Termsheet: Driving growth

Permira Debt Managers executed its first non-sponsored deal in March with UK logistics firm Kinaxia Logistics to support the acquisition of two family-owned businesses – Foulger Transport Limited and Lambert Brothers Haulage. The £25 million loan backs a buy-and-build strategy that, since 2009, has seen five longstanding companies merge into one haulage and warehousing group that has its eye on a market-leading position.

PDM was sole lender on the deal through its second direct lending fund, Permira Credit Solutions II, which closed on roughly €790 million in July and was levered up to €1.1 billion.

Proceeds from the package refinance the various sources of credit that once underpinned each separate business, including a number of asset-based facilities and mortgages. Kinaxia will also purchase a logistics hub to act as headquarters, while there is also a war chest for future acquisitions and some family owners have cashed-in.

The bullet loan has a five-year tenor and is priced at the upper end of the 7 percent-10 percent range, the internal rate of return target for Permira’s fund. Leverage is below five times, a source said. There are warrants and a small PIK element attached, PDI understands, as well as a full suite of covenants.

The senior secured financing is an attractive alternative to private equity, both Thomas Kyriakoudis, chief investment officer of Permira Debt Managers, and Peter Fields, Kinaxia’s co-founder and chairman, tell PDI.

Kyriakoudis will join the company board but management will remain in control and not lose upside commonly seen with a majority share private equity investor.

Unlike most entrepreneur or family-owned companies, however, Fields has extensive experience in private equity, M&A, commercial finance and venture capital, which shaped his decision to go with private debt.

Private equity has its place, but he says “there are those that come in with a very short-term plan, which basically means strip out costs and try to rationalise the business or make changes”.

The businesses that currently form the Kinaxia group were successful in their own right and have been around 50 to 100 years. There is no turnaround story and they are cyclical businesses, which many PE firms do not like anyway, he adds.

“We’re putting together companies that are already good companies and creating operational and purchasing synergies. And these synergies are difficult to define,” Fields says.

In many ways the deal had to be approached like an equity investment, Kyriakoudis says. “We had to start with a clean sheet.”

It was also a complex deal. “We had to really structure it a bit like we would a private equity deal,” he adds.

In sponsor-run situations, private equity firms provide all the documentation. Negotiating and drafting the termsheet was a challenge.

“We had to be very flexible around the right structure of the deal, so that was something we had to start with a blank sheet of paper in terms of structuring the deal, and putting together the right terms, thinking about how to take security and so on,” says Kyriakoudis. “There’s not an already fixed capital corporate structure that we just lend against, it was something that we had to really start from scratch. There’s a lot of work. It’s a bit like doing a private equity deal to be honest.”

BUY-AND-BUILD

Fields’ plan is to produce step-change growth through a buy-and-build strategy. And although banks extended financing lines to the Kinaxia businesses before, for this strategy it was not a readily available option. “There is no history to show [banks]. And they love history,” Fields says.

Fields believes he has been fortunate with banks. “We did work with banks early on, who were supportive in asset lending. Invoice discounting is something that we’ve used and also mortgages. So we have used banks, but classic profit lending requires a track record of generating profit before they lend to you,” he says.

Kinaxia is in the process of completing an asset-based credit agreement with another lender, PDI understands, though drawdown will not occur for some time. Turnover of the company is £50 million and the plan is to start using an asset-based lending facility, in conjunction with the PDM funds, to pay for other acquisitions.

“I’m a big fan of asset lending. And I think it’s really undervalued and has a growing place,” says Fields.

However, he warns that it requires care and skill to manage. Excellent cash flow forecasting and the discipline not to overspend is essential because if things get choppy, the assets pledged could be on the line.

The PDM facility is not asset-based, but Kinaxia’s has a lot of valuable unmortgaged properties to provide downside protection. PDM’s main focus as a lender is that the company can service and repay its debt, Kyriakoudis says. It’s a cash-generative business, with limited capex, a flexible cost base structure and unique assets that are difficult to replicate easily, he adds.

HISTORY

Though Kinaxia itself does not have a long balance sheet history, the paths of Permira Debt Managers, better known as for its private equity arm, and Fields, have crossed before when they worked together on the buyout of Azelis, an Italian logistics business, in 2003.

Kyriakoudis and Kinaxia’s other founder, Graham Norfolk, also know each other.

Competition for deals is one of the biggest challenges facing direct lenders, but PDM was the sole lender working on the financing after Kinaxia approached it last year. After being told why the merger with Foulger and Lambert Brothers was a good fit, PDM came back with a simple structure that appealed to all the owners.

“A number of people have rolled their equity in their family business into the overall business. There is no sponsor here apart from us,” Kyriakoudis says.

Fields describes the process, which took four months, as refreshing. “The reason why we’re with them, and it’s unusual for such a big company, is that they showed real skill in asking the right questions, getting enough understanding for what we do, rather than just doing an accounting exercise, and then believing in our project,” he says.

The transaction is one of two non-sponsored deals from PDM’s second fund. Its first direct-lending fund comprised 92 percent sponsored deals, but the firm plans to increase the proportion of non-sponsored loans in the second, reflecting growing opportunities.

“In non-sponsored, there is more opportunity to create interesting deal angles and get attractive returns for our investors,” he says. The vehicle is performing at the top end of its 7 percent to 10 percent net IRR target, PDI understands.

Certainly, returns are the most crucial goal for PDM, while the key from Fields’ point of view is an investor not driven by ownership. The result is a “very grown-up relationship”, says Fields, between partners with a similar vision for the future – growth backed by specialist financing.  

This article was amended on 4th September to reflect that Permira Debt Managers is a separate business from Permira.