funding the future SUMMER 2013 journal

The perfect blend? Looking at private equity’s relationship with family-owned businesses

Leading the way Talking Turkey Olympic ambitions New BVCA Chairman Simon Clark We investigate what investment How management teams should be outlines his vision for the year ahead opportunities are emerging in Istanbul learning lessons from London 2012 Introduction Contents Welcome to the fourth edition of the BVCA Journal, in which we introduce a new Chairman and a new Director General

It is a huge pleasure to write the Finally, I believe there is more the introduction to this edition of the BVCA BVCA can do to help private equity and Journal. It is the first to be published houses offer a collective since Mark Florman changed role within message to investors about why this is an the association to become Strategic asset class that deserves their attention Adviser and Industry Ambassador and and a significant share of their money. 10 I had the honour of being appointed I have always been struck by the Director General of the BVCA. sheer diversity of our industry and its I have always This internal leadership transition undertakings. This is reflected in the “been struck by inevitably involves some change but also extraordinary range of activities that the a very considerable amount of continuity. BVCA team engages in. 24 the sheer Under Mark’s leadership, the BVCA has This edition of the Journal reflects sought to broaden the range of actors this, with a focus on private equity diversity of our with whom it connects, both at home investment in family businesses, a and internationally. This is something fascinating feature on the Turkish industry and its that I intend to embed and extend. It is market and an intriguing case study of undertakings no longer enough to assume that being Talaris, a company formerly owned by economically effective proves you’re The Carlyle Group that manufactures ” socially reliable and relevant. cash machines. This edition of the Journal includes An article looking at the recent Budget an interview with Simon Clark, our illustrates that HM Treasury is no longer new Chairman and Managing Partner a cash machine. In my now former role of Fidelity Growth Partners Europe, as Director of Policy at the BVCA, I was who discusses some of the themes that especially proud of our publication The he will spend the next twelve months Growth Initiative, in which 50 private 31 articulating. These are my priorities too. equity and venture capital backed CEOs I am particularly determined to be put forward their ideas for how to revive active in the large part of the United the economy. News Number crunching Well handled Building brands Kingdom that exists outside central This proved to be an influential 04 Private equity news, 20 Exploring the key 31 Examining Carlyle’s 41 Developing a strong London. This is where many individual document not only for this Budget but, I including updates on the budget findings of Somerset Capital’s acquisition of cash systems brand is essential to attracting BVCA members and the majority of UK believe, for the years to come. The BVCA and public procurement rules recent survey business De La Rue and then retaining consumers investee companies are located. has placed itself at the heart of economic I also want us to become even closer and social debate in recent times. It must Taking the hot seat Meat and drink Perfect partners Guest columnist to, and to champion, entrepreneurs, who stay there. 10 New BVCA Chairman 23 Why investing in the 35Looking at Interim 42Liam Kennedy looks have little in the way of an organisation Simon Clark outlines his plans leisure and dining sectors is Partners, an executive interim at the potential investment that can speak on their behalf. Tim Hames, Director General and ambitions for the year ahead increasingly attractive management business landscape of the future

Asset-based lending Turkish delights Mid-market matters 15 The advantages of 24 Evaluating Turkey’s 37 Why the private equity combining asset-based lending investment opportunities and mid-market has continued to tty with a cashflow strip burgeoning economy enjoy robust deal flow Reserve your copy of the BVCA Journal. Editor Barnaby Simons Creative Director Ben Barrett Art Director David Donaghy To guarantee that you receive your copy g e hy: Designer Dean Buckley Picture Editor Johanna Ward Publisher Georgina Beach of the next edition, please email Generation game Right structure Game changing Rob Hammond at [email protected] g rap Production Director John Faulkner Managing Director Claire Oldfield CEO Martin MacConnol o Considering the Outlook for top-line How adopting the t 16 28 38 To advertise in the magazine, please contact BVCA Journal is published on behalf of the BVCA by Wardour, 5th Floor, Drury House, 34-43 Russell Leon de Bono on +44 (0)20 7420 1853 or at h o relationship between private growth is likely to remain weak winning attitude of Team GB can Street, London WC2B 5HA Tel +44 (0)20 7010 0999 www.wardour.co.uk [email protected] equity and family businesses over the coming years help to strengthen your pitch COVER p COVER

2 BVCAJOURNAL BVCAJOURNAL 3 news

News Bank-capital rules Taxing issues tackled

to affect fixed salaries A revised proposal for a Financial As London is one of the main hubs Transaction Tax (FTT) in Europe of euro-denominated transactions, it is The European Parliament and Council was released in February, following likely that the UK will push back hard of Ministers have reached agreement the rejection of the initial proposal by against this provision in particular. on the Capital Requirements IV package member states. EU taxation files require – containing both a regulation and unanimous support from member a directive – that will introduce new states to become law, and a number A number of countries... held capital requirements and remuneration of countries, including the UK, held “ structures for banks. The conditions significant concerns as to the merit of significant concerns as to the on pay have thus far proved the more the proposal, meaning that it could not merit of the proposal contentious, with a cap on bonuses, or proceed in its original form. “variable remuneration”, set to be applied Eleven member states remained in ” to senior executives in the industry. favour of an FTT and took the decision Legislators hope that by limiting the to re-launch the proposal under a amount a senior banker can receive in legislative process known as “enhanced their bonus package to a maximum of cooperation”. This allows a willing one year’s annual salary (this can be to include the cap in the forthcoming group of countries to press ahead with raised to two years, subject to shareholder Undertakings for Collective Investment implementation of a particular file, approval), we will not see a repeat of in Transferable Securities (UCITS) V provided there are at least 9 Member senior executives incentivised to take Directive for investment fund managers. It States on side in Council. greater risks in the pursuit of ever-higher remains to be seen whether private equity The new proposal is heavily modelled returns. The banks, however, maintain and venture capital will be targeted with on the original and, if implemented, that the most likely outcome will be a the same measures when the Alternative would mandate a 0.1 per cent tax on significant rise in fixed salaries. Investment Fund Managers Directive trades of shares/bonds, and a 0.01 per The rules on bankers’ bonuses will comes up for review in 2017. cent tax on derivatives. take effect in 2014, but momentum The industry will take heart that last However, there are certain is growing for similar measures to year the European Securities and Markets differences, including the inclusion of be taken against the entire financial Association broadly accepted that the the so-called “issuance principle”. This services sector. Indeed, the European carried interest model of remuneration would see transactions covered even Parliament’s Economic and Monetary effectively aligns the combined interests if all parties are located outside the Affairs Committee has already agreed of the investor and the fund manager. countries participating in the FTT.

News in brief

Private equity companies interviewees believed their Business bank begins to stimulate commercial interest ESG Framework private equity associations and ready for growth private equity backers were The Government’s ‘business and encourage new lenders in the is published 10 leading general partners ock

Private equity houses are more more likely to increase funding. bank’ has now opened for s t SME finance market. A new Environmental, Social and (GP). The Framework was likely to invest further finance Respondents were also applications. The programme The scheme is available to Corporate Governance (ESG) developed to help GPs better tty i / into their portfolio companies bullish about growth prospects, will see £300 million of public e lenders focused on UK operating Disclosure Framework for Private understand why investors want than banks according to a with 90 per cent planning to money invested alongside businesses, with an annual Equity has been released. ESG-related information, and

survey published by PwC. maintain or increase staff levels, private investors to address the rap g hy: turnover of up to £100 million and A 16-month consultation to help rationalise the types of g o

Flexibility in uncertain times which was up 60 per cent from difficulties faced by many SMEs t who are seeking investment of process involved more than questions that LPs are asking o

reported that 74 per cent of a year ago. in accessing finance. The aim is p h £1 million to £100 million. 40 limited partners (LP), 20 about ESG policies.

