Nicholas Lockley finds recently re-branded UK mid-market specialist Silverfleet Capital content as the economy enters a wintry spell.

Life in Europe's temperate climes means adapting to the seasons and that includes the cold, often wet and grim weather of winter. There is no doubt some people are constitutionally better suited to the “season of discontent” than others.

So too in finance.

Meeting in Silverfleet Capital's space-age office of bright, shimmering white surfaces, Gareth Whiley, a partner at the firm, says: “We are in the private equity equivalent of ‘winter’.”

Outside it is blue skies and sunshine. Office workers are in shirtsleeves and apparently without a care in the world. In Whiley's world the picture is gloomier, but it is at least not raining on him or his firm's portfolio.

“In early 2007 we didn't know what would trigger the slowdown but we knew it was not far off. We are happy we don't have an over-leveraged portfolio. In that situation PE firms can become very introverted,” he says.

Neil MacDougall, the firm's managing partner, thinks the onset of this financial cold snap, which has seen many lenders to the buyout market freeze, was inevitable once the credit crunch hit.

He says: “You cannot have one of the greatest shocks to the financial system in recent decades without consequences. In addition to their other problems, the banks in the London market are no longer getting early repayments. In previous years the loan book was coming back too early, now it's not coming back at all.”

But MacDougall and Whiley are sanguine. One of the fundamental tenets of private equity investing is, according to Whiley: “Buying low and selling high.” To do that has been very difficult in recent years. Now, with the pain in the UK economy and the collapse of banking confidence, they expect opportunities are round the corner as vendors come under increasing pressure to sell to generate liquidity and prices re-adjust downwards as the cold snap begins to feel like an ice-age.

MacDougall says: “The great thing about the private equity model is we have up to five years to invest. We are not under any pressure to buy and therefore can choose when we think the time is right.”

And while the firm is preparing for difficult times, it is still optimistic when it sells portfolio companies. According to MacDougall: “Unlike the relatively weak demand for quoted equities, right now private company valuations are still high, which is clearly evidenced by the renewed interest in possible public-to-private transactions.”

It is key that the assets are high quality and that the banks believe the borrower will be low risk and the loans attractive in syndication. That and a tightly-run process with a number of the larger capital-rich private equity firms in contention can deliver good returns. Two of Silverfleet's exits this summer underline this.

The firm recently agreed the sale of Jost World, a global manufacturer of components for commercial vehicles, to its larger rival Cinven. According to one source close to the deal, the total consideration was about €525 million ($812 million).

This will generate a 3.1x money multiple and an IRR of 47 per cent on Silverfleet's original equity investment when it bought the business around three years ago in August 2005.

When the deal closes following the receipt of regulatory clearances, the firm will be toasting a similar success on its sale of TMF, a business process outsourcing company, to Doughty Hanson.

After a keenly contested auction which saw two or three firms go all the way to the line, Silverfleet is banking a money multiple of six times its original investment made in 2004, generating an IRR of 55 percent. An adviser close to the deal said US firms Hellman & Friedman and General Atlantic lost at the last after a process that had “twisted and turned”.

Swiss bank UBS ran the auction and is, alongside Dutch bank ING, providing €445 million of financing to support Doughty Hanson's €332 million equity cheque.

Mark Corbidge, a senior principal with Doughty Hanson told, a sister website to Private Equity International, that the business would be an ideal candidate for a listing. “It has what I call the Holy Trinity for a listing. It is enjoying top-line growth -both organic and a good pipeline of acquisitions. It has a high quality of earnings with contracts over a year. And it has a very high cash-conversion; its cap-ex requirement is low.”

MacDougall says the investment illustrates a core Silverfleet strategy: that of buy-and-build. “During the period of our involvement with the business, management was able to achieve a large part of its buy-and-build programme. In 2004 the company operated in 23 countries, whereas today it is active in over 60 . In that period TMF has been a prolific acquirer, having made over 50 follow on acquisitions with several more in the pipeline at the time of signing,” he says.

Earlier this year, the company published a ten-year study on the buy-and-build strategies of private equity-owned portfolio companies in Europe. It showed 2007 was a record year for follow-on acquisitions by private equity-backed businesses. The 385 transactions represented more than a 10-fold increase on the number completed in 2000.


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