The UK has been an interesting place to be in the private equity business lately. The macro news has been consistently good. Lenders are throwing money at deals at a time when interest rates are at historic lows. Exit conditions have been highly favourable, with the IPO markets well and truly open for business. And the public relations problems of the pre-crisis era have (Phones 4U notwithstanding) largely faded into the background.
A country that has long been able to boast arguably the world’s most sophisticated private equity market outside of North America is now seen by many investors as a solid growth bet – something that would have seemed a distant prospect as recently as a few years ago.
As a result, many of the UK’s leading mid-market firms have been able to come to market very successfully with new funds. In the last year or so, the likes of Graphite Capital, Vitruvian Partners, Bowmark Capital, Sovereign Capital and Inflexion have all closed big new vehicles, while the likes of Equistone, Exponent Private Equity and Bridgepoint are expected to follow suit before too long.
But one of the most impressive fundraises came this summer, when veteran mid-market group ECI Partners closed its latest buyout fund, ECI 10, on £500 million – after just five months in market. As the list of firms above shows, the UK mid-market is not just sophisticated in terms of experience and supporting infrastructure; it’s also hugely competitive. And that’s especially true today, when some observers think there aren’t enough deals around to absorb all this liquidity (according to the Centre for Management Buyout Research, total UK buyout value in the first half of 2014 was just €8.6 billion, barely more than a third of total exit value).
So has ECI found a way to stand out from the crowd? Or was it just a fortunate beneficiary of a rising tide lifting all boats? In October, Private Equity International went to see ECI’s London-based managing partner Sean Whelan – who led the fundraising process, alongside IR partner Jeremy Lytle – to find out.
THE STARS ALIGN
Whelan admits that the firm did – to some extent – get lucky with timing. “The stars did align quite well for us. We got a sense – at the back end of last year and certainly this year – that the fundraising environment was improving. And internally, we’d set ourselves some milestones at the beginning of 2013: we’d told our LPs that we expected to return a certain amount of capital in the next 12 months, and we really over-achieved on that.”
ECI certainly managed to complete a number of eye-catching exits in the year leading up to the fundraise: most notably the IPO of discount retailer Bargain Booze, which yielded a 4.5x gain, and a 6x return in March from the sale of CarTrawler, an online car rental platform. Indeed, the latter was its biggest ever exit, in absolute terms.
As a result of this deal, and the subsequent sale of card processing company XLN, ECI 9 (the firm’s previous fund, a 2008 vintage) has already repaid about 60 percent of the committed capital – with 13 companies still left in the portfolio. “This is a fund that’s already performing extremely well, and we have a number of other big winners coming down the pipe,” says Whelan. “That was clearly a big factor in the success of the [ECI 10] fundraise.”
In the run-up to the fundraise, ECI had also taken the slightly defensive step of hiring a placement agent for the first time, bringing in Lazard to advise on the process. “As an organisation, we tend to take a reasonably conservative view. We thought we’d have to be in market for longer than we were – and in what we thought would be a tougher fundraising environment, it seemed a good idea to have someone of the quality of Lazard on board to help us. If the market was going to be more challenging, we wanted to be able to talk to more people – and there are only so many hours in the day.”
As it turned out, however, Whelan and Lytle didn’t need much help finding new LPs. “In the event, we got about 80 percent of our capital from existing investors, who on average committed about 30 percent more than last time. That meant we had a relatively small gap to fill – and a lot of the new LPs came from relationships we’d had for some time. So we maybe didn’t need Lazard’s services to the extent we expected.”
However, he says the firm was “very happy” with the work Lazard did, particularly in terms of running the process. “The diligence process LPs go through [now] is much deeper, which means it’s much more intensive for our point of view. That’s another area where it’s useful to work with a placement agent, just to spread the load in dealing with data requests.”
There were no unusual incentives to get LPs to sign up, Whelan says. “One of the things that made the fundraising relatively straightforward is that we replicated the terms from our previous fund; there was nothing different from what people signed up to last time, except that we doubled our GP commitment.” Why did it do that? “Because we believe in what we do, and were prepared to put more money behind it.”
Co-investment was, inevitably, a bigger talking point this time around – but LPs didn’t insist on it, he says. “Co-investment wasn’t a condition; more of a nice-to-have. But the fact that we have offered co-invest in the past and will continue to do so in ECI 10 is important to them. And it works both ways: it enables us to invest in businesses that are at the higher end of our size range.”
That said, he admits that co-investment is not a big part of ECI’s offering; just one of the 15 deals in its previous fund ECI 9 (Clarke Energy) offered any at all. But he says it may happen for ECI 10 – if it can find the right partners. “LPs need to be able to move at the pace we move. When you do co-investment, you don’t want it to get in the way of your ability to do a deal.