4 BVCAJOURNAL BVCAJOURNAL 5 news

Digesting the Budget Pension plans threaten

This year the BVCA did not submit its welcome news, a second phase of the investor flexibility usual recommendations list ahead of the Red Tape Challenge will look at areas Budget, but instead published a more such as infrastructure, key stages in comprehensive analysis. This contained the growth of companies, and business The European Commission has policy recommendations drawing on activities where negotiating the system indicated that it will come forward private equity-backed companies’ is complex. Also in line with our with a legislative proposal insights to inform the Government’s recommendations are forthcoming amending the Institutions policy process and spur dynamic growth. changes to simplify VAT. for Occupational Retirement Several key recommendations of the On business finance, the Government Provision (IORP) Directive in BVCA Growth Initiative – related to has suggested that extensions to the the summer. However, given the labour market, tax and regulation, Funding for Lending Scheme will be the lengthy debate surrounding business finance and industrial policy considered in order to boost lending implementation of the Solvency II – have been taken on board by the further. A new remit for the Monetary Directive – set to further regulate Government in the 2013 Budget. Policy Committee was outlined, the activity of insurance funds on The Chancellor announced a further reaffirming the primacy of price the continent – this timetable is cut in the main rate of corporation stability and inflation targeting, but also likely to prove optimistic. tax, down to 20 per cent from April suggesting elements of a more activist One of the key issues 2014. On the Employment Allowance, monetary policy. The Government has surrounding the review of the deducting the first £2,000 from the also unveiled its plan for the creation of IORP remains the potential for National Insurance bill of every company a UK Business Bank, which will bring solvency capital requirements, originally to continue financing the real economy. will mean many small and medium together about £1 billion of new capital designed for the insurance sector, to be The BVCA will continue to do its utmost to enterprises (SMEs) paying no fee at all. and £2.9 billion of commitments. carried across and applied to pension demonstrate how damaging such a course The abolition of stamp duty on shares In terms of equity finance, an funds. This would severely jeopardise of action could be in the wider pursuit of traded on AIM and other growth markets additional £25 million will extend the the ability of these institutional investors European economic growth. was also one of the recommendations Enterprise Capital Fund programme BVCA put forward. Among other from 2013-2014 to include a venture capital Catalyst Fund, which will invest in funds that specialise in early stage venture capital and are near to close. The BVCA welcomes this move as Green light for it will be of significant support to UK SMEs and it is also integral to the Government’s growth ambitions and European regulations industrial strategy. This year’s Budget significantly supported the digital content production March witnessed the endorsement This announcement follows protracted industry and the aerospace sector. of the European Venture Capital negotiations between the two The Government has committed to Regulation by both the European institutions on issues such as the provide £1.6 billion of funding for an Parliament and Council of Ministers. mandatory use of a depositary for industrial strategy and to take forward designate funds – which no longer Lord Heseltine’s recommendation on appears in the final agreed text – and the creation of a single Local Growth the highly politicised point of where Fund. Announcements that the above- funds and their portfolio companies ock t

the-line research and development s can be domiciled. With these issues tax credit will increase to 10 per cent, now resolved in a satisfactory manner, tty / i and that the Small Business Research e the venture capital industry can look

Initiative will rise from £40 million to g hy: forward to harnessing the potential

more than £200 million by 2014-15, help rap of the new marketing passport and g o

to reinforce the role that research and t achieving greater economies of scale o h

development has in future growth. p across the continent.

6 BVCAJOURNAL BVCAJOURNAL 7 news

New way for Green issues are venture capital trusts top of the agenda

response to the consultation paper Despite extensive engagement with which entities formed part of their CRC and as a result of the representations the Department of Energy and Climate group(s) at that date and establish whether made, the FSA has now dropped its most Change over the past three years, it has the aggregate half-hourly electricity concerning proposals. VCTs, real estate now been confirmed that private equity consumption of those entities during investment trusts and exchange-traded funds and their portfolio companies will the year 1 April 2012–31 March 2013 products will be excluded from the scope continue to be treated as grouped for the exceeded the CRC qualification threshold of the new marketing restrictions. While purposes of the CRC Energy Efficiency of 6,000MWh. If so, firms will need to the question remains open for EISs, the Scheme (CRC). register with the Environment Agency for FSA will consider it further in the light of Under the mandatory UK-wide phase two by 31 January 2014. achieving a “balance between consumer emissions trading scheme, participants Last summer the Financial Services protection and choice”. are required to monitor and record their Authority (FSA) proposed a clampdown The FSA has refocused the proposal to energy usage within a set amount of time, Participants are required on the marketing of unregulated prevent the promotion of non-mainstream known as a ‘phase’. The qualification “ collective investment schemes, including pooled investments to ordinary retail date for phase two was confirmed as 31 to monitor and record their venture capital trusts (VCT) and investors. But it allows firms to market March 2013. Firms needed to determine energy usage Enterprise Investment Schemes (EIS) these products to high net worth or to retail investors. Following the BVCA’s sophisticated retail investors. ” Audit reforms debated Government proposals undertakings for collective investment in transferable securities (UCITS) directive will to tighten tax practice be excluded from the definition of a public interest entity. The provision of non-audit services, Ahead of the UK Budget, the until 28 February. The response however, remains a point for discussion and Government proposed new rules emphasised that while we do not object to the BVCA is making the case that banning regarding the procurement process the premise of the proposal we express our non-audit service provision via audit-only to deter tax avoidance and evasion. reservations that some of the proposals firm requirements would be counter- Any supplier bidding for central were disproportionate and discriminatory. productive. The current proposals from the government contracts worth The European Commission’s proposal to European Commission would also require £2 million or more will now be strengthen the requirements for the statutory mandatory rotation of auditors every six required to make a declaration of audit on the financial statements of public years, although MEPs are proposing to self-certification regarding their interest entities is currently under discussion increase this to a longer period. tax compliance. in the European Parliament and the Council. They have also called for the regulation The rules will also enable The BVCA is working to ensure private equity to be changed into a directive, which would government departments to and venture capital funds are not caught by allow a more flexible implementation by the ock t

terminate a contract if a supplier s proposals through the definition of public member states. subsequently breaches the new interest entities, which currently includes Elsewhere, in the UK, the Competition tty / i tax compliance obligations. e alternative investment funds. A preliminary Commission has published its long-awaited

The BVCA Taxation Committee g hy: vote by MEPs from the Committee on provisional findings on audit competition,

responded to a HMRC consultation rap Economic and Monetary Affairs (ECON) concluding that the audit market was not g o

on draft guidance for such rules, t stated that the Alternative Investment serving shareholders to a sufficiently high o h

which was open for comments p Fund Managers (AIFM) Directive and the enough standard.

8 BVCAJOURNAL BVCAJOURNAL 9 PRIVATE EQUITY PROFILE

Taking the hot seat Managing Partner of Fidelity Growth Partners, Simon Clark has been elected Chairman of the BVCA. Barnaby Simons talks to him about the health of the industry and his ambitions for the next 12 months

Can you summarise your dotcom boom. I kept seeing companies Q career to date ? over in Europe that were just as good, if I trained as an accountant in the not better, that were trading at sensible A UK before moving to the US, where prices and were a lot nicer to deal with. I joined the IT department at Reuters. So after a year, I requested a transfer and The company was in a bit of a mess but have been in London ever since. growing very fast. When the World Wide Web came along, it soon became clear What’s the highlight deal that that it would completely transform the Q you’ve worked on? news business. What became equally Cúram Software has been our clear was that Reuters wasn’t going to A biggest success. The founders change with it. So I left. are a businessman and a technologist. Next I joined a start-up in New York The technologist worked in the Irish called thestreet.com, which provided Department of Social Welfare and was financial news on the web. With my horrified by how badly families in need accountancy and IT background, I were looked after, simply due to a poorly ended up being CFO, CIO, then Head of aligned information network. International for this tiny business. After Cúram looked at reworking the model we took the company public, I left. of welfare provision by using technology We’d raised money from some very to bring together all of the government good venture capitalists and I learned services available, centralise resources about venture capital from some real and properly address the needs of masters. I found it fascinating how you vulnerable families. use a little bit of capital and an awful When we invested, it was a tiny lot of time to help a fledging business business. We invested $10 million and succeed. I started to think maybe this was made a really life-changing return on that n 2012 n so in the line of work best suited to me. investment. We worked with the team to ob

R Before I knew it, the phone was help the company grow, go international, ll ringing. It was Fidelity asking if I wanted build partnerships with companies such hy: Bi hy: to join their venture capital operation in as IBM and generally think big. Boston. I spent a year there and found that By the time we sold the company to g rap o t I really liked the job, but I didn’t like the IBM, it was 750 people, $20 million of h o p prices in the US. It was the height of the profit and absolutely dominant in its

