In June, as the private equity world was emerging from covid-induced paralysis, Vitruvian Partners held a €4 billion final close on its fourth flagship fund. Nearly 70 percent larger than its 2017-vintage predecessor, the vehicle had been in the market for just three months. Monument Group and Evercore acted as placement agents.

In addition to being a rapid fundraise, Vitruvian Investment Partnership IV attracted an enviable list of first-time investors, according to Private Equity International data. The California Public Employees’ Retirement System wrote a cheque for €300 million and the California State Teachers’ Retirement System provided $217 million. New York State Teachers’ Retirement System and Los Angeles City Employees’ Retirement System also came on board. The London-based firm’s strategy involves making buyout and growth investments of between €25 million and €350 million in European mid-market companies. Since its founding in 2006, it has made a name backing some of the continent’s biggest technology success stories.

In November 2016, Vitruvian sold a stake in travel search engine Skyscanner to a Chinese strategic buyer in a deal valuing the business at £1.4 billion ($2 billion; €1.6 billion). In 2012 it invested in Just Eat and went on to exit through a listing in 2014. The online food delivery service has since merged with rivals and Grubhub to become the largest business of its kind outside China, its commercials featuring the rapper Snoop Dogg becoming almost ubiquitous on British television.

Vitruvian’s approach has paid off. According to the latest HEC-Dow Jones Private Equity Performance Ranking, based on analysis of 977 funds raised between 2009 and 2016, it is the third best-performing PE firm in the world after Francisco Partners and Genstar Capital Partners.

Vitruvian today has more than 100 professionals, including 11 partners, across offices in London, Luxembourg, Munich, San Francisco, Shanghai and Stockholm. Its European portfolio is complemented by nine investments in the US and one in China, according to its website.

Despite backing businesses used by millions of people every day, Vitruvian maintains a low profile. This is partly by design. It chose not to feature in this story, and most of the sources who did preferred not to be identified. Based on interviews with those who have invested with and worked alongside Vitruvian, we set out to discover how it has become so successful and who are the brains behind an operation that one source describes as “top-quartile demanding”.

Break with the past

In February 2003, the co-head of leveraged transactions at Apax Partners, Toby Wyles, stood down after 13 years at the firm. He told PEI at the time that although he liked doing deals, he was less enamoured with the task of managing people. “I want to stay close to the private equity business,” he said. “But I wouldn’t want to go to a competitor.”

Three years later, Wyles resurfaced – alongside Michael Risman, a former Apax partner, and Ian Riley, who had been a senior partner with buyout rival BC Partners – as managing partners of a new mid-market venture: Vitruvian Partners. Ex-Apax venture capital and tech investor David Nahama and Mark Hartford, a former finance chief with PEI Media’s parent company Bridgepoint, completed the founding partnership. Marketing documents for the 2007-vintage debut fund, reviewed at the time by PEI, showed the partners’ intention to do the kinds of deals their former firms either no longer wished to or had become too big to do.

Although the sale of, the firm behind the video game Candy Crush Saga, would net Apax a 93x return in 2014, a senior East Coast investment consultant says the firm was already veering away from growth-oriented tech investments and moving towards traditional buyouts when it acquired the business in 2005.

In the marketing documents, Vitruvian’s partners boast an individual track record of 23 deals worth a total of €1.3 billion, achieving a 3.7x money multiple and 60 percent internal rate of return. The documents also emphasise that although the team was experienced, it had yet to see considerable economic upside, thereby hinting at the hunger that any investor looks for in an emerging manager.

“Mike Risman went off and thought, ‘Well, I’m going to continue to focus on that growth-focused stuff,’” the consultant says. “The first fund bought a number of companies that had nothing to do with technology particularly, but at the same time the growth and tech strategy began in earnest. By Fund III, it was really formalised.”

Vitruvian Investment Partnership closed above target on €925 million in February 2008 with support from investors such as Adams Street Partners, AP Fonden 3 and Harvard Management Company. Of the 12 investments made by VIP I, in sectors ranging from online gambling to public relations and television production, one would go on to define Vitruvian in the eyes of many LPs.

Just Eat’s Snoop Dogg adverts have become ubiquitous

In 2012 the firm led a group of investors, including Index Ventures, in making a $64 million investment in Just Eat. Founded in 2001, the Denmark-based business was one of the earliest entrants into the online food delivery market. The 2012 funding round was the company’s third in three years, and raised $129.4 million in total. The proceeds went towards aggressively consolidating a splintered market, with Just Eat making five acquisitions in 2014 and another six in 2015.

In April 2014, Just Eat became the first company to list on the High Growth Segment of the London Stock Exchange –  for businesses with compound annual growth of 20 percent-plus over the previous three years. At the time of the minority listing, it had an enterprise value of £1.5 billion.

