When UK mid-market firm ECI Partners was in the process of raising its ninth buyout fund in 2008, both the firm itself and its investors recognised that although ECI had proven itself time and again to be a great buyer and seller of businesses, there was a need for something more substantial in between.
At that time, Lewis Bantin joined ECI to start what became the Commercial Team and has since grown to four members. Set up to offer CEOs and management teams tailored support and a collaborative delivery style, the team serves as a catalyst to help portfolio companies bring more of their growth ambitions to life.
And the approach clearly works. The Commercial Team has worked on all 15 investments in the ECI 9 portfolio and the five investments to date in ECI 10. So far, ECI 9 has exited six portfolio companies and has delivered a total multiple of cost of a staggering 4.5x.
Private Equity International caught up with Bantin and Garrood to find out more about ECI’s winning value creation formula.
What’s the Commercial Team’s goal in a nutshell?
LB: We’re trying to help the management teams we back do more and do it faster. It could be turning M&A from a pipedream into ‘here’s a list of targets we’ve met and profiled that we think would fit’. Or developing a strategy for getting into the US market – who would we do that with, how would we do it, what’s it going to be worth? It’s all about taking great ideas the businesses have, picking the ball up, running with it, seeing whether there’s really something there, and then backing it up with resources and investment to take it forward.
We’re finding in the PE market that the pressure to do more and be more assertive about what we do has increased. When we sit in front of the investment committee as the case team, we need to believe we can achieve better yields on pricing, drive new organic sales better, that there is an M&A strategy we can put in place. We’re more and more looking at those upsides, and rather than just being paper ideas, we have to really put a bit more meat on the bones and deliver.
If management teams are behind the expansion ideas, what does the Commercial Team provide?
JG: Ultimately all the businesses we invest in tend to have good headroom to carry on doing what they’re doing already, and we want first and foremost our management teams to focus on achieving that.
If you take acquisitions. By definition, we are functional specialists in that area: what we do for a living is sourcing, diligencing and doing deals. But with a couple of the add-on acquisitions at Citation, we were able to be involved both pre- and post-deal, helping on the integration. Experience tells us that one of the biggest risks of an acquisition is that it can divert attention away from the core business to the acquisition and the underlying business can suffer as a result. We’ve seen management teams do an acquisition and think it will take care of itself, and before they know it they’re driving halfway across the country to look after the acquisition and the core business stutters.
I can think of a lot of examples where with something like international expansion or new markets or pricing, it would just be a project that management wants to do but they don’t have time to get round to. A lot of bigger businesses above our investment size have teams dedicated to corporate development – they have strategy teams, they have process change teams, they have operations teams. The vast majority of our companies don’t have that. An acquisition takes a lot of time so we can help support them and provide that bandwidth.
LB: The aim of our team is to take the list of growth ideas and earnings improvements and work through those, indentifying the ones that are likely to really materially move the needle for the business either in terms of earnings growth or multiple expansion. Getting clarity and focus around the key initiatives is important but it doesn’t stop there. We then get involved and start taking the initial steps with the team, identifying partners, bringing people on board such that we can actually get some real data on the potential. Often that then translates into investment by the company in hiring and building out the business in that area – new products and markets often require that. If we can help nurture that idea, get it going, measure the results, invest behind it if we get traction, then we see that as success.
How does the team function alongside the deal partners?
JG: There are a lot of private equity firms in which the investment team owns the deals, but then halfway through the deal, or at some time after the deal, someone from the operations team will come in. At ECI, we form a combined case team and start building the management relationship early. The management teams that choose to work with us have bought into the overall team from ECI and that includes the deal partner and Commercial Team individual. From the moment ECI thinks a deal is interesting – and it can be quite early on – one of us will join the team and, together with the deal partner, spend the early phases getting to know management.
Management teams like to buy into people and know who they’re dealing with. It’s good to feel like you build a relationship with people over time and they can pick up the phone to you, whereas if there are too many faces it just unsettles people and they don’t feel they can build that relationship and trust. A big part of a private equity transaction is trust and we want to make sure that the management team and ECI case team have built a solid foundation upon which to work together.