BVCAJOURNAL 11 PRIVATE EQUITY PROFILE

to trying to tackle some of the UK’s and positive work, but in the end, we need world’s biggest social problems. It’s a members who feel strongly about a topic to wonderful story and it doesn’t get told get stuck in and help out too. nearly enough. We need to celebrate it. What geography and sector What social issues matter the Q interests you at the moment? Q most to you? I continue to be impressed with the The one that we, as an industry, A Nordic region. The quality of their A have the most to contribute to is job technical skill is impressive and there is creation – specifically for people coming a real sense of being outwardly focused. into the workforce and people coming They immediately try to think of how they back to the workforce. can expand their operations into Europe, An issue very close to my heart is because their home markets are small wounded servicemen. We have people and because they are so cosmopolitan and who have served this country honourably open to the rest of the world. For many over a long period of time, have been Nordic companies, the second market injured in that service and have not a after their home market is the UK. So I trace of self-pity. They have developed think we’re going to see more of them extraordinary skills in the military such coming to London, which can only be a as self-reliance, resilience, teamwork good thing for the UK. and getting the job done. They also have Helping the public understand have to look to investment. What does our exceptional technical skills. “  industry do? Invest. So we have a key role It seems to me that the very least we how we are constructive and to play in this space. can do is to help reintegrate servicemen Out of office a force for growth is essential and women into the workforce. They have Q. Who are your ultimate Q What are you aiming to achieve in the potential to be great employees. Q. What are your interests? business heroes? and a story you need to keep the next 12 months? My wife and I have been The founders of our industry. A I’ve got three agenda points. The Q Why do you think that the actively involved with US I was at a past chairmen’s telling first is to promote the venture capital BVCA is important? politics. We ran the 2008 dinner recently. I looked and private equity story in order to attract The really important work that the Obama campaign in London around the room and thought ” investment into our industry. The investor A BVCA does is to make the case for us and have a friend who has just “Wow”. These people market. We were able to support two mix has changed pretty radically in as an industry. That’s a case that you can become Senator for Virginia. invented an industry that outstanding entrepreneurs who wanted to the last decade. There are whole pools never stop making. If you don’t make it, On the sporting front, I’m didn’t exist and they did it make the world better. of capital that are looking for places to people will misinterpret what we do and a keen kayaker and cyclist. for terrific reasons. They’re invest but they don’t yet know about us get it all wrong. We’ve got to tell our story, Physical activity is essential. I admirable people and have What’s been your relationship as an industry. I really want to make our warts and all. actually can’t think of a good really distinct personalities Q with the BVCA to date? industry’s story the centrepiece of my Helping the public understand how we CEO who doesn’t keep fit. and investment styles. It’s the Three years ago, I was asked to lead forthcoming chairmanship. are constructive and a force for growth You’d go crazy otherwise. secret of their success. A the organisation’s Venture Capital Second, I want the BVCA to be at the and change is essential and a story you Group, which was an honour, great fun heart of a constructive European debate. need to keep telling. But you need to reach and really interesting. I pulled together We’re there to bring our expertise and them, so good working relationships a bunch of the venture capital members our members’ expertise to solve difficult with the media and policymakers are and made sure that their issues were policy problems. We’ve had three years important. Private equity isn’t going to clearly understood and addressed. I was of the Alternative Investment Fund solve the UK’s problems, but there are then asked to join the council and to Managers Directive (AIFMD) and I am areas where it can definitely help. consider taking on the role of Chairman. proud of the work this organisation has I’m really looking forward to the ock t First, you serve as Vice-Chairman for a done to make it work for our members. s chairmanship. This is a membership

year in order to learn the ropes. Working Third on the agenda is impact i / ig organisation. It’s paid for by the members,

with Robert Easton, who I will succeed, investing. Sir Ronald Cohen, one of the g re owned by the members and it’s going has been a pleasure. He’s done a terrific founders of this organisation, has done to be effective so far as the members

job putting the BVCA at the heart of the something that is so entrepreneurial, rob hy: themselves get involved and get stuck in. growth debate. In a world in which we’re ingenious and unexpected. He’s taken We’ve got a great staff doing a fantastic g rap o

not going to get growth from government the techniques that we developed in the t job advocating our interests and making h o

spending or consumer spending, we private equity industry and applied them p the case for the industry. It does so much

12 BVCAJOURNAL BVCAJOURNAL 13 sponsor’s article

Private equity and asset-based lending

Asset-based lending (ABL) is increasingly being used as part of the BVCA Events 2013 private equity funding mix in deal structures when the target company Access global industry intelligence and invaluable networking opportunities has significant tangible assets The BVCA is the leading industry body for private equity and venture capital worldwide. Each year, we host over 5,000 professionals from the private equity and venture capital industry across 40 high-profile events. Centric has the ability and appetite to combine ABL with a cashflow strip, delivering a higher quantum that is so often required in a private equity sponsored deal. Regional Dinner Series 4 July BVCA Management Team Awards 2013 In 2012 we broadened the diversity, reach Exclusive networking dinners Marriott Grosvenor Square, London and spread of our new business referrals, The industry awards ceremony to recognise the delivering 62 transactions from 38 different 13 June Scotland & Northern Ireland Dinner, Edinburgh positive economic and social impact of private introducers. As such a growing number of Adrian Lurie, Partner at Alcuin Capital 19 September North West Dinner, Manchester equity and venture capital-backed companies private equity houses have come to recognise Partners, commented: “Centric Commercial the value ABL brings and have welcomed Finance knows our industry very well and International Series 16 October BVCA LP Summit Centric’s approach. we were delighted to find a partner that Forums with international partners to explore Landmark Hotel, London Over the past 12 months Centric also made approached this deal with so much flexibility challenges and opportunities for investment A forum to encourage the sharing of best the key strategic move to increase its individual and determination.” in emerging markets practice between institutional investors in private equity and venture capital facility limit to £15 million. This has served to Jon Newey, CEO, TileCo Group said: “This September Private Equity and Venture Capital in further strengthen relationships with venture deal represents an outstanding opportunity for Africa/MENA 16 October LP-GP Dinner capital firms and private equity houses looking our business. We had never worked with ABL Spencer House, London November Private Equity and Venture Capital in to fund transactions and refinance portfolio before. Centric was supportive throughout, able An evening of high-level networking and companies through Centric’s ABL platform. to work effectively with all involved parties and, Latin America discussion for senior LPs and GPs One such transaction was backed by Alcuin most importantly, the team quickly delivered a Women in Private Equity Series 17 October BVCA Summit Capital Partners and provided a successful exit tailored invoice discounting line and cashflow Breakfast forums for women in the private Landmark Hotel, London for UK mid-market private equity specialist, facility for TileCo Group.” equity and venture capital sphere to network, The premier one-day European private equity Graphite Capital. Our work with Alcuin Capital Partners, inspire and share insights and venture capital conference tackling the In this instance Centric helped fund a providing both an invoice discounting line and 15 May Institute of Directors, London industry’s global issues, trends and opportunities management buyout of TileCo Group, the a cashflow facility for TileCo Group, is a prime UK’s leading manufacturer of tile, mosaic and example of how ABL is increasingly recognised 2 October Institute of Directors, London 14 November Tax, Legal & Regulatory Conference stone products to the residential developer and by the private equity community as an accepted BVCA Charity Sports Series British Library Conference Centre, London architectural specification markets. TileCo and complementary form of funding for The most comprehensive private equity and trades under two widely recognised and event-driven transactions. Once again, we 25 June BVCA Charity Day at Wimbledon venture capital conference dedicated to the complementary brands: Domus and Surface. were pleased to have been able to prove its The 5th annual BVCA day at Wimbledon offers technical aspects of the industry The Group is actively involved in a wide considerable value. excellent networking combined with a day of variety of premium construction projects tennis at the Wimbledon Championships. 21 November Annual Gala Dinner The Pavilion at the Tower of London within the UK and internationally, including Andrew Rutherford is a Director of Centric ock

4 October BVCA Charity Golf Day London’s exclusive networking dinner s t commercial, office, infrastructure and high- Commercial Finance, an independent Financial Brocket Hall Golf Club, Welwyn including charitable fundraising opportunities end private residential applications. TileCo has Services Group, focused on delivering event-

rap i hy: previously provided its products to customers driven Invoice Discounting and Asset Based g o

