Posted: 16 February 2021

The rewards of small cap buyouts

The rewards of small cap buyouts

Research into corporate deal activity in the UK consistently highlights a polarisation in the market between large and small deals. While some investors are gravitating towards larger transactions, others like WestBridge, are sticking firmly to their niche. Here, partner Tim Whittard explains why.

The size parameters being used to define a small or lower mid-market deal vary considerably depending on who you are speaking to.

At WestBridge, our core focus is very much on companies with values of between £10 million and £25 million, where we can invest between £5 million and £15 million.

We’re often asked whether we’re tempted by the bigger price tags and higher profiles of larger transactions.  The honest answer is no, we’re not.  Although, every one of our senior team has worked on many large transactions over many years, at WestBridge we have chosen to stay focussed on the smaller end of the UK market for a number of reasons.

For a start, competition in the mid-market for the limited number of deals available is fierce. This has driven up deal pricing and management teams often face extremely challenging targets if they are to deliver the returns their investors are looking for.  The pressure to deliver is considerable and can sometimes be difficult to manage.  

At our end of the market, there is a very different dynamic. 

With reduced competition, we have greater opportunity to work in close association with management teams, vendors and advisors to originate and develop deals.  These often remain more attractively priced and provide the chance for us to spend time more time in the business and with the management team before completing the transaction.

This helps us get a deeper understanding of the business and develop a stronger relationship with the people we are backing before the deal completes.  Importantly, this deep immersion often enables us to form a clearer view of how to generate and deliver significant incremental value than is sometimes possible in the highly competitive and time restricted processes that are often the norm at the larger end of the market.

This increased level of early stage involvement in the development of the business is what we really enjoy.  It’s where we really start to demonstrate our added value approach.

The essence of our role is to support management teams by helping them enhance the way they run their business and put the building blocks for accelerated growth in place.

We work very closely with them – identifying and helping to implement more effective operations; enhancing corporate governance; developing and assisting in the execution of buy and build programmes; helping to restructure and support existing management hierarchy; and reviewing and developing sales and marketing activity. 

Creating value in a company is clearly important but, as a responsible investor, we see our role as going much further. For instance, by ensuring that the foundations of good practice around environmental, social and governance (ESG) are put in place at the start of our involvement with a company.

No two businesses are the same.  One solution doesn’t fit every situation, nor should it.

Generally speaking, we are typically the first private equity provider that a management team will encounter in the life of their business.  Where bigger companies have probably already implemented the type of changes we introduce, businesses we invest in invariably see dramatic and positive results from the introduction of the simple changes we facilitate.

Of course, there are challenges with working in the smaller end of the market.  These can include businesses with sub-optimal scale in their respective markets to attract and remunerate the best talent available or that they simply do not have the necessary skills in-house to drive the significant growth they are seeking to deliver.  However, with our collective experience, there are very few scenarios we can’t handle effectively. 

However, there are also great advantages of focussing on this part of the market.  We often find that the businesses and people involved are driven, innovative and creative – good at developing, defining and dominating the niche markets in which they operate.  They tend to be nimble, fleet of foot and able to adapt well to new challenges and opportunities – they also define and deliver great working cultures. 

We frequently find that our contribution is as much to do with giving management the confidence and support to achieve their goals, as it is to giving them financial investment and advice. 

To-date, we have invested £45 million from our first fund and co-investors.  This has been invested in eight companies, all of which met our key criteria of being established, profitable and ambitious.  It’s been hugely rewarding to see them all prosper.

In fact, rather than being a barrier to growth, their smaller size has been a positive advantage in their niche sectors.  With our help, four of them are now operating successfully in global markets and three have moved on to the next stage of their growth having exited, delivering an average of over 4x for our investors and significantly higher returns for the management teams.

Succeeding in the smaller buyout environment requires a certain set of skills but is not rocket science.  It simply boils down to the careful evaluation and selection of each investment in the first instance and then the sensible and sensitive development of that investment in close partnership with its management team.

Typically, WestBridge invests between £10m and £25m in established, profitable and fast-growing UK SMEs with enterprise values of up to £50m.  We are always keen to hear from ambitious management teams that require development capital, acquisition funding or support for a management buyout.  To hear more about our investment criteria or discuss the suitability of a company, do get in touch.


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