LB: One of the aspects of the Commercial Team model at ECI that is genuinely unique is the embedded and integrated role that we have both in the deal and post investment. We have our area of focus around commercial and operational diligence, building a relationship with management, etc., but in the end we sit down as a team and recommend the investment. I think that is still a unique and compelling feature relative to the models we see competitors use in the market.
Why did ECI choose not to have functional experts?
JG: If we only invested in retail businesses that always wanted to internationalise then it might make sense to have an international guy or a retail industry veteran. But our businesses are small, they’ve all got unique opportunities, so having someone who’s in a box isn’t that efficient.
We’ve all got many years of experience working with businesses as they grow and develop. At the small and mid-cap end of the market, companies are transitioning from a position where the CEO can wander round the office and knows everyone’s name to being much bigger businesses. Getting to the next level is going to mean bringing more people on board, letting go of the reins a little, expanding the product range and markets served. That’s what we’re good at helping our companies do, but you can only really do that if you’re there all the way through rather than being brought in on a specific functional topic.
LB: We have toyed with the idea of functional expertise but have concluded that you need a lot of scale to make that work. Inevitably if you build that kind of specific capability, you risk forcing that as your solution when there may be a more appropriate path for the company. For now we have focused on building a team that is focused on what each of our investments needs and who can then harness our resources and network effectively to help them grow.
How has the ECI network directly benefited portfolio companies?
JG: Employment law and health and safety solutions business Citation (sold to HgCapital in 2016) is one where we not only put people into roles that existed already but also created roles that didn’t exist, and I think that’s something ECI is quite attuned to. Growing businesses get to a certain stage where they need a sales and marketing director, they need a CTO. The ECI network came in quite nicely there.
We hired CEO Chris Morris, who we knew and trusted, and he knew and liked working with us, liked our style and approach having worked with us at LateRooms (sold to Tui in 2006 for a 9x return). He then brought in a sales and marketing director, also ex LateRooms. As a board we felt that an HR director was important to shift and improve the performance culture at the business so that was a relatively early hire but one that came from the broader network. Then we also had a CTO who was from another ECI investment, Clarity Blue (sold to Experian for an 8x return).
So in conclusion, the build-out of the Citation team was a combination of utilising our network, hiring a CEO who got our way of thinking, and then him and us filling out the key positions.
How do you ensure the whole company — and not just the management team — buys in to the value-creation plan?
LB: After every investment we run an open-book strategy day, where we’ll get not only the executive team but maybe one or two levels down, and we’ll spend some time speaking to them about what they see as the opportunities, the challenges, the frustrations, and what could be done better. We will put our perspective clearly on the table, ‘these are the things that we thought from the outside as an investor, but this is also what the team thinks’. An output from these sessions is a plan for how we want to take the business forward as a group, where we want to be at the next investment event, and how we measure our progress. That then acts as a roadmap where we as ECI can help unlock a particular opportunity or take away a barrier.
From our perspective it’s helpful if we do work at multiple levels within the business as it helps our understanding of where we can focus to drive growth. I remember with Car Trawler (sold to BC Partners for a 5.7x return), one of the projects our colleague Caroline Dent worked on was working through how Car Trawler on-boarded its new clients. She was doing brown-paper process diagrams for how they hand over a client from A to B and how the pricing and customer services are set. This is a quite deep operational process review, working collaboratively with the team and people in the business to unlock an opportunity.
JG: We don’t rush change. If we have views and we think there are opportunities, we don’t just come in on day one and say ‘right, here’s a list, please get on with it’. We’re collaborative. We give management teams time to breathe.
Value creation can feel like your investors come in and tell you what’s going on. We absolutely don’t do that. If you’re backing management, which we do, you are providing support and guidance, helping them make the most of the opportunity.
LB: We are backing the CEO and are there to help them grow and develop their business, and communicate with their people. We have a three to five year horizon, but we want to make the most of that and ensure we have turned over the stones and properly evaluated the options and opportunities. That’s been a theme since we founded the Commercial Team and one that we will be continuing throughout our 10th buyout fund.
This article is sponsored by ECI Partners. It appeared in the Operational Excellence Special published with Private Equity International in October 2016