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Selective investment into high conviction opportunities
INVESTED IN HIGH CONVICTION INVESTMENTS
6 months ended 31 July 2019
In the current market environment, we continue to be highly selective in our investment approach with a focus on high quality, defensive businesses. We invested a total of £64m in the six months with high conviction investments accounting for 38%, including two new co-investments: DOC Generici and RegEd. The ICG network accounted for 31% of new investments.
- DOC Generici is a leading independent generic pharmaceutical company in Italy. 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 co-invested £10m alongside ICG and a further £1m will be invested through ICG Europe VII. DOC Generici is the third largest company in the Italian pharmaceutical market, which is a resilient and relatively predictable market.
- 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, including through their fund. We expect RegEd to benefit from a number of favourable trends as its clients transition towards greater automation and less reliance on manual processes.
Both of these businesses have 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, 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.
Eight new commitments to both existing and new manager relationships
During the period, we completed eight fund commitments, including a new ICG managed fund, resulting in a total of £118m of new fund commitments in the six months. Of the seven third party fund commitments, two are new managers to the Portfolio (AEA and Gryphon), with the remainder to funds raised by managers we have backed successfully before. Of these, two are European funds (IK and Cinven), two are global funds (Advent and Permira), and one is a US fund (Oak Hill). 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, in most cases over many years.
Two new relationships are both US-based:
- AEA is one of the longest established US private firms, having been founded in 1968. It is a highly regarded mid-market manager which we have been tracking for over five years. It focuses on businesses in the industrial and consumer sectors, targeting niche sub-sectors such as packaging and high growth consumer brands. It has a highly operationally focused approach which allows AEA to execute complex transactions successfully such as corporate carve-outs. The investment team which will deploy AEA VII has a successful track record of delivering consistently strong returns through economic cycles.
- Gryphon Investors is another long-established US manager based in San Francisco, focused on business services, consumer, healthcare and industrial growth. We invested in its fifth fund, which by the time of its final close was already over half committed. This allows us to diligence the underlying investments, as well as to deploy committed capital more efficiently. Gryphon has a highly focused, thematic origination approach which seeks to identify companies within tightly defined sub-sectors which have characteristics aligned with our defensive growth focus. Shortly after committing to the fund, we co-invested in a Gryphon V investment, RegEd which is discussed above.
We also made a €20m commitment to ICG Europe Mid-Market, ICG’s latest European fund. This strategy invests in subordinated debt and equity across a variety of European opportunities, typically with ICG as the sole institutional investor alongside a strong management team. The fund will follow the same successful strategy of ICG Europe, but with a focus on smaller mid-market companies. The fund targets a gross IRR of 18% and a multiple of cost of 1.8x with a focus on low downside risk.
The first half of the year has been highly active from a new commitment perspective, as a significant number of our preferred managers were raising funds in this period. We expect to complete materially fewer new funds in the second half.