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p h revenues of more than £1million. For more information and to book visit: For events queries, contact BVCA Events: Heathrow Terminal 5. www.bvca.co.uk/events +44 (0)20 7420 1800 or [email protected]

14 BVCAJOURNAL BVCAJOURNAL 15 FAMILY FORTUNES

uncommon to find third, fourth or fifth- Family business generation companies where there is no in figures particular desire for an exit. They are run along the lines that the family wants to run them, and they are typically run 47% for the benefit of the family.” believe they can reinvent themselves with each The next generation new generation According to PwC’s Global Family Business Survey 2012, 25 per cent of 78% family businesses surveyed intend consider the family firm as to pass on their shares to the next notable for its strength of generation. However, they will also culture and values bring in professional managers, citing the next generation’s lack of skills as the main reason. Another 17 per cent the business. It may start the process The say they will sell, or float, their family of bringing on people already in the business outright when the time comes. business, or help the entrepreneur The lack of skills perceived in the develop a succession plan.” generation next generation is something Kidson sees as a motivating factor in succession Added value planning, although he is cautious in “When done badly, raising private game saying that private equity provides the equity is all about the numbers – who best answer. will take the least amount of the The prospect of working with private “With the saying ‘clogs to clogs business for the most amount of the in three generations’ in mind, it’s money. That is a dangerous game to equity is a tricky one for any family not uncommon to see more than play,” says Donaldson. business. Rob Haynes investigates one generation not run a business “When it works well you really particularly well. Whether family understand it is a partnership and members would see the solution to you like the people you are going into be a private equity firm running the business with”, he adds. “It means you business is another thing – what they don’t just choose the highest bidder, you could do is appoint a strong chief choose someone who offers something executive and then incentivise them to more than just money. If they can help achieve certain goals.” you grow the business, then the dilution If there are neater results to be found would pay for itself. Some will have seen in bringing on board private equity, the growing pains before and be used to there are benefits in the process itself. that process.” Is the union of private equity and “The priorities around family This is a point taken up by Robert Bringing on board outside experts family business the perfect marriage business are retention and sustainability Donaldson, Head of M&A and Private is something that family businesses of convenience? Beyond the numbers, of the family ownership model.” That Equity at Baker Tilly Corporate Finance: should also shout about, especially when family businesses must try to reconcile culture, says Hastings, can conflict “It does mean a change of mind-set, dealing with the banks for additional their values around long-term business with the typical approach of a private but prepares the business for the next finance. In today’s climate, where small plans with the relatively short time investor, who typically looks to hold an phase, when entrepreneurs want to to medium-size enterprises find it horizons envisaged by private equity. investment for three to five years. retire and there are no natural heirs to hardest to raise debt, family businesses Mark Hastings, Director General of “The typical approach of the current benefit from private equity. the Institute for Family Business (IFB) generation will be to preserve the “Having private equity definitely says: “The fundamental culture of business for the next generation and The fundamental culture eases the path with the bank,” says tty family business is characterised by a generations after that,” adds Robert “ Donaldson. “The private equity partners long-term perspective backed by long- Kidson, a partner at Moore Stephens, g e hy: of family business is would have thought about the business term investment decisions. More often which consults in finance and business and would have done their own due g rap characterised by a long- o

than not, the investment is made from development. “So the mind-set is t diligence before investing, which, h o equity or retained profits. very often a long-term one and it’s not p term perspective ” combined with the layer of equity going

16 BVCAJOURNAL BVCAJOURNAL 17 in ahead of the bank, would definitely would expect to monitor what’s going make raising debt easier.” on in the business and contribute to its operations, thereby introducing a Better governance professional discipline, which may or According to the IFB, which lists the may not be welcomed by the family. Swire Group, Clarks and JCB among its This is a point picked up by 250 members, a lot of family businesses Donaldson. “What private equity is are looking for external expertise about is having the same rights as other to enrich the board and to improve owners, being consulted on the big governance and control. This is an decisions like employing high-salaried observation supported by PwC research, persons (say, north of £100,000), a which suggests some 64 per cent of major piece of capital expenditure, or family businesses have non-family in disposing a subsidiary.” Because they board members. are not in the business day-to-day, they “In a family-owned business, the want to ensure they are not cut out of board would comprise almost entirely decisions you would normally expect family members, some of whom shareholders to be involved in. Yet there might have very little involvement at should be limits to involvement. all – whereas if you look at a private “What they don’t want is to hamstring equity scenario you would get one or the business with too many controls two representatives from the firm, or so that it can’t operate. If controlled people nominated by them, going on properly, the ideal is not to over-restrict the board as non-executive directors,” the family from running the business, says Kidson. These, he explains, rather to protect its investment.”

18 BVCAJOURNAL crunching the numbers Growth equity transactions Somerset Capital’s 2013 A large proportion showed 67% The participants an interest in private Mid-market demonstrated a equity investments in family office survey results buyouts preference for: Europe and the US In early 2013, Somerset Capital The investors in question were 60% conducted a survey of the predominantly located in the family office investors in its UK and Europe, and half Secondary network in order to determine managed assets in excess of 48% investment plans for the year $500 million. Forty-two per cent 83% Turnaround ahead. Fifty-one family offices were pure financial investors, participated, of which 76 per whereas 58 per cent continue to 44% cent were single family offices. own an operating business. Venture capital Equity 37% 26% Private equity Of the family offices 23% surveyed, the average allocation to asset classes was: Bonds Real assets 15% 15% Large buyouts 60% Cash 13% 15%

Hedge Funds 6% Commodities 2%

Did THEY DISPLAY A preference for control OR NON- CONTROL deals? “Family offices are rotating out of cash 46% Control of participants plan to increase 19% and bonds in favour of equities their allocations to private equity (public and private) and real assets” over the next twelve months No preference Sectors of particular interest: 56%

More than half indicated an interest in continuing Existing New Directs to back existing managers, and in continuing to back 58% 58% 58% new managers Non-control 26% Technology Business services Healthcare

20 BVCAJOURNAL BVCAJOURNAL 21 sponsor’s article

Client: Ridgeway Group Ltd. Team: Stephanie Perry Client: Prologic Plc. John Hutchinson Delphine Méhouas Team: Stephanie Perry Mark Metcalfe Suzanne Brooker Details: Acquisition of the Carolyn Butler BMW and MINI A HIVE OF ACTIVITY dealerships of Wood Takeover Details: Takeover by way of Acquisition Group Ltd. and Woods recommended offer of Bournemouth Ltd.

Client: Secret Client: Blinkbox Client: Tristar Client: Lab 21 Ltd. Client: Panalux Group Productions Ltd. Entertainment Ltd. Team: Stephanie Perry Team: Philip Weaver Team: Stephanie Perry Team: Daniel Jacob Team: Andrew Peddie Mark Metcalfe Carolyn Butler Carolyn Butler Sarah Ilic Mark Metcalfe Meat and drink Details: Acquisition of Details: Purchase of Details: Acquisition of Details: Joint venture with Alan Hunt

M7 Worldwide Microgen Mama Group in Disposal Acquisition Acquisition Direct Lighting

Acquisition Details: Sale of company Transportation Bioproducts business Venture Joint relation to Wilderness Festivals Ltd. to Tesco PLC The recent sale of the 3i and Risk Capital Partners backed restaurant chain Giraffe

Client: Act Client: Lab 21 Ltd. to Tesco for £48.6 million highlights the Productions Ltd. Client: MCM Select Foods Team: Andrew Peddie Team: Philip Weaver Team: Andrew Peddie growing attraction of the leisure and dining Samantha Ladbrook Carolyn Butler Carolyn Butler Alan Hunt sector for venture capital and private

