Exponent’s second fund closes ahead of target

The spin-out from 3i is profiting from investor appetite for mid-market deals as the credit crunch hits large buyouts.

Exponent Private Equity, a UK mid-market firm, has closed its second fund with commitments of £805 million (€1 billion; $1.6 billion). The fund is double the amount raised in the first fund in 2004. 

Hugh Richards, one of the firm’s four founding partners, said the increased capacity was in line with the growth in the market. “We position the firm in the space vacated by the big boys as they get larger. The upper mid-market has moved and investors are clearly interested in that argument.”

Richards and his co-founders Richard Campin, Chris Graham, and Tom Sweet-Escott have committed more than 80 percent of Exponent’s first fund to eight investments. These include the acquisition of the TSL Education business from News International for £235 million in October 2005 which was then sold to Charterhouse in May 2007.

That sale is the only exit to date. However, Richards said this had not been an issue with investors during the fundraising. He said they understood it was a young portfolio. “All the plans came right with TSL and quicker than expected. It was a helpful proof of principle, but it would have been unrealistic to expect more.”

Investors were more concerned about the effect of the credit crunch on bank lending to the mid-market and the impact on M&A activity. Richards said this had been hard to predict at the time of the fundraising, but to date there was still liquidity. “The terms have changed and you have to look at the fine print. The covenants are more onerous.”

The firm’s work in progress had also held up well, “aided and abetted by the change in the treatment of [UK] capital gains tax for business assets”. The introduction of a flat rate instead of taper relief is encouraging vendors to sell.

He said the portfolio, which includes Durrants Media Monitoring, acquired in a secondary from August Equity for £82 million in April 2006, and Trainline, bought from Virgin for £163m in June 2006, was in good shape and there was no evidence of an economic slowdown.

Richards said it was difficult to map macroeconomic changes on to the deal landscape. “Will businesses be cheaper in a year? Who knows? It is best to look at deals from the bottom up: is this a good business with a good plan and a good management team at this price? Can we make some money? That’s the best protection.”

Exponent will focus on investing in large, complex mid-market buyouts of UK companies and can commit up to £200 million in any one transaction. 

The fundraising had been swift, opening in May with most commitments secured by September. According to Richards, it has taken till now to tie down one or two investors.

Investors included funds managed by Pathway, Pantheon Ventures, Danske Private Equity, MassPRIM, OMERS Capital Partners, NYL Capital Partners and Bank of Scotland, as well as substantial US endowment and European private family sources.

The fund’s legal adviser was Debevoise & Plimpton and the placement agent was Helix Associates, part of the boutique US bank Jefferies.