Investment activity

Selective new investment 

Year ended 31 January 2020

We invested £159m in the year, broadly in line with the £158m of new investment in the year to January 2019. 39% of new investment was into our high conviction portfolio, down from 50% in the year to January 2019. While we had a similar volume of opportunities compared to the prior year, we executed fewer co-investments, given our cautious stance on valuation multiples being paid for acquisitions. We completed three US co-investments and the Froneri secondary transaction, totalling £35m and one co-investment alongside ICG (£10m).

Co-investments have always been a feature of our strategy and have outperformed both primary and secondary investments over the short and long term generating a local currency return of 21% p.a over the last five years. Our focus remains on defensive growth businesses with high cash flow conversion which have demonstrated resilience to economic cycles. The co-investments made in the year were:

• DOC Generici is a leading independent generic pharmaceutical company and the third largest company in the Italian pharmaceutical market. It is active in the supply of drugs for the treatment of all the common medical conditions with a strong presence in areas including cardiovascular, gastrointestinal, metabolism and neurological treatments. We invested £12m in this company.
• Berlin Packaging, provider of global packaging services with a focus on the food and healthcare industries in which we invested £9m alongside Oak Hill Capital Partners. The company provides its clients with a fully integrated service to design, finance and commission packaging. It is the number one distributor of rigid packaging in North America operating in a $7bn core addressable market. It has a strong financial track record and a highly cash generative business model with demand that has proved resilient through the cycle.
• VitalSmarts, a US provider of on-line and in person leadership training, our second co-investment alongside Leeds Equity Partners, in which we invested £8m. Both the manager and company have an excellent track record in corporate education and the deal dynamics at entry were attractive in terms of both entry multiple and the company’s capital structure. The company has worked with over 300 of the Fortune 500 companies and has a highly diversified income base.
• RegEd is a leading provider of regulatory compliance software services, primarily to broker-dealers, insurance companies and banks in the United States. The company’s customers include over 200 blue-chip customers including 80% of the top 25 financial services firms in the US. We invested £5m in RegEd alongside a new US manager, Gryphon Investors. We expect RegEd to benefit from a number of favourable trends as its clients transition towards greater automation and less reliance on manual processes.

All of these companies have defensive business models. Additionally, DOC Generici features a combination of subordinated debt and equity investments giving an element of structural downside protection, a consistent feature of many of our investments with ICG.

12 new fund commitments to both existing and new manager relationships

We completed 12 new primary fund commitments in the year totalling £156m. 11 of these were to third party mangers. Of these third party fund commitments, six were raised by managers we have backed successfully before: two European funds (IK and Cinven), two global funds (Advent and Permira), and two US funds (Oak Hill and Gridiron). We also made a commitment to ICG Europe Mid-Market Fund, ICG’s latest European fund. The managers we back tend to raise funds that are oversubscribed and therefore difficult to access, and the calibre of these managers speaks to the relationships that we have built with these firms over many years. A key area of focus in our selection and due diligence process relates to the performance of managers during periods of significant financial stress.

We also added five new manager relationships of which three are focused on the US mid-market (AEA, Gryphon Investors and Charlesbank) and two are focused on the European market (Carlyle Europe and Investindustrial). Since the move to ICG we have built many new relationships with US managers and they have been a key source of co-investment and secondary deal flow in addition to the in-house deal flow that ICG has given the Company access to. As a result, the Portfolio is increasingly geographically diverse; of our 29 core manager relationships, 12 are US managers and we have successfully increased our US exposure to 30% of the portfolio. Over the medium term we expect our weighting to the US market to further increase to up to approximately 40% of the Portfolio.