Details: Launch of the MBO Details: MBO where Roger Gregory Theatre Fund, Details: Acquisition of Pitmans acted equity investment Investment Introducing Private Equity Partner Acquisition an EIS qualifying shares of for management investment structure T: 0207 634 4634 Myconostica Ltd. E: [email protected] Tesco saw the acquisition as a way to attract more lucrative growth for its supermarkets. Client: 2e2 Ltd. However, it was a surprising acquirer of Client: Maple Leaf Bakery Client: Westcoast Group Client: Karali Ltd. Team: Andrew Peddie a chain of restaurants and it provides an Team: Andrew Peddie Team: Andrew Peddie Client: Ascot Racecourse Ltd. Team: Tim Clark Samantha Ladbrook Mark Metcalfe Carolyn Butler Team: Daniel Jacob interesting additional exit route for venture Details: Sale of the Philip Weaver Carolyn Butler Alan Hunt Details: Advising on capital and private equity houses holding such Cumbria operations Details: Acquisition of Details: Business and assets Disposal Disposal Details: Acquisition of Directors’ duties Compliance Acquisition of Maple Leaf to 31 restaurants of Xayce Ltd. sold to Acquisition investments. Presumably other retail operators Europea Trade NV David Wood Baking Capita Consulting will be thinking carefully about ways to attract customers to their stores or to encourage them to spend a longer amount of time in their Client: John Maude Client: CACI Ltd. shopping experience. Team: Philip Weaver Team: Andrew Peddie Client: Digital Animal Ltd. Another group of restaurants that is Carolyn Butler Mark Metcalfe Team: Daniel Jacob currently up for sale is the Côte chain, which Sarah Ilic Details: Sale of shares in Details: Acquisition of has expanded quickly and reflects the growing Disposal Maudesport Ltd. to Tomorrow Details: Fundraising Acquisition Demco UK Ltd. Communications Ltd. Investment popularity of restaurants that offer simple angel and the venture capital institution at the cooking using good quality ingredients. same time. It is certainly true that the dining habits of The venture capital institution obviously the British public have changed dramatically received huge comfort from the fact that a very over the past few years, with far more people experienced business angel was investing his Contact our busy bees for more information - www.pitmans.com/corporate dining out on a casual basis than ever before. own money and the business angel appreciated This change appears to have survived the the formality and corporate governance that the economic downturn, although there are financial institution brought to the investment. regional variations. We know that the UK Business Angels At Pitmans, we have recently acted on an Association is keen for such investments to be early stage investment in a modern Japanese made and for firms to tap the huge resources of restaurant, acting for the venture capital money in the business angel community. Christopher Avery Andrew Peddie Stephanie Perry Philip Weaver and a very experienced The food and drinks sector requires many Partner Partner Partner Partner business angel, who has numerous interests different aspects of legal advice and Pitmans T: 0118 957 0432 T: 0118 957 0441 T: 0118 957 0248 T: 0118 957 0321 in the leisure and dining sector. handles hospitality transactions involving a E: [email protected] E: [email protected] E: [email protected] E: [email protected] This transaction demonstrates how the number of issues. It is comforting to know that boundaries between the traditional stages of even in these difficult economic times, some funding are being broken down. Instead of an sectors appear to have weathered the storm tty early stage company receiving funding from better than others and are becoming attractive

hy: g e hy: a business angel and then, at a later stage in to acquirers from different markets. its growth, applying for institutional venture g rap o

t capital funding, it made far more sense to Roger Gregory is a partner at Pitmans LLP. Daniel Jacob John Hutchinson Patrick Long Jim Meechan h o Partner Partner Partner Consultant p attract investment from both the business He can be reached on 0207 634 4634 T: 0207 634 4653 T: 0118 957 0444 T: 0118 957 0488 T: 0118 957 0220 E: [email protected] E: [email protected] E: [email protected] E: [email protected]

22 BVCAJOURNAL BVCAJOURNAL 23 FOREIGN AFFAIRS

Turkish delights Located at the crossroads of Europe and Asia, Turkey boasts an expanding economy rife with opportunities. David Turner investigates

Can Deldag, head of the Middle East and North Africa at private equity house Carlyle, has a magic number that should send potential investors spluttering into their Turkish coffees. He predicts that by 2015 national output will reach $1 trillion, compared with only about $280 million a decade ago. “It’s not surprising that investor interest is growing”, says Deldag. “The Turkish economy is doing very well. In particular, its middle class is increasing.” The prospect of tapping into growing consumption by Turkey’s expanding bourgeoisie is a crucial factor piquing the interest of private equity investors – boosting the number of companies with staff on the ground to about 20, according to private equity specialists. The bulk of the money, they say, comes from the US, UK and other western countries, though Middle Eastern players include Eastgate Capital, the private equity arm of Saudi Arabia’s National Commercial Bank. Household spending growth – which helped push real private consumption growth to a peak of 8 per cent in 2011 – is tty being fuelled partly by the expansion of

hy: g e hy: consumer credit, says Yusuf Ozdalga, head of Eastgate’s Istanbul office. Low current g rap o

t levels of consumer and mortgage debt h o

p create “more dry powder for economic growth”, he explains.

24 BVCAJOURNAL BVCAJOURNAL 25 FOREIGN AFFAIRS

What are the middle classes devoting He remains interested in consumer– their cash to? Venture capital money in focused investments, but the slowdown “As the purchasing power of households “ has also increased his yen for increases they will spend increasing Turkey could rise from about opportunities not tied to the economic amounts of money on buying homes, cars $100 million now to $1 billion cycle, including businesses serving and private education,” says Deldag. Turkish companies’ growing appetite Carlyle has reacted by purchasing a in the next five years for improving competitiveness through 48 per cent stake in Bahcesehir Koleji, outsourcing and technology. Mediterra a school education company, for an private equity transactions, according” to has, for example, invested in Mobiliz, a undisclosed sum. The number of its professional services firm Deloitte – more telematics company (see box). campuses has doubled from 11, when the than double the 2009 level. Ozdalga of Eastgate is among several stake was bought in December 2011, to However, one looming cloud in this private equity investors who raise 22, says Deldag, who predicts “another rosy picture for private equity is the concerns about the poor quality of some 10 to 15” in two years. He forecasts that, easing in Turkish economic growth, from Turkish companies’ accounts. However, as middle-class spending power grows, a 9 per cent peak in 2010 – a slowdown Turkey’s new Commercial Code, which private education’s national penetration engineered by the Turkish authorities in is currently being phased in, “is a step in will rise from 3 per cent to 8 per cent. order to stop the large current account the right direction”, since it requires more Deldag believes that, as overseas from spiralling out of control through disclosure than before. interest in Turkish private equity rises excessive imports. Another problem for potential private in the next “three to five years”, the total Ahmet Faralyali, Managing Director equity investors is pricing. Martin value of private equity deals will double. of Mediterra Capital Partners, a Turkish Weckwerth, Partner in the Frankfurt big international players. For companies In particular, “we’ll start to see more and private equity firm funded mainly by office of Permira, says Turkish companies’ with EBITDAs of 3-15 million – his more exits and secondary transactions” overseas investors, warns: “The economic strong profit growth has created high preferred market segment – Faralyali says – the sale of stakes to other private growth we expect in the next five years valuation multiples. modest multiples of six or seven times equity and investment companies. Last will be significantly lower than in the past In food retailing he has seen deals done EBITDA are possible. year witnessed $1.6 billion of Turkish five years.” at multiples of 13 to 15 times earnings Competition remains muted, too, for before interest, tax, depreciation and those even smaller companies targeted by amortisation (EBITDA), compared with six venture capital rather than private equity. or seven in mature European economies. Baris Aksoy, head of Intel Capital for Weckwerth adds: “The difficulty in Turkey, the Middle East and North Africa, persuading Turkish family-owned describes Turkey’s venture capital market companies to sell majority stakes makes as “definitely very nascent”. governance complex.” However, he predicts that total venture Faralyali is able to circumvent the capital money in Turkey could rise from valuation problem, however, by buying about $100 million now to $1 billion in the into companies too small to stimulate next five years, because “digital Turkey is competitive bidding frenzies from the being built today”.

