The listed look

On The Record with Mark Watts, managing partner, Marwyn Capital

Marwyn Capital’s principal investment arm – which lists special purpose vehicles to fund growth and industry consolidation plays – has had a busier 2010 than some fellow private equity firms; to date, it has done five deals and one exit. Co-founder and managing partner Mark Watts tells PEI why the firm prefers its non-traditional approach to buy-and-build deals
What led to the founding of Marwyn in 2003?

We saw a gap in the market between what traditional private equity houses were doing with their portfolios and what listed businesses were achieving on the public markets. The principle differences related to management remuneration and capital structure. Public company managers tended not to have the same level of share based incentives and, as a result, were not focused to the same extent on generating capital returns over a two or three year period. The management might be earning high salaries but there was relatively little of their own capital deployed in those businesses. We saw the opportunity to introduce core private equity principles, focused on share based remuneration, operational involvement and efficient capital structure, into the relatively lower geared public company arena. You just have to have a group of shareholders prepared to allocate a portion of their portfolio to more operationally geared opportunities with a two to three year time horizon.

Why carry out your strategy via blank cheque vehicles?

For one, it’s actually relatively easy to get a group of shareholders to invest behind a public company prospectus relative to a private company shareholder agreement. The public structure gives institutions an opportunity to say “yes” or “no” to capital raisings at various points in the company’s growth cycle. From my perspective that also mitigates risk for us because it means that we must convince shareholders each time we do a deal that it’s the right deal to do, rather than the classic private equity approach of drawing down capital from a committed fund, to allocate as they wish, without further reference to their investors.

The other advantage is that you have a totally transparent structure. All the management incentive, any fees that are being paid, they all have to be disclosed. Our view is that the private equity industry will be forced to become more and more transparent over time. You can also use the listed equity to convince people to sell their businesses, especially if they are not keen to sell out entirely and they want to retain some potential upside. We can pay shares to an owner for part of the consideration. And they will benefit from the value that Marwyn brings to their business as we build it up through the growth cycle.

Where do you fit into an institutional investor’s portfolio?

One of the challenges we've had over the years is growing our own funds under management. Growth has always been constrained by the fact that private equity investors, who should be most interested in our approach, typically put their money into a private equity bucket. And that bucket is strictly defined by the fact that all the investments made though it will be in private companies.

What’s your track record been?

We generate an average IRR on exit of about 50 percent and just over two times cash on cash.

You have mentioned your returns are slightly impacted by Marwyn using less debt in deals than would a typical private equity firm. Do you disagree with the use of leverage?

We actually think that debt can be just as good as equity. There is a general feeling that debt is bad at the moment, which is obviously illogical. And we think that creates a huge opportunity. The challenge for private equity is to start taking advantage of a large number of businesses that the banks have inherited. They will have their work cut out as many of the funds have had their own portfolio companies enter bank ownership. In this context they will struggle to convince the banks that they will be the right co-owner of a distressed business since almost all bank deals require some ongoing equity ownership.

Where do you think the best investment opportunities will be found?

We think that selectively picking up assets from bank balance sheets and from larger businesses that are looking to sell non-core assets will be a significant opportunity over the next couple of years.