YFM Equity Partners, a 30 year old UK regional independently owned private equity firm, was bought out by the current management team in 2013. The original name (Yorkshire Fund Managers) represents the firm’s grass roots while it now boasts offices in Leeds, Manchester, Sheffield and Birmingham, as well as London.
David Hall (pictured), Managing Director explains that with GBP225 million under management, regionality is a function of where they sit in the private equity market. “We are predominantly in the market for lower to small cap firms,” he says. “YFM’s deal ‘sweet spot’ is in the GBP1 million to 10 million range. And generally in terms of the market for private equity buyouts and ownership change in the UK, the further from London and the further from a mainline station you are, the better the deals for private equity houses like ourselves. Those seeking investments tend to seek support from local providers and many London private equity firms deem it uneconomic to travel for the smaller transactions, and nor do they have the local contact base to unearth such opportunities.”
The regional network has evolved to maximise this distinguishing strategic advantage. “This regionality gives us a regular deal flow that our competitors can’t really access,” Hall says.
A typical transaction for YFM is the 2010 investment in a Sheffield based manufacturing business that made valves for mining and LNG gas. The firm was turning over GBP10 million and making GBP1.5 million per annum and the management team had a chance to buy it but raising debt was hard at the time so they turned to the equity route. The firm wanted to expand its export sales and achieved that, partly on the back of the success of their valves during the Chilean mining accident in 2010.
The business developed and grew and YFM exited with a sale to a US business as the company was turning over GBP25 million and making GBP3-4 million operating profit. “Our investors made an 8.5 times multiple on the deal,” Hall says.
The average return on investments over the last 12 years since 2004 has been 2.6 times. “That return is reflective of what these businesses are making through the UK regions, and we are proud to have successfully harnessed these strong returns for our investors,” Hall says.
The firm identifies potential businesses through market, management and price. “The faster the business and market is growing and the more experienced the management is, the higher the price, generally speaking,” Hall explains.
There are occasions when businesses don’t grow to plan and face situations that nothing can be done about. An example of that was a foray into the domiciliary care sector in 2008.
“We did the deal and knew it would be tough but hoped management, with our support, would be able to get through,” he says. “But the thing that we couldn’t fight was that the market deteriorated markedly with the post 2008 impact of spending cuts on UK local authorities which were fiercer and deeper than people expected. There was a constant downward pressure so we couldn’t scale the business in the way we wanted.”
There was also a reputational risk for the firm in ensuring that whoever took over the business would seamlessly look after the residents of the care facilities.
“We got 15 – 20p in the pound back over the life of the investment but our approach was that we had to find the right home for it to go to so that all the people who were being cared for would be looked after seamlessly by the new owners.”
“In terms of time frames, we are a medium term investor of five to seven years,” Hall says. “We are trying to look for emerging areas so, for example, we are currently seeing opportunities looking in the north and the south west for businesses that have premium end advanced manufacturing with good quality apprenticeship schemes and with export potential.
“This tends to be a relatively unloved sector. Generally money can tend to chase new paradigms. The closer to Shoreditch you are, the closer you are to the online world. Everyone perceives that as a fast growing market but it is overserviced, so you see more volatility and you need a more diverse portfolio.
“We will look at businesses which have online exposure, but in the main we tend to focus on those which are already selling into the market and moving their offering from purely physical to online.”
Within the B2B sector, YFM looks for businesses that offer efficiency tools that save money, a view that has only been strengthened by Brexit, as Hall believes that what lies ahead for the UK is at least a contraction and possibly a recession.
“A typical firm that we might back could be one which offers data analytics, provides information to other businesses and that has already worked out that what it is collecting can be repackaged and re-presented,” he says.
“This is appealing post-Brexit because people will look for value and efficiency and purchases will be more profit orientated.”
YFM has private investors and some smaller institutional investors but has noticed a new class of investor coming in, drawn from the entrepreneurial, sophisticated individual who has perhaps made a fortune in one sector and wants to diversify their portfolio through serial investments into the private equity space, but can’t access enough investment opportunities on their own.
These investors generally have to commit GBP1 million, or more, but for that they can expect to get a diversified portfolio of eight to ten investments in established businesses that are going through an ownership change.
For these ‘new’ institutional investors, there is a two year investment period and YFM only charges fees when they deploy the capital invested. “This has been positively received,” he says.
The firm recently announced the launch of their YFM 2016 Fund, which has already secured GBP22 million from existing pension funds and new family office backers. The latest news from the firm is that along with Maven Capital Partners, YFM has backed the MBO of Indigo Telecom Group Limited, acquiring the business from parent TTG-Global Limited.
The combined investment provided a GBP12 million funding package, including additional funds to support a buy and build strategy to scale and diversify the Indigo group