UK SME specialist YFM Equity Partners is gearing up to close its YFM Equity Partners 2016 Fund in March 2017.
The firm is expecting to close the fund on around £40 million, its initial target for the vehicle, managing director David Hall told Private Equity International.
YFM held a “dry close” on the vehicle on £22 million in June, as reported by PEI.
YFMEP 2016, the first in a series of funds planned by YFM which will have investment periods of two years, was created to invest in opportunities which no longer qualify for venture capital trust (VCT) investment.
The vehicle’s investor base is increasingly made up of high net worth individuals and family offices, in addition to pension funds and institutional investors, Hall said.
The fund will only charge fees on drawn down capital. Committed LPs have not requested that YFM put in a GP commitment.
Changes to VCT legislation, introduced as part of the 2015 Finance Bill in the UK, 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.
Hall told PEI that thanks to a paucity of capital in this space, “dealflow is treble what it was last year”, and that the fund is likely to be fully invested in less than two years.
YFM has already made two deals from the fund, teaming up with private co-investors to back the MBO of rubber and metal manufacturer Ferrabyrne, and teaming up with Maven Capital Partners to back the MBO of Indigo Telecom Group.
As well as YFMEP 2016, the firm is also investing from two VCTs and its YFMEP 2015 Co-Investment Fund, which invests alongside its VCTs. Overall YFM invests a maximum of £50-60 million per year, around half in buyouts and half in growth transactions.
To handle the increase in potential investment opportunities, and to support its portfolio companies, YFM is recruiting for two investment professionals to join its 15-strong deal team. By the end of March 2018 this team could be as large as 20, Hall said.
At the end of November YFM sold outdoor clothing and equipment retailer GO Outdoors to JD Sports Fashion for £130 million ($161 million; €152 million), generating a total return to YFM and its investors of £23 million, a return of approximately 37x, as reported by PEI.
This followed the sale of President Engineering, which delivered an 8x return, and Waterfall Services, which delivered 5x. YFM has delivered a 3x return from its last 29 exits.