UK SME specialist YFM Equity Partners has collected £22 million (€28 million; $31 million) for its new YFM Equity Partners 2016 Fund, according to a statement from the firm.
YFMEP 2016 is seeking to raise a total of £40 million to invest in opportunities which no longer qualify for venture capital trust (VCT) investment.
YFM has held a “dry close” on the vehicle, which means the capital collected can be used to invest alongside other YFM vehicles or in collaboration with other GPs. It has yet to hold an official first close.
“It is likely that the first deal might be alongside someone who we’ve co-invested with previously,” YFM managing director David Hall told Private Equity International.
The vehicle’s investor base at present is predominantly UK-based pension funds with some capital from UK family offices and high net worth investors.
YFMEP 2016 is the first in a series of funds planned by YFM which will have investment periods of two years.
“We’re driven by investor needs,” Hall said. “This cycle appears to suit them.”
The fund will only charge fees on drawn down capital. Committed LPs have yet to request that YFM put in a GP commitment, Hall said.
“The fact that we’re saying there’s an opportunity to deploy the capital quickly and that we’ve got a fee structure in place that reflects that has meant that they’ve not [asked] for a GP commitment because they can see that we’ve kind of done it in a different way.”
YFMEP 2016 has been created in response to recent changes to VCT legislation introduced as part of the 2015 Finance Bill in the UK which prohibit VCTs from funding management buyouts and acquisitions. Additionally, companies must have made their first commercial sale in the past seven years, or 10 years for ‘knowledge intensive’ companies, to be eligible for VCT investment.
This has left a gap in the market for a fund of this size, which is looking to invest between £2 million and £10 million in around 10 businesses.
“It’s an underserved space. What market that there was there, quite a lot of that was done by venture capital trusts, they were investing £300-400 million a year in management buyouts in the space, and aren’t anymore,” Hall said, adding that the space YFM is focused on is too small for the vast majority of private equity firms.
“The lower mid-market tends to start really at £10 million equity cheque plus, and probably nearer £20-£100 million. £50-£200 million is where there’s a more competitive landscape.”
Early stage investor Panoramic Growth Equity closed its second vehicle on £65 million last month aiming to capitalise on the gap in the early-stage market now VCTs are banned from conducting buyouts, as reported by PEI.