Real Deals quizzes Mobeus on raising first LP Fund
Managing Partner Mark Wignall and Partner Ashley Broomberg discuss the process of raising Mobeus Equity Partners’ first £140m (€160.6m) institutional fund.
How did you approach the challenge of raising a first institutional fund following the change to VCT legislation in 2015?
BROOMBERG: The VCT change was well-trailed and we at Mobeus Equity Partners were well-prepared for our fundraising when the announcement came. It was much more of an opportunity than a threat for us because we already had a clear vision and strategy for an institutional fund. Also, our VCT business was a buyout business, unlike some which were with more hybrid models with infrastructure funding and so on. Mobeus was always a private equity house that just happened to use VCT capital.
WIGNALL: We had worked out our partnership agreement well in advance, so we were able to face obvious questions early on, such as ones around plans for succession and retirement. We’d also worked out what our VCT strategy was going to be going forward, having done enough preparation to understand that we would have to separate our investment teams and that institutional investors would require top buyout professionals.
Did you have to change the way you approached investors?
WIGNALL: When we started fundraising, we spent meetings telling investors the story of Mobeus. But by the time we had finished, we had worked out that institutional investors didn’t want to hear a long story about Mobeus. Instead, they wanted to understand how Mobeus was differentiated from the rest of the market, what our investment strategy was, and how we would make returns. We had to evidence how consistently we’ve been able to buy into companies at very good value and then sell them at higher multiples. By the end of the process, we’d got into our rhythm.
BROOMBERG: It was not just the story that changed. The institutional client base has different needs and demands to VCT clients around the cost of capital and the speed at which they like that capital returned. So we’ve had to think quite carefully about how we operate to meet the demands of that capital base.
As a first-time institutional fundraiser, did you have to make any compromises on fund terms?
BROOMBERG: The terms of the fund are as plain vanilla as you can find, and we haven’t made a single concession. I think it’s testimony to the strength of our offering that we didn’t have to put any sort of innovative structuring in place. When we started out, there were a number of investors that were keen to talk about stapled secondaries and the like but we were very firm that we would not be doing those sorts of deals because we believed in the underlying quality of our offering.
WIGNALL: Early in the process a number of investors said, ‘How about rolling your VCT assets into this fund?’ or ‘How about a mini-fund to prove yourselves?’ We said: ‘Very interesting, but that’s not what we want to do. We want a proper fund so we can go out and do a proper job.’
What is the make-up of your investor base?
WIGNALL: We wanted to target international institutions who were experienced investors in private equity and prove that our track record was good enough to attract these investors on the basis of the risk and return our fund offered. We don’t have any development finance institutions in the fund and the majority are pension funds, health foundations and charitable foundations. Three of the ten investors are American, representing 37 per cent of the total capital that we’ve raised so far, and the rest are European. Also, note we haven’t finally closed the fund. We have some outstanding conversations with potential investors and will close it over the summer. Our absolute limit is £150m.
BROOMBERG: The US investors had a really detailed knowledge of the European market and the UK in particular, even the smaller end. They still see the UK as relatively good value and also I think, quite frankly, they saw a currency opportunity.
What are your reflections on the investments you’ve made through the fund so far?
BROOMBERG: We completed two deals in 2016 – design consultancy Kinneir Dufort and invoice finance business Factor 21 – that represent £15m in total, about ten per cent of the fund. These have both been pleasing on two counts, because we’re getting going with deploying capital and because both of them are doing really well. We also have a number of deals in advanced stages of due diligence.
WIGNALL: We think there’s an attractive investment space in the small-cap market. We can rise above a number of firms that would not be able to raise quite as much capital and would struggle with a cheque of £7m to £9m. Meanwhile, larger firms with £250m to £300m funds would find the investments in our space a little too small.
How has the shape of your business developed following your decision to raise the new fund?
WIGNALL: We had 18 people when we did our MBO in 2012. Today we’ve got 31 people and also some who have signed offers of employment but haven’t officially joined us yet. We’ve now got separate buyout and growth investment teams with shared portfolio teams plus a lot of support. There are some economies of scale and some synergies – we have 30 people in the same office, talking to each other and sharing ideas and contacts.
BROOMBERG: An institutional fund the size of ours is quite challenging if you don’t have another arm to your business. The VCT side of our business gives us real scale and means we can raise a modest size fund and stay in our investment sweet spot. Other buyout investors that only have institutional capital have to raise £250m to £300m funds to make their economics work. This can be great for them, but it takes them out of our marketplace. The duality of our business allows us to maintain a fund of £140m to £150m that is extremely well-resourced, as if we were a mid-market firm. We think this gives us a sustainable advantage.
Interview by Hannah Langworth, Real Deals