Fuelling the future

In a country with the highest petrol a 50 per cent stake in Mobiliz in prices in the world, it pays to invest November for an undisclosed sum. in cutting your fuel usage. Mobiliz, a Mediterra’s funding has allowed vehicle telematics company, aims to Mobiliz to change its business model help businesses down this road. from the high-value but one-off sale of Telematics is the science of making telematic devices to a slower-burning the best use of one’s fleet through subscription system. ICT systems that show vehicle “The company has to put up $500 ock t

s locations and allow communication or $600 up front per customer, but between truck and depot. This allows the lifetime value per customer of the tty / i e companies to minimise the amount subscription model is higher”, says

hy: g hy: of hours that each vehicle spends on Ahmet Faralyali, Managing Director

rap the road. Mediterra Capital Partners, of Mediterra. Mobiliz services about g o

t a Turkish private equity firm, acquired 80,000 vehicles. o h p

26 BVCAJOURNAL BVCAJOURNAL 27 sponsor’s article

organisation – some that are small and some advisor, or replicating the role of an external that are very large. advisor. In my experience, aligning these in- However, for others, building an internal house teams with external expertise gives the operational improvement capability within most rapid portfolio improvements. the private equity firm is often viewed as So what role should external advisors play? costly and firms that have not made this How do they get involved, to what degree is this investment tend to create value using other done and how is it effectively managed from avenues. For instance through governance the private equity side? mechanisms, adding specific roles to External advisors are used widely by firms strengthen a management team or relying that do not have an in-house operating team. solely on the insight of the deal team to drive However, the private equity firms that do focus. However, some of the largest returns have an in-house team are increasingly using have been secured through using external advisors to complement internal expertise. advisors to augment the management team Advice can be sought in both buy and sell side with their breadth of expertise, skills at diligence phases, building 100-day plans, the opportunity identification (often missed by lifetime value creation plan and implementing incumbent management) and incremental specific operational value creation projects resource capabilities. across the investment cycle. However you work with advisors, it is important that the investor exercises a degree Investors will need to be of control over what is now a three-way relationship between the private equity house, “increasingly hands-on when management and the advisor. Staying close to the progress will help maximise the pace and looking to create value through level of return. operational improvement In my experience, however, the most Finding the right structure successful operational improvement ” programmes do not come out of the private Despite improving levels of mergers the size of the deal and the investment strategy No one operating model is necessarily equity house mandating the use of X, Y or Z and acquisitions activity and the dictate a bespoke approach. What remains better than the other to drive operational advisors. Instead, the portfolio management occasional sign of broader economic true, though, is that private equity investors improvement in the portfolio. From my team should always lead the conversation/ looking to deliver value through this route experience, for those private equity firms decision as it will work hand in glove with recovery, the general outlook for top- must take an active role in their investment. with focused sector preference, it seems that either the private equity house’s internal line growth is likely to remain weak This may mean accessing professionals that success is driven by internal development operational teams and/or external advisors. have operational expertise and can apply this of functional operational expertise. For It should always be the portfolio company Increasingly, the key lever for private in a private equity context – whether these are generalists, the ability to identify and manage that has the final say on whether to take an equity to generate strong investment returns in-house partners or external advisors. a group of specialist advisors is key (whether advisor on board – it should own the initiative is actively driving real internal value Different operating models exist to support internal, external or a combination of the two). and pay any fees. The firm can add a lot to creation in their businesses, with operational operational value creation, and it is not just Having an in-house operating team can be the relationship and has an important role to improvement widely acknowledged as about in-house versus external expertise. extremely valuable. It understands the private play. The firm can illustrate best practice as becoming the primary source of value creation In my time working with private equity, equity process, is more cash-focused and it has a broad vision of what is possible due now that the impact of leverage has reduced. I have seen various structures and none of typically has substantial personal incentives to its experience of working with multiple Improvements in areas such as cost, these operating models are necessarily any for success. The team has the ability to design businesses across different sectors and in quality, service and delivery are clearly better than the other – they just have varying improvement initiatives while considering the vetting advisors. dependent on the skills, appetite and drive of advantages, or disadvantages in some cases, broader context. However, there are several Regardless of the operating model you the management team. However, the private and their involvement in the improvement important challenges that may be faced in deploy, investors will need to be increasingly equity investor can have a critical role in this process differs. What is important is realising this structure, such as the alignment between hands-on when looking to create value through area, both when a management team needs the internal capabilities (and, importantly, the operating teams, portfolio management operational improvement. They need to have to be challenged or, in many cases, where the capacity) in the portfolio business, and the and the deal team, as well as the incentive an open three way dialogue with management management team look for expertise or advice need to fill any expertise or resource gaps. schemes deployed and the transition period of and the experts (whether in-house or external) from their backer. At one end of the spectrum are the private starting such in-house capabilities. in order to seek out and deliver previously ock

This poses the question: how can private equity houses that have built internal s t The involvement of private equity operating overlooked or ‘too hard to tackle’ opportunities. equity best support those management teams operational capability. Some firms have teams at the portfolio level also varies. It can Get it right and the prize can be enormous.

within the portfolio company? invested significantly in the idea of operational rap i hy: range from a fully integrated partner with g o

There is no single formula for creating improvement and have created dedicated t management that has daily interaction, to John D’Arcy o

operational value. Variables such as industry, operating teams at multiple levels of the p h acting as an in-house consultant, to a board Business Manager, Newton Europe Limited

28 BVCAJOURNAL BVCAJOURNAL 29 PORTFOLIO PERSPECTIVE Regional Dinner Series 2013

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Special offer: Book fi ve tables for the price of four across any of our regional dinners. BVCA Members: Well handled Scotland and Northern North West Dinner, £1,755 + VAT per table Ireland Dinner, Edinburgh Manchester £175.50 + VAT per place After acquiring the cash systems business of De La Rue in 2008, Carlyle set about 13 June 2013 19 September 2013 Non-members: building an independent company with great growth prospects. We caught up with The Balmoral Hotel, Edinburgh Hilton Manchester Deansgate £3,495 + VAT per table CEO Tim Robinson, pictured, to find out how this was achieved Guest speaker: Guest speaker: £349.50 + VAT per place Scott Hastings, Rugby Champion Kevin Keegan, Footballer & Manager To register your interest Scott is Scotland’s most capped centre Keegan made an immediate impact for I joined Talaris in 2010, two years I already had experience of private in the 2014 Regional into Carlyle’s investment and so the equity in my role as Chief Executive three-quarter with 65 caps. He played in Liverpool after signing from Scunthorpe Dinner Series please carve-out from its parent was already of Xafinity, the Duke Street-backed 51 Internationals with his brother Gavin United in 1971. In 323 games at Anfi eld, email [email protected] underway. Given Talaris’s business is pension services and employee benefits and they are the only brothers to have spread across six seasons, he scored cash management products and services group. I understood the approach that played together in a British Lions Test 100 goals. He was brave, quick and had primarily for banks, trust among private equity backers take, I appreciated match. A former captain and full-back energy to burn, and despite being only customers is its most important asset. the clarity of purpose and speedy with Scottish Schools, he was fi rst 5ft 8in, he excelled due to his superb So, we had to ensure customers knew decision-making that private equity capped for Scotland a month after his technique and perfect timing. that; although the business was now brings to a business and expectation 21st birthday in 1986. operating under a new brand, we were from management. still offering the same high-quality I also knew Carlyle well and products and service. respected and got on well with the team

