O'Connors advises PHD Equity Partners on new investment model
PHD Equity Partners – the private equity arm of Dow Schofield Watts – is pioneering a new structure that will enable it to follow a longer term investment model and increase liquidity for investors.
The Daresbury-based business has also raised £5m in cash from shareholders via a rights issue to provide additional capital for acquisitions.
PHD has sold its investments to a new independent holding company for £24m.
PHD Industrial Holdings brings together its six investee companies and has consolidated sales of more than £60m, EBITDA of in excess of £7m and employs around 330 people.
It will grow its value through the growth of its subsidiary businesses and by reinvesting group profits in new acquisitions, with the aim of achieving a capital value in excess of £100m. Shareholders will be offered regular opportunities to buy and sell shares between themselves and with new incoming shareholders.
The company is now actively looking for acquisitions.
Typical targets will be profitable, cash generative SMEs with repeat products and services in well established industry sectors with turnover of up to £10m and EBITDA of £500,000 to £2m.
Existing investments include Wigan-based sealants and adhesives specialist Hylomar, Lancashire hardware specialist Olympic Fixings, Goole-based chemical manufacturer Technikraft, Nottinghamshire art supplies firm Teaching Art, and Auto Marine Cables and First Class Holidays, both based in Manchester.
All were originally acquired through PHD Fund 2, which was raised in 2014 and has performed strongly, providing regular substantial cash returns to investors.
Fund 2 delivered an IRR of 12.6% and a 1.5x money multiple on the sale to PHD Industrial Holdings. It follows the success of Fund 1, which generated a 21.6% net IRR and 2.4 money multiple for investors, after fees and carried interest.
PHD Industrial Holdings will be led by executive directors Andy Dodd, Philip Price and Craig Richardson with James Dow as chair. Rob Unsworth and Jonathan Brown will join as non-executive directors.
Andy Dodd said: “Many private equity firms are looking at longer term investment strategies or selling portfolio companies internally from one fund to another. I believe we are one of the few in the UK to transition to this type of business structure.
“It takes time to find good investments and prime them for growth, and where there is a high quality, profitable business that is increasing in value, it makes no sense to sell prematurely. The cycle of fund raising, investing and exiting also means there is a significant proportion of time where funds are not invested.
“Our investors have been delighted with the returns to date. However, the ability to reinvest cashflows and hold investments for longer will allow them to benefit from compound growth and further enhance returns, while offering greater liquidity and tax efficiency.
“The new structure, together with the £5m fundraise, will also give us considerable firepower going forward.”
O’Connors provided legal advice on the transaction, while RSM provided tax advice.