Our pipeline remains full, and we remain on the lookout for the sorts of investments likely to appeal to private clients says Bernard Dale.
I am pleased to report that in the last quarter, we have completed two exits. 23.5 Degrees, a 2015 growth capital investment in a Starbucks franchisee, was sold to Starbucks in October. And cinema and leisure operator The Light, also a 2015 growth capital investment, was sold to Risk Capital Partners. This brings the total number of our lead private equity investments exited to 14, at a combined return of 2.7x investment1.
As with most private equity portfolios, value growth in successful companies is a mix of profit growth and profit multiple increase between entry and exit. In our case, our combined exited and live portfolio has shown 1.8x growth in EBITDA since investment (year of investment to current year projected). This is a good achievement, considering it includes a number of new investments and given that we do not actively pursue ‘buy and build’ type investments, so the growth delivered is overwhelmingly organic in nature.
The second part of the equation is multiple growth. Our average entry multiple (where measurable) is c6x EBITDA with over 10x delivered on the portfolio that has been sold (including a few investments sold at a loss/no gain). We have found that although cash generation is a small component of value growth, it makes a useful contribution, particularly when it is a focus in the run up to exit. This potential for multiple growth is a key attraction of investments of our target scale.
This EBITDA growth and multiple ‘expansion’ combination has been a core feature of PE investment returns world-wide as shown by Bain & Co and Mckinsey & Co analysis, though the analyses differ in the importance of margin in the value growth achieved. Source: Gain.pro European PE Asset Handbook
23.5 Degrees has been an outstanding investment. We backed management to acquire 16 sites from Starbucks, and today it has revenues approaching £100m and 115 sites at the time of sale with a concentration in the popular and profitable ‘drive-thru’ sites.
The Light was significantly impacted by Covid. The business closed, revenue fell to zero and it is requiring additional debt funding to survive. The pandemic and tough trading conditions in the sector saw a number of its cinema competitors fail. After much hard work and via a transformation of its business model to a ‘film + leisure’ offering, The Light recovered, to enable a sensible exit, providing liquidity back to CC clients.
In 2025, we have three businesses targeted for exit, all of which are expected to deliver a healthy return for clients and maintain our very good average return performance.
Meanwhile on the new business front, Winder Power, our first MBO of 2024, goes from strength to strength with a growing order book, now at £70m+ as the ‘Great Grid Upgrade’ kicks off with a vengeance. We completed our second MBO of 2024, Hood Group in October. Hood Group is a data and technology driven insurance specialist working with many blue-chip clients including John Lewis, RAC, Axa and Aviva. This sector is characterised by both higher-than-average EBITDA margin and a high level of buy and build activity. These are dynamics we are familiar with following the 2022 sale of Tempcover at an investment return materially in excess of 5x.
Both investments saw funds raised within two weeks, which shows our clients’ appetite for good quality investments: both were characterised by experienced management, low third-party gearing, differentiated products and low recovery capitalisations (the value at which an investment is recovered). The latter is an important consideration for us when appraising investments and deal structures, particularly at a time when some savings accounts have been paying around 5% interest risk-free.
Our pipeline remains full, and we remain on the lookout for the sorts of investments likely to appeal to private clients, which include growth capital and shareholder re-organisations as well as MBO investments. Keeping this pipeline strong and delivering profit on the three investments earmarked for sale should keep us active in 2025.
1: Gross of carried interest