February 27, 2020
Steve Darrington is the CFO of Phoenix Equity Partners and has been in the role since 2001, when the private equity house was founded. He currently oversees the £420 million Phoenix Equity Partners 2016 fund which has so far made 12 investments, and the £450 million Phoenix Equity Partners 2010 fund which is in realisation mode and has so far exited 10 of 12 investments.
Q: What is your criteria for investment?
A: “We are a UK mid-market investor and we invest across six sectors – consumer & leisure, financial services, healthcare and education, media and information, services, and technology. Our investment strategy is to invest in defensible niche sub sectors with strong non-GDP correlated growth drivers and we will typically look to invest between £20 million and £50 million as a control investor.”
Q: How has the industry changed since you took up your job?
A: “The industry has changed hugely since I began this role. It has grown up and become far more institutional, partly because there are many more participants and partly because there is much more capital available, making the market more efficient. Twenty years ago the smaller private equity firms were finding their way in terms of defining the blueprint for their business but now the industry is much more professional. There is a lot more infrastructure, guidelines, procedures and documented investment methodology, clearly defined governance, much more transparency, much more consideration for environmental, social and corporate governance and the wider social good, and of course regulation.
Private equity firms don’t go steaming in with their cheque books; we are commercial partners for owners and management teams of growing businesses, and the reason they want to work with us is that we can provide support, expertise and help as they grow, as well as capital. The only way to make money now is by growing a business through creating value and growing profitability. The financial engineering element of our net returns only accounts for 5-7% whereas the growth element is 70%.”
Q: How do you find and secure investments in this increasingly competitive market?
A: “First, we invest significantly in outstanding intellectual talent in our origination team. In the past two years we have really ramped up our use of data analytics to facilitate criteria based searches across a vast array of databases and information sources. This allows us to have real time access to around 2000 businesses which at any time are doing things that are of real interest to us and then we distil this down to 200 businesses that we have identified as worth keeping a close eye on. We try and buy businesses that we want to buy, as opposed to businesses that happen to be for sale, and we are very successful at finding off-market deals.
Second, we spend a great deal of time winning the hearts and minds of management teams. We try to form a relationship with management teams years before a deal takes place. It is not uncommon for us to have had conversations two, three or even four years in advance. We plant the seed that Phoenix is a good business partner and might be able to help in certain situations due to our experience in the sector, and then we work incredibly hard to continue its germination, to the point where we hope that when the company decides it is time to do something, we are the first people they pick the phone up to.”
Q: Are you concerned about the high money multiples needed to secure investments?
A: “There is no doubt that prices have gone up, but for the right deals, the entry prices are still manageable, particularly if you structure a deal so that the management team can reinvest and share a significant part of the upside. Private equity returns are trending downwards but they are still remarkably healthy and in excess of public markets. It is however an area which we are constantly aware of and if we do pay up for a business, it has to be absolutely outstanding.”
Q: What is happening to the length of your investment cycles?
A: “Our investment cycles lengthened to 5-6 years following the financial crisis of 2008/9 but they are narrowing again to 4-5 years. At the moment a potential buyer can get reasonably good leverage in transactions because there is a lot of debt available, particularly via debt funds, so there is still a very healthy market for good assets.”
Q: What do you see as being a key driver in the industry over the next five years?
A: “There has been a flight to size in the industry and there is now so much capital being managed by large buy out houses that to some degree they are struggling to differentiate between the assets they buy. The more capital that flows to the larger investors, the less genuine alpha returns there can be, because these multi-billion dollar funds are all chasing the same assets and management teams, so the standard deviation of the returns between the super investors is low. For private equity to maintain its returns, the pendulum has got to start swinging back to smaller and medium sized opportunities where a business can grow and potentially disrupt its market, because they are the ones that can genuinely create alpha returns.”
Drax Lead: Mark Tomley
Director, CFO Practice
Tel: 0203 949 9557