Investment activity

Increased investment rate into high conviction investments
(12 months to 31 January 2018)

In the current market environment, a patient and selective investment approach is key, and our focus has mainly been on the highest quality defensive businesses. High conviction investments accounted for 42% of the £142m of capital deployed in the year to 31 January 2018, up from 39% last year, reflecting our medium term strategic objective of increasing high conviction investments to 50% – 60% of the Portfolio. The increase in high conviction investments was primarily driven by an increase in ICG investments which accounted for 35% of new investment in the year. This increased from 25% in the previous year, highlighting the continuing strategic benefits of the move to ICG.

Alongside ICG Europe we invested £18m in Domus Vi (a leading European nursing home operator) and added £10m to our 2014 investment in Visma (a market leading provider of software for small and medium-sized businesses in Northern Europe).

We also participated in a secondary fund recapitalisation which increased our exposure to Gerflor (a global market leading flooring manufacturer) to £13m. Alongside ICG Asia Pacific we invested £8m in Yudo (a leading global manufacturer of mission-critical components for the injection moulding industry). All of these investments have a bias towards structural downside protection, by typically investing in a blend of subordinated debt and equity. This helps to limit downside risk while remaining within our target return range. We believe this approach is particularly attractive at this point in the cycle.

Elsewhere in our high conviction portfolio, we completed a £5m secondary investment in two funds managed by Oak Hill Capital Partners, a US mid-market manager, and signed a £7m co-investment alongside Leeds Equity Partners, another US mid-market manager, although this investment did not close until shortly after the year end. While high quality defensive growth remains our overarching investment philosophy, our flexible strategy allows us also to be opportunistic, and during the year, we were able to find a number of relative value situations facilitated by the transaction dynamics, such as fund recapitalisations and late primary investments (as described below).

Selective new commitments to both existing and new manager relationships

We completed eight new third party fund commitments and increased the commitment to  ICG Strategic Secondaries Fund II, resulting in a total of £110m of primary fund commitments in the year (31 January 2017: £118m). Four of the new third party funds were raised by managers we have backed successfully for many years (CVC, PAI, TH Lee and Hollyport), while four are new to the Portfolio (New Mountain, Oak Hill, Leeds and HgCapital). Three of the new manager relationships (New Mountain, Oak Hill and Leeds) are focused on the US mid to upper mid-market reflecting our strategic objective to increase exposure to this important market.

All new commitments are to established managers with successful track records of investing and adding value through cycles and with a bias towards high quality defensive businesses. We believe that focusing on the most established managers in developed markets reduces risk and leads to more consistent and less volatile returns.

Both the Oak Hill IV and Leeds VI funds had already invested in several portfolio companies, giving us good visibility into the underlying portfolios and opportunities for immediate cash deployment as well as early valuation gains. In the case of Oak Hill IV, the fund recently announced the sale of a portfolio company for a multiple of 3x cost, returning 43% of capital deployed to that fund to date. Situations such as this, known as “late primary” investments, suit our style of investing by applying our bottom-up, underlying company focused due diligence style and help us to deploy capital more efficiently. In the last two years, we have completed 18 new fund commitments of which six were late primary investments.

The £8m increase in commitment to the ICG Strategic Secondaries Fund II is a further example of a late primary investment, with the demonstrable progress of the existing portfolio making the fund a compelling opportunity. To date, the fund has completed six transactions at highly attractive valuations of 6x to 7x EBITDA. The total commitment to this fund is now $35m, with a further $15m co-invested alongside the fund in one of its transactions.