FPE Capital Managing Partner, David Barbour, speaks with PE Wire about the firm’s unique relationship with Stonehage Fleming, the opportunity set for UK growth capital investors and its focus on tech-enabled businesses in the lower mid-market…
PEW: Could you provide a bit of context regarding FPE Capital’s relationship with Stonehage Fleming?
DB: We spun out of Stonehage Fleming in 2016. The key was to own and grow our own business but also to ensure we could raise an institutional fund – which we did with our GBP101 million Fund II.
We invest in founder and entrepreneur-led businesses and it’s been a real advantage to speak to these teams as fellow business owners. Stonehage Fleming aren’t involved in the management or profitability of the business but they have a board seat and we continue to see their deal flow.
They have continued to benefit from a meaningful share of carried interest on historic funds and we have been able to grow an independent business – so all parties have benefitted.
PEW: What benefits does this bring to you, from an LP relationship perspective, and how would you define a ‘typical’ FPE Capital investor?
DB: The Fleming family office is not and never has been a conventional LP for us – they have introduced some interesting successful individuals and smaller family offices to us, and that historic investor base is still, in part, with us; forming a real and tangible network of business leaders and contacts for the benefit of our portfolio.
These investors sit alongside our new institutional investor base – which forms the bulk of our funding.
So a typical FPE investor now is a large endowment or single family office that is very experienced in the LP market and has a strong appreciation for the returns possible in the smaller deal market, and a desire to access this over the mega-cap funds.
In addition, they appreciate the team’s exclusive commitment to a single strategy specialist focus – unlike so many diversified fund groups.
PEW: What is the investment philosophy you are pursuing at FPE Capital?
DB: Henry Sallitt and I have led the team since 2008, and since then we have pursued a very consistent investment theme: backing high growth smaller UK companies that are using technology to drive growth.
That philosophy has brought us very good returns and increasingly we feel we are well positioned as one of the most experienced UK growth investors across technology enabled businesses in segments such as payments, software and IT services.
We are also keen to avoid venture and technology adoption risk. As a result, our investments are in businesses that have reached profitability and proven their model. Most importantly, we invest in the true lower mid-market where opportunity flow remains very good, competition is lower and entry multiples are more reasonable.
PEW: Broadly speaking, how would you assess growth capital opportunities in the UK?
DB: The UK smaller company market is extremely vibrant and increasingly attracts high quality management teams. Technology is driving change across all industries. That disruption means there has never been a better time to be a growth investor. All large incumbents are vulnerable. The wider PE market is waking up to this but wants more mature businesses. We bridge that gap.
PEW: When looking at companies in the TMT, Energy Services, Financial and Business Services sectors, do you take a macro view (exogenous factors) as well as a forensic bottom-up view of the management team, revenue stream, margin potential etc.?
DB: We look for large markets where we can grow scale but also leave a lot of market upside for the next owner. Of course we look at the macro issues – but from the position of the disruption not the incumbent.
We also look for key B2B business model attractions: high recurring revenue, high gross margins and great customer references. Getting comfortable with the opportunity, the business model and the team are the key elements in our evaluation. Of course we do detailed diligence on the financials and legals, but growth capital is about getting the big issues right and then building a team to execute on that.
PEW: Some people have suggested that the UK growth capital space is still in its early stages and ripe for expansion. How do you see things evolving, and what excites you most about the market?
DB: There is definitely a lot of truth in this. When we raised our Fund II in 2016, a large US investor said, “This reminds me of the US about 15 years ago”. We see the exit market for high growth smaller businesses as being stronger than ever – as bigger funds and strategies seek out the key infill growth businesses that are disrupting traditional sectors.
Many of our recent successful exits have borne this out. Our aim is to reach those businesses before they have been through their maturation process and prepare them for sale to these buyers, generating significant growth and multiple expansion en route.
As a team, we believe this area can only grow further in coming years. We are one of the few established teams focussed exclusively on this area, happy to do minority growth investment and low/no leverage growth buyouts.
PEW: What factors go in to determining how best to ‘right size’ an investment in the portfolio – be it a buyout, a restructuring or a growth capital deal?
DB: We always start from a position of what’s best for the underlying business. We are able to invest up to GBP20 million ourselves and find that deals that have growth potential generally work across the minority to buyout spectrum. We aim to have nine to 12 investments and we are well on track for the right level of diversification in Fund II.
PEW: Why should investors be looking at funds in this lower mid-market space? Do the returns look more attractive than more competitive mid-market funds?
DB: As mentioned above, we believe there is real additional value at the lower end of the market as businesses are subject to greater strategic and operational guidance for the first time. There have been a plethora of recent studies showing that smaller, specialist country-specific funds have been much better performers and although some LPs seem focussed on mega-cap funds, we see LPs accepting this increasingly.
PEW: Finally, would you mind illustrating your investment expertise with one example of a recent exit in the fund? What value creation did the FPE team manage to deliver on?
DB: Last year we sold CreditCall – a Bristol-based chip and PIN payment software business for a 4.2x return.
It’s a great example of the power of growth investing and a clear thesis.
The thesis was that the roll out of chip and PIN technology in the US would be a big opportunity for the business. And it was an entirely secondary MBO – buying out a long tail of smaller investors.
Despite the lack of primary investment, we recycled EBITDA and consciously drove revenue growth at the expense of EBITDA. During our ownership, we hired a strong new CEO to join the existing team, invested in the technology, trebled both revenues and employees, successfully took the business and the product into the US and positioned the business as an attractive strategic asset in the payment sector.
Our eventual exit did not rely on a traditional EBITDA multiple, but on the demonstrable recurring transaction revenue we had built. We sold the business to NMI, a portfolio company of the leading US growth investor, Francisco Partners.
One of the key things this investment shows is that growth is not just about primary capital – it’s about putting in place the team, the ethos and the ambition to create a growth environment. Yes we enabled significant reinvestment of the firm’s cash flow, but the larger driver was those operational changes and expansion into the US market.