PEI reported at the time that the listing of a 25 percent stake had generated £100 million for Just Eat’s private equity backers, with Vitruvian’s 14.14 percent stake making it the largest shareholder. PEI understands that Vitruvian made an 8x overall return on Just Eat, showing that PE firms did not have to take control positions to generate strong exits.

“They’ve got this ‘dynamic situation’ investment thesis: trying to identify cash-generative, high-growth, high-margin, shock-resistant companies,” says one early Vitruvian LP. “Just Eat was a model for how this can work. It became a differentiator, especially in a European context. Who can put big cheques to work in these sorts of tech companies? Apart from Hg Capital, probably only Vitruvian.”

Funds III and IV have two distinct categories of investment, according to marketing documents seen by PEI. The first, “core”, consists of control positions in cash-generative mid-market businesses. The second, “cortex”, is made up of minority stakes in technology companies that are expected to be “synergistic” to the core portfolio. One-third of the core investments made by Fund IV can be in companies domiciled outside Europe. The fund is targeting a gross IRR of 25 percent-plus and a 2.5x multiple over a four-year hold period.

The core investments made by the 2017-vintage Fund III include Netherlands-based cybersecurity company Bitdefender and Israeli e-commerce technology platform Global-e. Cortex investments include AI-driven cybersecurity business Darktrace and gene-based drug company Oxford Biomedica. The latter joined Vitruvian’s portfolio at the start of the coronavirus crisis in February 2020 and has helped AstraZeneca with the development of a vaccine for covid-19.

The popularity of Vitruvian is as much about its low loss ratio as its ability to generate returns. According to a document shared with LPs dated March 2021, alongside an average realised deal multiple of 3.5x, the firm’s impairment ratio across all four of its funds is only around 5 percent of the total invested capital. This is indicative of a growth model based on profitability and revenue growth as opposed to excessive use of leverage.

“People don’t view them as a firm which buys a company, puts on some leverage and it hopefully goes up in value,” the consultant says. “Not many banks would lend against their early-stage investments anyway. The playbook is a real thing. They come into businesses and really enable them using tech.”

A marketing document for Fund IV describes Vitruvian as a thematic investor that targets 10-12 “themes” at any time, normally within the technology, healthcare, business services and financial services sectors. These themes are a closely guarded secret, even to LPs. PEI understands that they are not linked to sectors but are about identifying “patterns” that successful high-growth companies have in common, whether in terms of market themes or individual business models.  It targets companies that are asset-light and experiencing “significant tailwinds” due to technological or regulatory change – characteristics that form part of the aforementioned “dynamic situation” investment thesis.

Helping portfolio companies achieve revenue growth is the main aim. This is to be achieved through entering new markets, rapidly increasing headcount, expanding product and service offerings and, as Just Eat exemplifies, making add-on acquisitions. Vitruvian has also built a “value-added team” – consisting of specialists in technology, digital marketing, recruitment and operations – to assist portfolio companies.

“We’ll bring in accountants [and] we’ll bring in consultants to do interviews with customers or suppliers to understand what’s really going on,” said Vitruvian partner Tom Studd during a filmed panel discussion at the 2017 Startup Grind Conference in Barcelona. “It’s generally the first time these companies have had someone really look at the business from an analytical perspective and say what they could be doing differently.”

Studd said that business does not necessarily have to be profitable, but it should have healthy unit economics, such as a website with a growing number of single-user visits. He pointed out that neither Just Eat nor Farfetch, a luxury fashion retailer, had been profitable when Vitruvian first invested in them.

Top-quartile demanding

Underpinning the playbook is a well-defined, highly demanding culture. Gail McManus, managing director of recruitment firm PER, describes a classic Vitruvian hire as highly commercial and numerate with a strong strategic and consultancy background. She says the firm has done a good job of hiring a similar type of person across its six offices.

“It still has a strong founding culture,” she adds. “It’s very meritocratic and a good fit for someone who wants to stand up and be counted.”

Another senior recruiter says a key part of Vitruvian’s culture is total accountability: “The most junior person in the firm could get a call from the top asking about an email they’ve sent.”

For those who thrive, the payoff can come quicker at Vitruvian than at other firms. Vitruvian has a unique carried interest structure – “the Vitruvian Blend”. It is the same structure for all LPs and involves a hybrid of US waterfall, European waterfall and a final proprietary element that is open to negotiation. This is designed to help junior team members accrue carry more quickly, an inducement that perhaps harks back to the debut fundraise and the sense that Vitruvian’s founding team had been under-rewarded for their efforts at their previous firms.

“It still has a strong founding culture. It’s very meritocratic and a good fit for someone who wants to stand up and be counted”

Gail McManus

The culture appears to instil great loyalty. Aside from changes to the roles of Wyles and Riley, the group of partners and managing directors remains unchanged since the firm was founded. “They’re a young team, very international and very energised,” says one advisor who worked with the firm.

