August Equity Partner Mehul Patel, better known as Mickey, explains the importance of adjacency to Rachel Bridge at Drax
Mickey Patel knows exactly what he is looking for when he makes an investment. He wants to find businesses that are making between £1 million and £5 million EBITDA, in industries where August has had adjacent experiences and then support them to grow organically and acquisitively to achieve an exit valuation of more than £100 million.
It is a mission that is clearly working well. In the last seven years, the August team has exited seven businesses, each individually achieving an enterprise value of higher than £100 million. During 2018 alone they exited over five businesses with a total enterprise value of £1.1 billion. He says simply: “We are all about growth in sectors we know about.”
Mickey focuses on investments primarily in the areas of technology, software and managed services, but August also looks at businesses in animal health, healthcare and support services.
When evaluating potential investments, they principally focus on three elements – the management, the market and the business model. In terms of management, that means backing an ambitious CEO and team who are ingrained in their subsector. Mickey says: “Their plans are ambitious. I spend considerable time working out an individual’s background and finding out what drives them.”
In terms of the market, August is primarily looking for adjacent areas – a business that is in a related area to another business that August has already invested in, perhaps in terms of the services they offer or the market they address - where they can see significant potential for growth. Their investment in SecureData, which was a cyber security provider transitioning to a managed services model, for example, was followed by an investment in a unified communications business called Charterhouse Voice and Data which had similar characteristics, while an investment in a veterinary business was followed by an investment into the animal health diagnostics sector.
Mickey says that adjacency delivers several crucial benefits, notably expertise, credibility and network. He explains: “If we have already had a few years of being in a market with another business then we understand what the issues are and know how we can build value for our investors. When we sit in front of a management team, they don’t have to explain the business or market to us, because we can already talk about the key issues and share our thoughts on how the market might evolve. And having the network in place in a particular area means that we are more likely to be able to acquire businesses directly with them.”
Finding off-market deals is an increasingly important focus, he says, because it means that the deal is not just about price: “We want to be focused on building relationships and giving value through deeper strategic input, executing bolt-on acquisitions, developing the IP, raising third party financing and positioning for exit.”
He much prefers to identify a preferred sector first and then look for possible opportunities that way. The recent acquisition of Charterhouse Voice & Data was following a year long relationship with the management team and came after spending two years researching over 70 companies in the broader sector.
Mickey says the secret of achieving a successful exit is to focus on a well thought through plan right from the start: “We focus on the 80:20 principle – in the backdrop of a 3 to 5 year period there is finite time and capital resources that can be deployed. We have historically found that 80% of the value generators come from 20% of the strategic options - others will deliver diminishing marginal returns. For example, there is often an attractive plan to expand the business internationally through new offices in Europe and the US."
"In most cases doing that organically can take a lot of time and focus away from the management team which may not always be time well spent. In the context of Wax Digital, a SaaS e-procurement provider we backed in 2015, we proved the opportunity by partnering with a complimentary service provider in the US and through customers that were themselves international, before deploying considerable time and resources. The business now has users in 102 countries.”
One of the deals he is most proud of is SecureData, a cybersecurity business which August Equity grew and exited to Orange Telecoms Cyber Defence division in January 2019 for an outstanding money multiple return and won the award for best exit at the recent 2019 British Private Equity Awards.
He says: “The business grew significantly over the six years of our investment, there was senior management additions, we acquired four businesses, set up a South African technical team, we integrated the businesses and put new systems in. But we also created the largest independent cyber security business in the UK, which is fantastic not only for UK Plc but also other tech businesses which aspire to reach that level. We helped build something exceptional today that was not there before we backed it.”
Drax sector lead: Ruby Sheera
Partner, Technology and Tech-enabled businesses
Tel: 0203 949 9555