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Carlyle recognised that Talaris could reduce costs and improve efficiency. The investor’s view our plan so we brought in Paul The firm hired a COO, Paul Adams, to Fraser Robson, Adams as COO. He set about achieve this. He oversaw the transfer of Associate Director of moving manufacturing to China the manufacture of our core autoteller Carlyle Partners Europe to save costs, but also increase products from Sweden to China. the quality of product and This not only reduced production There were a number of things flexibility of supply. Orders in this costs by 15 per cent, but it also provided we liked about Talaris when business tend not to be steady, greater flexibility in the supply chain we invested. It sells equipment but come in waves, followed by and resulted in an improved product to banks and, as a large and quieter periods. and service to our customers. global asset manager, we have We also had to bring in a Carlyle was also able to support us in relationships with Talaris’s core new CEO after the incumbent our international expansion plans. In customers that we felt we could stepped down through ill health. what I call a “three phone-call leverage to the company’s This wasn’t as dramatic as it moment”, Carlyle’s networks enabled us benefit. It was already a global could have been as Talaris had a to secure one of our biggest contracts. business but we could help it good team of senior managers At the time, we were trying to break expand into new territories. It that could continue running the into the Latin American market. One of was also a primary buyout of an business while Tim settled in. my colleagues based there called me to unloved division – we could see It’s a testament to Tim’s style see if we could connect at a more senior the potential to strengthen the that none of them left during level with Brazil’s largest bank, Banco management team and make that time, so there was minimal do Brasil. operational improvements. disruption to the business. I called Carlyle, which has an One key challenge we faced The exit was interesting as it there. This is vital if you are joining a investment partnership with the bank. was that a couple of weeks after was more a merger of equals private equity-backed business as you I appreciated the The third phone call was from Carlyle the deal had been completed, than an acquisition by Glory, spend a lot of time with numerous “ in the UK to a counterpart in Brazil who Lehman Brothers collapsed. which was the leader in Japan. It different individuals. clarity of purpose and knew a board member at Banco do That clearly had an impact was a good strategic fit because The rebranding was just one aspect of Brasil. After a trip to Brasilia, we won on Talaris’s core customers. Talaris brought international helping Talaris benefit from its speedy decision-making the business. However, this ensured that coverage to the buyer. independence. Historically, it had been that private equity We had similar experiences in China Talaris really focused on liquidity However, we were always operating as a business split into a and India, where Carlyle was able to and cash management to get conscious that there had to be series of discrete product lines. brings to a business support us with contacts and gaining through the crisis. It also meant a good cultural fit. Tim and his However, we needed to shift emphasis access to the markets there. even more focus than usual on team built a good relationship to customer needs so we could provide ” Overall, Carlyle was able to strike the the 100-day plan. with Glory, so we had solutions and outcomes that benefited balance between being a supportive Optimising the manufacturing confidence that the deal was our end-users. for Talaris as a whole and then what is investor and allowing us to get on and footprint was always part of complementary in every way. Instead of measuring our success by, right for its own team. run the business. Talaris in figures for example, the speed of note feeds in This ‘One Talaris’ approach helps our This was true when it came to exit in an automatic teller, we needed to move people think beyond their own niches. March 2012. We had received an Sales coverage on entry: towards looking at what customers Private equity ownership has really approach from Japanese trade buyer wanted and speaking their language: helped in this culture shift. When I Glory. Carlyle was careful to take our 60 countries shorter queues at branches, the right joined, I spent time talking to our views into account as to whether the amount of cash in the branch, better people at all levels and the feedback I cultural fit was right and whether this Sales coverage on exit: security. We could then work back and received was that the speed of decision was the best direction for the business. decide what products and services we making had changed dramatically. As CEO I have to weigh up the benefits 100 countries needed to improve to achieve our goals. Another aspect was that the cash of any new owner to our stakeholders, This required a strategy and culture systems business had previously only as well as our current shareholders. EBITDA growth during change, particularly as Talaris is an been a part of what De La Rue did. Since Throughout the process, Carlyle was Carlyle ownership: international business. We implemented the buyout, employees really felt that able to lead the transaction, involving the ‘OneTalaris’ programme, taking our when we talked about company strategy, my team as needed, but generally 9% CAGR cue from the ‘OneCarlyle’ concept, where cash systems is all we do, it was leaving the management team to which draws together Carlyle’s different completely relevant to their roles – what continue with day-to-day operations. Top line revenue growth disciplines and office network to they did as individuals really mattered Even now Talaris has been sold, we during ownership: support portfolio companies. This helps to the company. remain on excellent terms with Carlyle. employees focus on customer needs as As with Xafinity, there was now a The relationship carries on, albeit on a 1.4% CAGR the top priority, followed by what is right clarity of purpose. From the outset, more informal level.

32 BVCAJOURNAL BVCAJOURNAL 33 Interim Partners ad 185x240_Layout 1 06/03/2013 14:42 Page 1

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34 BVCAJOURNAL BVCAJOURNAL 35 sponsor’s article

SupportingBuyouts Mid-market RECENT TRANSACTIONS THAT OUR PRIVATE EQUITY TEAM HAVE WORKED ON INCLUDE: momentum taking longer to reach agreement on commercial terms, and increased due- diligence requirements. One issue that is arising in deals where the underlying investment has not necessarily followed the initial business plan is ensuring that management’s equity has value in order to incentivise them to perform. It is important to seek to ensure value in management’s stake in a tax-efficient manner. When this is not dealt with until late in the process, Acted for FF&P Private Equity Acted for Peyton and Byrne, the Acted for the Harmoni group, the Despite challenging market or when the make-up of the various on the management buyout of restaurant group, retail bakery largest independent provider of stakeholders is such that it is not possible the specialist property services and events business, on the health and social care services in conditions, the private equity mid- to make the necessary changes in the company, David Phillips. £6.25 million investment by the the UK and an investee company market has continued to see robust capital or shareholder debt structure, Business Growth Fund. of ECI Partners, on its £48 million deal flow, particularly in sectors such inefficient bonuses may need to be sale to Care UK. as technology and healthcare paid. This can have a material impact on value in the hands of management. One reason for activity in the mid- It is therefore important to consider market – while other areas see limited any restructuring that seeks to achieve deal flow – is the ability for private capital treatment very early on in, or equity houses in this space to undertake even prior to, any sale process where this all-equity deals. This removes the may be applicable. requirement for bank debt, which At Speechly Bircham in 2012, we continues to be relatively hard to come have seen that there are reasons to be Acted for Izurium Capital on its Acted for FF&P Private Equity Acted for FF&P Private Equity by. Also, the fact that all-equity deals cheerful in the mid-market and lower $30 million equity investment in on its £4.2 million investment in and Bestport Ventures on the can still deliver significant returns when mid-market, particularly in areas such Emailvision Holdings Ltd, a leader Sohonet, the leading enterprise management buyout of the made, for example, into rapidly growing as technology and healthcare. We acted in customer intelligence and networking, data management and payment technology company, technology companies – where the use on three technology-based private equity marketing automation. co-location hosting provider to the CreditCall. of leverage is not required to generate deals last year (MBO of CreditCall, and film and media industry. the necessary returns – means that these investments in Emailvision and Sohonet) deals in certain sectors can still make a and, in the healthcare sector, we acted lot of sense. on the £48 million sale of Harmoni We are seeing strong competition for group, an investee company of ECI quality assets in the market, resulting Partners, to Care. in hard-fought auction processes We are confident that private equity reminiscent of the height of the boom. As deals in the mid-market and lower ever, this puts the emphasis on seeking mid-market will continue unabated in proprietary deals. 2013 and, while market conditions will ock

Acted for Kevin Stanford on the Acted for the management Acted for a senior industry s t In 2012, the Olympics had an impact remain challenging, there will continue £105 million buyout of All Saints by of Arena Group, an events management team member and on the timing of a number of deals. to be good opportunities for investors.

rap i hy: Generally, deals are taking longer

Lion Capital and Goode Partners. management company, on the BECAP SPV Limited (a company g o

t to complete for a variety of different Malcolm MacDougall

£16.3 million investment by MML backed by Better Capital) on the o

Capital Partners LLP and Sports £32 million buyout of Spicers Limited p h reasons, including financing, the parties Partner, Speechly Bircham LLP Investment Partners. and Spicers (Ireland) Limited.

BVCAJOURNAL 37 PROFESSIONAL DEVELOPMENT

The rewards of a change in mind-set We never quantify Private equity veteran John Handley is a BVCA training “the costliest element of lecturer. He explains the importance of possessing a coming second – the huge winning mentality when pitching to management teams opportunity cost ”

London 2012 will be remembered for for silver medals in private equity’ has performance maximisation within the many things: spectacular opening and never been more accurate. While we private equity firms themselves. closing ceremonies; ‘super Saturday’ with quantify the cost of aborted due diligence Winning deals is not a science but, in its eight gold medals, including one for when a mandate is lost, which in itself is an ever more competitive environment, the nation’s sweetheart Jess Ennis; and substantial, we never quantify the costliest the ability to differentiate between private the even greater achievement of a sell- element of coming second – the huge equity firms can often come down to the out Paralympics that followed. However, opportunity cost. marginal gain approach adopted by Team there was a subtle change, which went In this context, what do we do about it GB coach Sir Dave Brailsford. However, unnoticed, that set certain GB teams apart in the private equity world? In our investee this also assumes that even the basics of – their attitude to winning. companies, we constantly talk around the mandate winning are universally and Compare the cyclists and the board table about capital investment and professionally applied. But as something swimmers. One team excelled and the overall performance improvement. But of a ‘poacher turned gamekeeper’, and other materially underperformed. The my experience is that this does not always having both coached and been pitched to cyclists, who talked of nothing but gold reflect itself in people development and by a number of private equity executives, medals, saw anything else as ‘failure’. The the variable quality of these interactions, swimmers were occasionally ‘delighted’ including basic errors, continues to with a bronze or a place in the final. surprise me. Nobody decries the sacrifices that John Handley A former managing director of mine athletes, such as the swimmers, put into once wisely said: “You won’t win a deal at a their sport. But the cyclists’ attitude to John Handley first meeting but you certainly can lose it.” winning, their meticulous preparation and has 20 years of How right he was and, more critically, still attention to detail was a far cry from the private equity is. The sometimes poor grasp of pitching seemingly laid-back swimmers. experience, basics, together with a tendency within the How does this relate to the world of which includes private equity industry to value intellectual private equity? In a deal market, where seven years intelligence over emotional intelligence there remains a shortage of quality assets with Lloyds (and therefore an ability to evaluate the and a very significant level of uninvested Development management teams that we interact with), cash, the overused phrase ‘you get nothing Capital (LDC) where he became a senior means that softer skills training in this director. He lectures regularly for the area is more important than ever. BVCA and other clients in the UK and If Brailsford was asked to come into your tty You won’t win a deal at abroad. John left LDC in 2005 to pursue firm and develop a winning mentality, a pluralistic career and currently sits on g e hy: what would he do? He famously talks about seven boards, in addition to meeting his it being simple as he “merely” makes his “a first meeting but you g rap o

