After 18 years in the UK private equity industry – 10 at 3i and 8 heading the portfolio team at YFM Equity Partners – I’ve come to the conclusion that our job is really very simple;
Sounds simple? I think it is, although we do love to make it sound more complicated and it’s easy to get distracted by other stuff which wastes time and can destroy value. Essentially it is not the investor’s job to interfere in day-to-day operational matters but we do want to be an active partner of the Executive team, with a continuous review of strategy and alignment holding the key to success.
Take President Engineering, a manufacturer of niche engineered products used in mining safety and in the transport of very low temperature liquids. YFM backed the incumbent management team in a buyout in 2010 to break away from its parent. The strong team then focused on developing brands and an international expansion plan which created significant revenue growth and led to approaches from trade buyers. The business was sold in 2015 delivering a return to our investors of over 8x in 5 years. Admittedly we were helped by the economic cycle but fundamentally we got the basics right, backing a nice niche business with growth potential and a strong team who personally made a lot of money on the sale.
In this case the core strategy remained pretty consistent through the life of the investment and apart from some input towards to the end to ensure a competitive auction (improving our returns by 30%) our role was simple. However there are other cases where we need to adjust our sights along the journey.
In 2011 YFM backed a strong team to buy out the retiring founder of Selima, a payroll and HR software provider. The core strategy was to improve the sales process and grow recurring revenues from a wider customer base outside the historic public sector customers. However fundamental changes were required to the product and we agreed through discussion with the executive team and Chairman to allow funds to be spent on a major product upgrade which delayed the growth plans by a couple of years. The overall strategic vision remained clear and recurring SaaS revenues began to build strongly from 2014. Ultimately we exited via a trade sale in May 2017, making a healthy 4x return for our investors which could rise to 5x including expected deferred proceeds over the next 2 years.
In this case we had to be patient, reset the strategy and maintain alignment through some challenging years when I suspect more impatient funders might have cut and run.
Our mantra at YFM is not to be busy fools but to continuously challenge whether we are really making a difference to the outcome for our investors. We continuously seek to optimise growth strategies and work hard to maintain alignment towards our goal of maximising exit value.
Over the years I’ve been privileged to work with many very talented and successful people in a diverse range of business sectors and these are just a few examples. As an added bonus our investment philosophy and strategy of investing up to £10m into UK businesses creates jobs, increases exports and UK tax receipts.