Endless appeal

2014 couldn't have gone any better for UK turnaround house Endless. Over the course of the year the firm deployed almost £150 million of capital. Acquisitions included business supplies provider office2office in what was Endless's first public-to-private transaction, and the firm also sold assets, including bathstore for 5x money.

To top it off, Endless held a first and final close on its fourth fund on £525 million after just three months in market, substantially overshooting the vehicle's initial £400 million target. Even though Fund IV is more than twice the size of its £220 million predecessor, the firm received applications for £800 million worth of commitments and had to turn some investors away.

“We got fantastic support from our current LP base,” Endless founding partner Garry Wilson tells PEI, adding that around 85 percent of investors in Endless' previous fund committed to the new vehicle.

The majority of the new investors Endless accepted into the fund are charitable foundations and educational establishments, in line with the firm's commitment to “completing the circle” – taking steps to mitigate the effect of the job cuts Endless is often pushed to make at portfolio companies.

“It's very important for us to bring charitable foundations into our investor base because if we can generate good returns for them, and they then go and use those returns for good purposes at their end, that to us is part of completing the circle,” Wilson says.

Despite the substantial increase in fund size, Wilson insists any changes in strategy will be no more than nuances.

“You're going to see Endless continuing to do what it's done in the last nine years, which is investing in businesses which have challenges, rolling up our sleeves and getting stuck in,” he says.

Any concerns LPs might have had about the increased fund size are likely to be tempered by the knowledge that Endless itself is the largest single investor in the vehicle.

“When we're sat at investment committee, knowing that the people around that table are going to have to write some sizeable cheques is a very good investment discipline,” Wilson says. “Sometimes we do get it wrong, [and] when we get it wrong I can say to our LPs 'If it makes you feel any better, we lost more money than you did.'”

The high-profile failure of Better Capital-owned City Link, which went into administration on Christmas Day taking 2,356 jobs with it, has shone a light on the risks private equity firms face when backing struggling businesses.

“There's a reason why there's not lots of turnaround funds,” Wilson says. “You get a turnaround wrong, it's a public failure. It's a tough thing to cope with.”

Ignoring the lure of businesses priced to sell, and evaluating a business on a cash rather than a profit basis helps Endless discern which faltering companies are actually viable.

“A profit and loss account can be manipulated very easily,” Wilson says. “Cash cannot be manipulated.”

Endless puts between three and seven of its team into a portfolio company full-time during the first few months of ownership, immediately getting to work on the financial aspects to free up the management team to focus on the day-to-day running of the business. Having a “disproportionately large team” instead of outsourcing work to advisors allows Endless to keep a better eye on its investment, as well as building trust with the portfolio company.

“When we do our own due diligence, when we work in our businesses, it means we rarely get any shocks about what's happening in our portfolio and we know what needs to be done,” Wilson says. “If we're in the business, we're speaking to people, people meet us, they realise that we're reasonable people. We're not the private equity bogeyman. We're the same as they are.”