regular lecturing commitments. t athletes the “best they can be”. Do we do h o certainly can lose it ” p the same?

38 BVCAJOURNAL BVCAJOURNAL 39 sponsor’s article

Building brands, building value

our opinion, it should be debated around the board table on an ongoing basis – not Realising the potential a one-off exercise, but used to guide a set of metrics for both key internal and external stakeholders. Sometimes brand strategy and measurement can get buried in the of brands marketing department. We would argue that by thinking of the brand as a business driver, the insight and power of the brand management can bring overt rewards for owners and users alike. We are experts in assessing The ability to stand out from a Considering brand health is often Circus is the strength and potential cluttered marketplace part of any commercial due diligence process. It is important to understand of a brand It goes without saying that a big part customer views through the usual a boutique We deliver commercial and of the value of successful companies, process of research, but also to get a such as Apple and Pret A Manger, sense of how the brand is viewed by vendor due diligence from a is driven by brand. It is the reason other important stakeholders and how consumers seek these companies out, it performs against its peers, be they management brand and consumer point of and why they can attract and retain the current or emerging. In this regard, one best people. obviously wants to review performance, view. Our recommendations For private equity, brand can but also build an expert opinion as to consultancy, and insight are based on data sometimes seem intangible, hard to how the brand might need to evolve in quantify and difficult to measure. But the future. analysis, market and consumer we all recognise those organisations This sense of dynamic brand specialising research and expert advice. that have a strong sense of self and management is critical throughout the draw us into their franchise. This is ownership cycle. For a brand to have achieved by the application of clear enduring value it is important that the brand strategy and management – right strategy is embedded throughout in brand and We work with portfolio something that investors should be the organisation. Brands can build appraising not just pre-purchase, but affinity beyond ownership and a strong companies to define and at all stages of ownership. sense of belonging for employees, as well marketing build powerful brands Brand helps align people and as users, is a positive constant during resources behind a shared mission, periods of change. We believe that great brand delivering greater commercial In our view great propositions are strategy should act as a business efficiency. It is a compass for decisions built on both functional and emotional strategy across all areas of the business that planes and, for greatest efficiency of driver, not just a marketing creates fewer wrong turns and dead ends energy and spend, use the power of for management. And, most importantly, brand ideology to build growth and discipline. Successful brands brand clarity can help customers choose sustainable differentiation. The brands tty reduce operational complexity, products or services – driving sales, we all admire do this and hardwire the hy: g e hy: market share and growth. discipline into the boardroom. Find out more Brand health is, therefore, an provide a compass for decision- g rap o

t important contributor to both a strong Dilys Maltby

circuslondon.com h o making and, above all, drive p market position and earnings growth. In Senior Partner, Circus 020 7292 7888 efficiency and growth.

BVCAJOURNAL 41

0005_Circus Ad_185x240_AW.indd 1 22/02/2013 15:00 Guest columnist BVCA Training Programmes 2013 The people’s LPs Learning solutions from the industry experts Liam Kennedy, Editor of Investment & Pensions Europe, considers the investment landscape in the coming years

Institutional limited partners (LPs) are attached. I know of one Dutch getting savvier with their private equity manager who was investments. Some are rationalising their recently forced by the regulator portfolios by reducing the number of general to sell down his private equity partner (GP) relationships, and demanding investments to meet short-term Advanced PA/EA Course* 9–10 September more of those that remain. US LPs are starting funding requirements – even to hold closed meetings with GPs absent. though private equity was his Assertiveness & Influencing Techniques 30 November Despite issues with fees and the direction best performing asset class at of the industry pre-crisis, the growth the time. That story could be the Best Practice Financial Modelling* 11–12 September potential of the private equity asset class shape of things to come if new makes it an integral part of the portfolio for EU rules for insurers are adapted Effective Leadership 25 June, 20 November many institutional investors. But while US for pension funds in the UK and elsewhere. institutional investment in private equity has Instead of taking advantage of long-term Effective Forecasting & Budgeting NEW 13 June increased three-fold in a decade, European investment opportunities in the productive institutions’ commitment has not increased by economy, institutional investors are Effective Management Skills NEW 5–6 June anything like that rate. increasingly silos of government debt and users What explains this trend? Last year, John of financial investments. Finance for the Non–Financial Manager 9–10 October Kay, Professor of Economics at the London Policy-makers must recognise that they can’t School of Economics, made a strong case for have it all ways – they won’t achieve the level Finance in Private Equity 10–11 June long-term investment in his report on the of long-term investment the economy needs if Foundation Course 11–15 November public equity markets. they are simultaneously pushing institutional investors to only think of the short-term. Introduction to Private Equity* 24–25 September, 19–20 November Policy-makers must recognise The message may be getting through: the EU has issued a green paper on long-term LBO Modelling 18 June that“ they can’t have it all ways investing, and in the UK the government recognises the need for institutional Legal Agreements in Private Equity 3–4 September ” investment in long-term assets. But private equity shapes up better as a But if not, who will invest in private equity Management Teams: Maximising Your Most Valuable Asset* (updated programme) 1–2 October long-term asset class than public equity: in the future? Defined benefit pension schemes institutions hold private equity investments for are already yesterday’s game. Non–Executive Directors 22–23 October years, whereas the average holding in public There is a glimmer of hope. Thanks to the markets is measured in months. Nevertheless, government’s auto-enrolment policy, a new Pitch Perfect Presentations 8 October governments and regulators seem to be doing generation of pension funds will manage their best to put institutional investors off billions in retirement savings on behalf of Professional Networking Masterclass 2 July, 3 December investing in long-term and illiquid assets like millions of ordinary savers within a few years. private equity. It will be vital that those ordinary savers get Skills of Negotiating* 23–25 July, 26–28 November Their good intentions – through Basel to take advantage of good quality private equity rules, Dodd-Frank and Solvency II – have and venture investments. To achieve that, a Steering Value Creation 4–5 June been to secure the short-term solvency levels new generation of ‘people’s limited partners’ * Refresher prices available for past delegates of banks, insurance companies and pension needs every incentive to evolve. It could be just funds. This approach comes with a price what the economy needs.

www.bvca.co.uk/training T: +44 (0)20 7420 1800 E: [email protected] 42 BVCAJOURNAL

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Tailoring our courses “ The BVCA in-house course provided our If you have team members who require training in a specific area and are seeking a cost effective way to enrich their attendees with a skills, we can work closely with our programme directors to broad overview of the tailor one of our standard courses for you. subject matter. It was well structured and Popular in-house courses delivered professionally presented. n Deal Structuring n Leadership Development We will continue to n Foundation use these courses as n Introduction to Private Equity part of the professional n Negotiating Skills n Non-Executive Director development plan for n Pitch Perfect Presentations our team.” Skillcapital Bespoke solutions We will work with you to develop an entirely bespoke training programme targeted to address your specific needs.

Exclusive programmes The following courses are specifically designed to be delivered in-house: n Advanced negotiation skills n Deal origination n Leadership development programmes n Psychometric testing and team dynamics analysis n Sales training masterclasses n Valuation workshop

www.bvca.co.uk/training T: +44 (0)20 7420 1800 E: [email protected]

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