Investment activity

Selective investment into high conviction opportunities

Nine months to 31 October 2018

We continue to be selective in our investment approach and, with a focus on the highest quality defensive businesses, we completed four co-investments and two secondary investments in the nine months. These, together with investments made by ICG funds, drove high conviction investments to 53% of the £115m of capital deployed, up from 42% in the year to January 2018. This increase in high conviction investments was primarily driven by an increase in investments sourced through the ICG network which accounted for 33% of new investment, as the strategic benefits of the move to ICG in 2016 continue to add value. The larger investments made in the period were:

• Minimax (a global provider of fire protection systems and services), alongside ICG Europe, in which we invested £12m. ICG has a 12 year history with this business and is the sole institutional equity provider in the most recent management buyout transaction.
• PSB Academy (one of the largest tertiary education institutions in Asia) alongside ICG Asia Pacific, in which we co-invested £7m, increasing our total investment in this company to £8m.
• Endeavor Schools (a US schools operator) alongside education investment specialist Leeds Private Equity, in which we invested £8m.
• Abode Healthcare (a provider of hospice and home health services in the US), £5m investment alongside US mid-market manager Tailwind Capital.

All of these businesses have highly defensive business models, with demonstrated resilience to economic cycles and high cash flow conversion, as well as strong growth drivers and clear value creation plans. Additionally, the two ICG co-investments feature a combination of subordinated debt and equity investments giving an element of structural downside protection. On a blended basis these investments are targeting returns in line with our usual equity investments, but the subordinated debt element significantly reduces the overall risk. This is a feature of the vast majority of our investments with both the ICG Europe and ICG Asia Pacific strategies.

Seven new commitments to both existing and new manager relationships

We completed five new third party fund commitments and committed to two ICG managed funds resulting in a total of £109m of new primary fund commitments in the nine months. Of the five new third party fund commitments, two are to European managers we have invested with for many years (Graphite Capital (£30m) and Bain Capital Europe (€8m)), and three are new to the Portfolio (The Jordan Company, Tailwind Capital and Five Arrows).

The commitment to Graphite IX continues our strong relationship with our former manager, Graphite Capital. The fund builds on Graphite’s more than 30 year successful track record of investing in mid-market buyouts in the UK, and held a final close at £470m which was in line with both its target and the predecessor fund.

ICG’s latest European fund, ICG Europe VII, closed €3.7bn of commitments in May 2018. This strategy invests in subordinated debt and equity in European buyouts, usually with ICG as the sole institutional investor. The fund targets gross annualised returns of 15%-20% with low downside risk and its first investment, Minimax, was also a co-investment in the nine months. We have invested successfully in this strategy for almost 30 years and our €40m commitment to ICG Europe VII takes the total exposure to this strategy to £138m (including undrawn commitments).

We also committed $10m to the latest ICG US mezzanine fund, North American Private Debt II, which raised $1.35bn. This fund invests in subordinated debt and equity of US private equity-backed mid-market companies, targeting gross annualised returns of 13%-17% with low downside risk. The commitment is consistent with two of our strategic objectives of increasing exposure to the US market and to in-house strategies that fit our investment criteria. We also expect it to broaden and deepen our US middle market third-party manager relationships.

Commitments to The Jordan Company and Tailwind Capital, of $15m each, further increase our focus on the US mid-market. Both of these managers have long track records of investing and adding value through cycles. Tailwind has already generated an attractive co-investment in Abode Healthcare and the new relationship with the Jordan Company generated a secondary investment opportunity in a successor fund during the nine months. We expect both funds will generate additional high conviction investments in the future.

We also committed £7.7m to Five Arrows Capital Partners. Five Arrows is a mid-market private equity manager with a presence in Europe and the US and is another new manager relationship during the nine months.