Private equity is not universally popular in Ireland, given its role in buying portfolios of distressed debt and turning these into vast profits. The sector is particularly controversial in Northern Ireland, after Cerberus bought the Project Eagle portfolio of northern debt from Nama at a large discount. But this is just one manifestation of private equity – which is also taking a positive role in growing the northern economy.
According to PwC, there were 220 disclosed deals in Northern Ireland last year, of which about 20% involved private equity. Barry John Kelly, head of mid tier transactions at PwC in Belfast, explains: “We have been seeing a growing appetite for a number of years now. Putting aside purchasers of debt portfolios, mid-market funds have been coming to Northern Ireland because there is a scarcity of deals in Great Britain. And some funds are being established in the Republic of Ireland and they are interested as well.”
Roger Alexander is a former Mazars partner who is now managing director of Cubic3, which arranges funding for major projects across Ireland. He is currently leading on a Bangor regeneration scheme, which, if it comes off, will involve investment of over £60m, of which £20m would come from private equity. “In general I am finding a lack of deal flow,” he says, “but that is across Europe. In terms of private equity, a number of firms are hungry for deals. There should be demand in Northern Ireland, but I approached 56 funds, including household names which are owners of shopping malls and PPP investors, and only five or six were interested in Northern Ireland – and they already had assets here.
“That was not because of returns, which were over 5%, and they are safe investments. There was no issue about [deal] profile, but just about Northern Ireland. In some cases they were not aware of the territory, in some cases there was nervousness about the political situation. A lot of funds have lost their willingness to invest in new projects. It’s not just about Northern Ireland. But a number [of private equity funds] are now more interested. Property prices have come back.” Evidence for this change of attitude by various private sector investors can be seen in the rash of new brownfield residential development and the number of major projects currently underway in Belfast, adds Alexander.
One of the examples of new private equity interest in Northern Ireland property is through the recently established Aurora Prime Real Estate Fund. This is being led by David Gavaghan, a well-known business figure in Northern Ireland. He was most recently chief executive of Titanic Quarter Limited and is also a former CEO of Northern Ireland’s Strategic Investment Board, which advises the Northern Ireland Executive on major infrastructure projects.
The Aurora Fund has combined forces with Crescent Capital – Northern Ireland’s largest independent fund manager, which has been investing in venture capital in the north since 1995. (See box.) They see what they describe as “a major opportunity to create a fund that can generate significant capital growth for investors”. Aurora is seeking to raise £50m locally and internationally to invest in Grade A office space in Belfast. Gavaghan refers to the fund taking advantage of “a new dawn emerging in Belfast”, adding that “the ingredients are in place for a transformation in Northern Ireland’s capital city returning it in a modern day context to what it was a century ago – a hive of industry, creativity and wealth formation”.
But the footprint of private equity in Northern Ireland goes beyond property investment. One of the largest recent deals – its actual size is not disclosed, but it was several million pounds – saw the Carlyle Cardinal Ireland fund take a stake last year in one of the north’s fastest growing technology businesses. Learning Pool was established in Derry in 2006 by accountant Mary McKenna and IT specialist Paul McElhaney to provide online staff training.
Carlyle’s involvement is extremely beneficial for Learning Pool, says McElhaney, not just because of the investment, but also for the expertise the fund brings to the board. “We have a partner which knows how to scale businesses around the boardroom table, which has the ability to recapitalise the business and go after future growth, and enables us to carry on just doing what we were doing,” he explains.
As a direct result of Carlyle’s engagement, Learning Pool has acquired a competitor. “It was important to have access to capital because it changed the ambition of the business,” explains McElhaney. “Our acquisition of [rival business] Mind Click was a very obvious acquisition, it was staring me in the face for years, but I didn’t have the balls to do it. We paid several million pounds for the acquisition. When it is all your money it’s a different conversation! Having a private equity investor gave us more confidence that it was the right thing to do and the access to the cash.”
The major private equity fund brought expertise to the decision-making process. “Certainly in terms of raising the analysis level, Carlyle have been very proactive,” says McElhaney. “Everyone doing my job should look at this role both as a manager and as an investor. But the manager job is a very big job, so it is very hard to get past that. Having private equity on board forces you to get past that. They have raised the level of challenge and ambition, they have absolutely changed the game on that because ultimately their imperative is to get the maximum return for their investors.”
McElhaney is clear that the choice of partner has been crucial to the success of the deal. “With CCI there was €300m fund and they are actively investing,” he explains. But it was also important that they were an Irish fund, aware of the business environment on both sides of the border. “That was important for us, getting a private equity fund that was here, that would understand the context of being an Irish company selling in the UK and further afield.”
He continues: “We are now a lot more strategically focused, we have a five year business plan that is heavily focused on business innovation. We are more strategically focused on long term planning, rather than getting through the next six months and then seeing where we were at, which I think we were guilty of. Having a long term plan is better. We are also more focused on succession planning and developing the team, as opposed to building the team.
“Private equity is a very legitimate alternative to some of the more common approaches entrepreneurs take, such as exiting early or raising VC too soon. I think private equity has changed quite a lot in the last five years, so there is more money around and that money is more aggressively spent. So my advice would be to entertain it and get good advisors and explore the opportunity. You have to get your head around the fact that you are not exiting the business, you are staying in the business and going back to your desk the day after the deal with bigger targets and hopefully more ambition.”
Although Learning Pool is a private company, with McElhaney having owned most of the equity, the company already had two established independent directors on the board to challenged McElhaney as CEO, following the departure of Mary McKenna in 2011. “It put a bit of manners on me, it was very positive for me,” McElhaney says. And those non-executives – e-learning veteran Donald Clark and well-known Northern Ireland entrepreneur Bryan Keating – played a key role in finding advisors to help negotiate with an equity fund.
The decision to go for private equity actually followed the receipt of a takeover bid, causing the directors to reflect on their position. “We had got to £6m-ish turnover and some reasonable profitability, when we were tapped on the shoulder by a competitor who said they would like to buy us out,” explains Paul. “It was very attractive, financially. But I felt that I would be bored. So we looked to see what else was out there and looked at private equity as an alternative exit. It was definitely not in the plan. The attraction was that it would de-risk me a little a bit, because all of the risk at that point was mine – the management team had some share options, but at that point I was holding all the shares.”
Learning Pool expects Carlyle to stay invested in the company in the medium term, before perhaps selling its stake to a strategic private equity firm. “I think an IPO is unlikely for us,” says McElvaney. “There aren’t many businesses in our sector that are listed.”
For many businesses, private equity engagement is a process that takes them from early stage to maturity – before going on to another stage in their development. But make no mistake, private equity can be crucial in enabling those young businesses to grow older and more successful.
Box – Crescent Capital
Crescent Capital is Northern Ireland’s leading private equity firm, whose investments have helped build several of the north’s leading businesses. Past investees have included Andor Technology, which develops specialist digital cameras for use in spectroscopy and scientific imaging; software company Lagan Technologies, which built a large presence in the British local government market and in the US, before being bought by a specialist US private equity fund, Accel-KKR; and Balcas, which manufactures wood pellets – including those used in the controversial Northern Ireland Renewable Heat Incentive scheme. Current Crescent investees include Fusion Antibodies, a spin-out from Queen’s University, and Datactics, another Queen’s spin-out, which provides data mining software.