string of departures last year, when five other investment professionals left (none of these exits triggered a key-man clause, apparently).
Gresham 5 will target smaller deals, investing in businesses with enterprise values of up to £50 million – a “less competitive lower mid-market niche”, according to the firm. Inchley argued that the firm’s strength “has always been our ability to identify smaller private companies with high-growth potential through our regional network”.
Gresham’s £340 million Fund IV – which closed in 2006, in a hot fundraising climate – was 45 percent bigger than its third fund, a £235 million 2004-vintage.
One source told PEI that Fund IV was, with hindsight, too large. It pushed the firm into doing larger deals – which have generally been among the weaker performers in the portfolio, our source suggests. That includes its one notable failure: Betts Global, a toothpaste tube manufacturer, which went into administration in 2009 after failing to keep up with debt repayments.
That said, Gresham has enjoyed a number of good exits recently. In January, it delivered a return of “more than 3.5x” on footwear company Hotter Shoes, a source told PEI at the time. Last year, Gresham sold recruitment firm Swift Technical Group for a 2x return and training company 7City for a 3x return. The firm’s third fund, a £235 million 2004-vintage, is understood to have delivered LPs a 2.2x return to date.
Yet fundraising won’t be easy for Gresham, several sources say. One concern is whether – as a result of the lower management fee – the firm will have sufficient capital to complete the strategy, according to one LP source. And after doing larger deals for years, will Gresham still have access to good deal flow at the smaller end of the market?
In fact, with many of the original team gone, it’s hard not to see Gresham as a spin-out, according to one LP source. “Performance is good, but are the people that remain the people that generated that performance?” LPs are more likely to stick with stable managers that they know, rather than backing a team that has changed a lot, the source adds.
Of course, good performance numbers go a long way – and the recent change in strategy is supported by those that know Gresham well, another the first source insists. But all this upheaval will clearly make some nervous. Even this source admits that “clearly the team issues are something Gresham needs to address”.