The culture is personified by Risman, who has become somewhat synonymous with Vitruvian since Wyles’s retirement prior to the launch of the 2013-vintage Fund II and Riley’s decision to step away from day-to-day activities. A former rugby player, Risman has been described variously as “very, very sharp”, “occasionally charming”, “physically imposing” and, in the eyes of the LP community, as being like “Marmite”, a British food spread renowned for dividing opinion.

“It’s the same with a lot of the best GPs,” says one LP who negotiated a limited partnership agreement with Vitruvian. “They are not in it to make people happy. They are in it for economic gain. When they negotiate against you, you have to be on your best form to deal with it. But when they’re on your side, when you give them your money, you know they are doing the same thing with their portfolio companies, sellers and buyers of their assets.”

While the “Vitruvian Blend” is a source of tough negotiation, the basic economics of its funds have remained standard. Fund IV falls within the “market reasonable” range of 1.5-2 percent for management fee, 15-20 percent for carry and an 8 percent hurdle, according to pension documents.

An executive from a former Vitruvian portfolio company says the toughness has a strong ethical underpinning: “If you tell them the unvarnished truth, they are responsive and very much of a mindset as to ‘what’s the solution?’ If you are misleading, they can be very, very aggressive. They are super tough but fair.”

The executive says the Vitruvian model is better suited to technology investments than to the traditional buyout deals that accounted for some of its debut fund. The firm’s strength is backing the right people and giving them the support to develop their companies. It is less interested in steering the management team and keeping a close watch over their day-to-day performance.

“The problem is when they’ve got their judgment call on the management wrong,” says the executive. “There isn’t necessarily a structure to fall back on, as there is with other PE firms.”

Vitruvian’s fourth fund has pushed it into an elite group of European growth investors. It is smaller than compatriot Hg but a long way ahead of other challengers. Meanwhile, US tech investors are well represented at the top of the PEI 300 fundraising ranking, with Vista Equity Partners, Thoma Bravo and Insight Partners ranking among the 20 largest worldwide.

“In the US, I could list off the top of my head 20 brilliant technology funds that are probably only doing software,” says a London-based placement agent who has raised a handful of European tech funds. “In Europe, in that size range, there aren’t many funds with particularly good returns.”

Why is this the case and does it show signs of changing? The agglomeration effect created by Silicon Valley has proved highly significant for decades. The local universities attract talented people who go on to create businesses, which in turn encourages a growth mindset. Conversely, “Europeans are value investors”, says one London-based lawyer with experience working in tech and VC. “That means buyout, x amount of leverage, 2x multiple after three years and get out. It’s a different way of thinking and it has to be learned.”

Silicon Valley’s high concentration of people with expertise encourages the development of new ideas and business models. This attracts financiers looking for access to the best investment opportunities. Once a fund makes its mark in that environment, it has its pick of companies everywhere.

“Insight Partners doesn’t even have a London office, yet it is one of the biggest software investors in Europe,” says the placement agent. “That’s what makes it incredibly challenging. Why would I invest with a European tech firm when I could just put my money with Thoma Bravo?”

Peter Read, a partner at Vitruvian, said onstage at the Startup Grind Conference that Vitruvian itself set up a San Francisco office to help its companies expand into the US market, find acquisition targets and explore the deeper pool of potential acquirers.

The pandemic could be a catalyst for change. Combined with heightened tensions between China and the West, it could trigger a process of de-globalisation and encourage the creation of regional tech ecosystems. The normalisation of remote working is already leading top talent to move away from expensive Silicon Valley locations, with Europe a potential beneficiary.

Rising price of entry

Europe’s ageing population means the continent has lacked the demographic promise of Asia and, to a lesser extent, the US, though again the pandemic may bring about a positive shift.

“You have 70- and 80-year-olds using technology to watch their news, communicate with friends and  family, to order stuff online,” says Mounir Guen, chief executive of placement agent MVision. “That’s

For tech investors, the pandemic has driven entry values even higher. This is great for portfolio companies – Vitruvian’s Darktrace is expected to list this year with an enterprise value of £3.8 billion – but less good when it comes to making new acquisitions.

In its latest PE report, Bain & Co states: “The simple math says that GPs buying companies at these prices will have to generate more value if they are to make good on return expectations – and they will have to do so in a highly volatile and uncertain business environment.”

The pandemic has reinforced the sense that every transaction is to some extent a tech deal. And despite tech funds becoming larger and larger, LPs’ appetite for the strategy shows no sign of abating. Until the others catch up, Vitruvian should have no problem finding high-growth, high-margin, shock-resistant European companies to back.