The View from the Direct Investments team – Bernard Dale Q3 2022

News: Insight & Opinion | 15 September 2022

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With the potential for tax changes in the medium term, we see a continuation of the trend that sees many founders considering ‘cashing in’ a portion of the value in the business they started, therefor we foresee plenty of good investment opportunities looking forward, says Bernard Dale, Managing Partner at Connection Capital.

In the last quarter, we have continued this year’s impressive roster of exits. The sale of Tempcover delivered a great result for investors and its management team, returning over £41m to clients who participated, equating to well over 5x the original investment. Our divestment from Sleeperz also generated a solid return of 2x money from a property backed hotel group. We have other portfolio companies in a formal exit process and we have found that for the right quality companies, activity in the M&A market remains positive and we expect to be able to return more profit to clients in the months ahead.

Noteworthy recent portfolio developments include the milestone that Starbucks franchisee 23.5 Degrees has now opened its 90th site, up from just 13 when we first invested in it, with more openings planned shortly. Mode Print Solutions has made two strategic acquisitions, taking it from an £8m revenue enterprise on our investment in 2018 to a £40m revenue group of three business in the 'Unified Comms’ sector today.

The serious worldwide economic situation is affecting our portfolio. We recognise that in order to weather the current challenges having a healthy cash position is key for many businesses and this will be our prime target for the portfolio in the coming months. We know that growth in equity value rarely follows a straight line and we will support those with robust prospects of long term value through short term problems. As part of this we are alert to situations where we may need to strengthen a business or support a management team with additional cash to  ensure that temporary trials do not derail them from reaching their potential We are proactive and our portfolio management process centres on not letting things drift and  our model gives us the flexibility to inject more capital and price it appropriately when  we see a clear benefit in supporting further investment.

Some of our best-performing investee companies have received at least one further round of follow-on funding from Connection Capital clients over the years for various reasons – Tempcover being a notable example when the business was running behind its growth plan, we worked with the NXC and CEO to build the management team and re-boot the business plan with more vigour combined with a further fund raise. We are now in a period of economic turbulence, where no one knows what lies ahead, and our clients understand that an additional funding boost may be required in the businesses in their individual portfolios. Though these investment decisions can be the hardest ones to make for us as investment manager for clients as shareholders, our track record in delivering success for clients is positive.

Spring 2022 has been an extremely busy time for dealflow, with four new investments completed in 2022 across both private equity and private debt spectrum. We are taking a long hard look at each new investment opportunity currently as deal flow has quietened in the market place over the summer. However with the potential for tax changes in the medium term, we see a continuation of the trend that sees many founders considering ‘cashing in’ a portion of the value in the business they started, therefor we foresee plenty of good investment opportunities looking forward.

These investments are labelled ‘cash-out’ deals, where owners seek to sell a minority stake to a Private Equity firm, as opposed to selling up entirely to a trade or MBO deal. This is likely to remain a popular solution as cloudy economic conditions persist. These deals enable owners to secure their family’s financial future by crystallising partial value while EBITDA is high and capital gains tax remains relatively low, while working with a private equity sponsor towards growing their company ahead of a full sale in three to five years’ time. Recent investments in Silverfish, Brompton Technology and 4Wood are all examples of this, and we believe they offer an attractive proposition for our clients with lower levels of gearing and therefore lower financial risk.

To sum up, yes, there are headwinds, but we’re in a strong position and we will endeavour to ensure that these do not blow our investments off course.