Mid-market private equity firm Graphite Capital has recently backed the acquisition by Park Holidays UK (formerly Cinque Ports) of two more holiday parks. It means the group has added four new parks at a cost of around £20 million since Graphite backed its £130 million management buy-in / buy-out in January 2006.
In the past 18 months, the firm has completed 15 exits and refinancings with a total valuation of over £900 million. It manages £750 million through two private funds and the publicly quoted Graphite Enterprise Trust.
Andy Gray is the senior partner at the firm and joint head of the investment team. He explains that the sweet spot for Graphite, which – aside from buy-outs and buy-ins – focuses on expansion capital, replacement capital and turnaround opportunities, is to invest between £10 million and £50 million of equity in transactions valued up to £125 million.
So what do investors like Graphite look for in a business? Gray says he likes to see an entrepreneur who fully understands what the business is about. By this, he means the business owner knows what is being offered, who the customers are and how many potential customers there can be, and has a realistic idea about the latent demand for the service or product.
The right stuff
A strong management team operating within an interesting market is also a huge plus, says Gray, but he acknowledges that a business is not a science and it can take time to get all of the pieces into place. Even then, there is a certain element of the unknown as to whether the business will be the success everyone hopes for.
Back in 1996, Wagamama consisted of two central London outlets. Gray admits he saw the noodle bar as a place for students to hang out and had no real idea how big the chain and franchise would be.
‘We took a third of the restaurant, paid off the debt and supplied capital,’ he says. From taking on a business, he states the first step is usually to strengthen the management team by, for instance, bringing in a financial director as it is crucial to have a strong grasp of the numbers. He says the trick is to ensure people are retained who have a real knowledge of the business.
‘We went into the Wagamama deal thinking that this is a one-man band and that, overall, it is not well managed,’ he says. Once satisfied that the right team was in place, the next stage was to test the Wagamama concept by gradually rolling out new restaurants.
A key moment was opening a restaurant next to West End department store Selfridges. It soon became apparent that the noodle dishes on offer were as appealing to the affluent chattering-classes as down-at-heel students. The challenge was to start thinking beyond the capital.
‘When you roll out you’re constantly testing things so it is important to think not only about London. You need to test yourself so that you are moving under the radar of the market to appreciate what the true potential of a business is,’ he comments.
The Wagamama model was slower to catch on in Manchester, where Gray notes the location was initially wrong, and Glasgow. Despite the teething troubles, Wagamama is now a well-known chain and franchise, not only in the UK but increasingly abroad in countries ranging from Australia, the Netherlands and even Dubai.
Testing the waters
Expanding overseas has also been part of a carefully considered strategy. Gray notes that the larger markets, such as Germany and the US, were kept on the backburner until recently as it was important to first test the reaction to Wagamama in smaller markets.
In June 2005, Lion Capital acquired Wagamama for £102.5 million. For Graphite, it provided a return 10.2x its £4.5 million investment and an internal rate of return of 40 per cent. It has kept a 12.5 per cent stake in the business, primarily because of the potential of the US market (Wagamama is to open for the first time in the US later this year).
Other strong performers for Graphite include the aforementioned Maplin, plus home health care services provider Clinovia and insurance underwriter Hiscox Dedicated. As for future prospects, Gray is excited by Sk:n, a provider of non-surgical cosmetic procedures, and the expanding Park Holidays UK.
Gray notes that typical problems when taking over a business often stem from trying to install the right management. He observes that an entrepreneur may be perfect for a smaller business, but you may need an entirely different mindset and a keen sense of teamwork to push a business up to the next level.
The key message from Gray is that growing a business through private equity backing cannot be rushed or hurried. It requires time and patience to fully understand the business and test its model, and there must be an awareness that mistakes will be made along the way as part of the learning process.
On average, Graphite works on five to six deals a year. For each company, Gray says the firm tends to invest in a business for around five years and will then start to look for an appropriate exit. ‘We have a medium-term perspective that allows you to make medium-term decisions,’ he says.