An entrepreneur and an international climber wondered …… What if people who loved the outdoors could buy everything they wanted in a huge store selling everything under one roof, staffed by enthusiasts, and selling at the best prices in the market?
And over the next 18 years, they kept wondering …. what if we built a chain of 50 of these stores? …. and what if we had 2 prices on every item in the store – with the lower one only for people who bought a discount card? …… what if we could have over 1 million people owning a discount card?….. what if we developed our own brand of tents that became the UK market leader?…… and, what if we launched our own bike range or became the biggest UK fishing retailer?
This was the story of Go Outdoors which started as one store in Sheffield and ended up 18 years later as the 58 store market leader, bought by JD Sports for £130m.
But 18 years is an exceptionally long time for a PE investor to hold on for. The economic impact can be great and demonstrate good corporate citizenship, but can such a long hold period ever make sense even for evergreen funds like VCTs?
Firstly the returns need to be exceptional to compensate for the hold period. If an investor is looking for say a 15% pa IRR return on their investment then doubling the value in 5 years achieves this. If the hold period is 10-15 years then the value needs to have quadrupled to octupled, which is rare outside of tech venture investing.
Secondly, it is extremely unlikely that the team that led the business at the start will be the right team when it is 4-8 times as big. In Go’s case, the business grew from 1 store to a £200m turnover 2000 employee business and over that time the business had 2 changes of CEO, 3 changes of FD, 2 chairs, as well as adding 2 NEDs, a head of ecommerce, a COO, a head of retail………
Thirdly, everyone will need to hold their nerve as the business goes through sticky patches. There is almost no chance that a business growing that fast for that long is going to do so without things going off plan. And for any hold period over 5 years you must expect to have to ride out an economic cycle. In Go’s case it took the team over 5 years to get the business model right in the first half dozen stores to allow the rapid roll out of new stores to begin. And the business changed its bank twice as the business grew rapidly and went through the boom of staycation and the bust of the credit crunch.
And finally, you need to know when it’s time to go. This is particularly hard for founders to accept. But there always comes a time when they are not the best people to run the business. And there also always comes a time for the shareholders to recognise that they are not the best people to own the business, when everyone should sell to a buyer who can take the business to the next level.
YFM continues to look for opportunities to invest up to £5m for growth capital using its VCT funds and up to £10m for buyouts and acquisitions using its LP funds. We are not expecting to see another 18 year hold but patience can pay off!
YFM Equity Partners
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