A Profit and Moss Account

A Profit and Moss Account

Nigel Moss is building LDC’s private equity presence and strength in Scotland. The former Bank of Scotland Corporate financier says his door is open for the right kind of deal where the managers know exactly what they are doing and where they are going. He spoke to BQ Editor Kenny Kemp.

Every business deal is different. The management buy-outs, the buy-ins or the trade sale are times of high-wire tension and stress. The deal involves human beings with different aspirations and backgrounds. The deal involves expectation, emotions and egos.  Nigel Moss has been around the table at such times, and wears some of the scars too from a rocky spell with Bank of Scotland Corporate, and sees there is a common thread. Moss, the managing director of LDC, formerly Lloyds Development Capital, in Scotland, knows that the difference between success and failure is a good management team.

Sitting in one of the modern board rooms in Quay 2 at Fountainbridge in Edinburgh, overlooking the Union Canal which joins Edinburgh and Glasgow, Moss is on the look-out for Scottish companies who are consistently making profits of over a million –companies with the potential to scale-up. “We are seeing companies all the time and we’re always looking for the up-and-coming ones too, even though some might be a bit away from us at the moment. We are keen to speak to any good management team regardless of exactly where they are. Hopefully, their business is going on an upward trajectory,” he says in his Ayrshire drawl.  “We are looking at backing good management teams. So LDC is a generalist private equity house, which means we don’t have any specific sector focus. We believe that if we are working with good management teams, who are the best in their sector, then we should be well positioned to find the right companies. We are helping firms on their journeys of three, four, or five years or more, helping these teams reach their goals.” LDC was created in 1981 and its first chairman was David Horne who worked with Lloyds Bank and he was one of the driving factors that persuaded Fred Crawley, the Lloyds Bank deputy chief executive, to help companies with development capital. It was originally called Pegasus Holdings and run by Bob Hamilton, based in Queen Victoria Street in London. Within a decade LDC had over 150 investments and at its 20 anniversary had invested £100m. Over the past five years the investment exceeds £1.5bn in over 80 businesses.

“It’s been a phenomenal story. Thirty years makes it one of the longest running private equity houses in the UK. During the 1980s and into the 1990s, LDC was learning all the time about different ways to structure deals.  Then we were putting hundreds of thousands into deals, whereas now the smallest cheque we will do is £2m. While the size and scale has changed, the philosophy hasn’t changed at all,” says Nigel.

Since its start, it has exited about 300 businesses across the UK, building up an ‘alumni’ network of connections who understand how LDC operates.

Today the chief executive is Darryl Eales, who appointed Moss giving him the remit to grow the Scottish operations. Private equity for LDC is about finding Scotland’s good management teams, helping them to grow their businesses, through either organic growth or further funding for acquisition.

“The person who does the deal with us tends to stay with the company going forward.  This is important for the management teams because we get to know them well during the deal process. They like to have that consistency of person as the touch point for the private equity house. We also like to introduce a chairperson and we work with the company to find that right person. It can be someone who has done private equity before or someone who can open up a different part of the industry for them.”

Nigel Moss says one of the most satisfying aspects of deal-making is bringing in someone who can augment the board, although in some of LDC’s 85 companies the chairperson stays on.

“Often we see it as a chance to make changes to the board. We will then work with the company and the management team. Because we are generalist in nature we don’t profess to know how to run the day-to-day business or tell them which sector to focus on. While we do a lot of diligence going into a deal, we back the management team because we believe they have the ability to grow the business.”

One recent example of LDC’s flexibility is the re-investment finance for MB Aerospace, headquartered in Motherwell, which has just bought Delta Industries in Hartford, Connecticut. The Scottish company, with operations in Derby, Detroit and Burnley and supported by Arlington Capital Partners, needed to expand its presence in the commercial and military aero-engine market in the United States. LDC’s new funding enabled the aviation company, led by Craig Gallagher, to expand revenues by 35% to more than $160m, with now over 550 employees.  “LDC is entrepreneurial in this regard.

Re-invest isn’t something we do often, but we are flexible. The sector is rationalising and size does matter. So MB Aerospace acquired a significant business in the United States.  Working with the main engine companies going forward, such as Rolls-Royce, Pratt & Whitney, the company needed to have more exposure to the US. It’s very exciting.” He also cites the example of the LDC office in Hong Kong, which was opened seven years ago, and is being used as a conduit for private equity supported companies to get into the Far Eastern and Chinese market. LDC sent Scotsman Craig Wilkinson to set up the office.

“We knew that a lot of our businesses wanted to export, set up manufacturing, and import from China. Yet it is not always easy for a £30m turnover company to find the right connections. It is not efficient for them to set up an office simply to find their feet.

We went out there and built up the connections, which included employing Chinese nationals.  This gives us a unique insight into the Chinese market - it helps a lot of our companies who are moving into Asian and Chinese markets.” For example, this has helped Ramco Oil Services in Aberdeen, a recent £50m secondary buyout supported by LDC, who have used the Hong Kong office to support opportunities in China.

“The Midlands has been the bedrock of LDC’s regional business model with a major office in Birmingham since 1987. Our core culture is still there, and is embedded throughout the company. It is not the investor who makes the difference, it is who you are investing in that is the key. That has held up well for the past 30 years.”

“We want to maintain a big footprint across the UK. We don’t want to be far away from any deal and, if something is happening, we don’t want someone who has to fly in from America or get on a flight. You want someone who is available regionally to work with the company.”

LDC’s footprint extends from Aberdeen to Bristol, through Leeds, Nottingham, Manchester and Reading, with 50 execs who can write the cheques, and this gives them an accurate view of businesses across the UK.  “We will see about 95% of what is going on in mid-market private equity throughout the UK, which helps us to chase those deals with the greatest potential. We know what the debt market is like, and the prospects for exits and what the competitors are like around the UK.  Our footprint, availability of funds and appetite to transact allows us to do the volume. In terms of number of deals we are the highest volume private equity house in the world.” Nigel Moss says this gives more comfort on pricing and in relationship when delivering a deal.

“One dramatic change in the last five years is that deals are taking a lot longer, so you want to work with an investor who can deliver and is proven over time. People are far more cautious. The past five years have been important for LDC because we have invested through the cycle, because 2009 and 2010 were good years to invest in.”

Naturally, the macro-economic conditions of meltdown in the Eurozone, an acute lack of liquidity in the debt market, and the doubledip recession, which heralded a spate of business failure, have made investors far more leery about funding medium-sized companies.  However, LDC has stuck with it. But LDC had a hole in its network. It was underrepresented in the oil and gas market, with limited exposure through its connection with the Epi-V fund. So expansion in Scotland has been fostered by the need to move especially into Aberdeen and the North East of Scotland.  Before Nigel’s arrival in June 2012, LDC had a lone wolf in Scotland who was expected to cover a lot of ground. Clearly, that had to be changed.

“I was involved with LDC before 2012 in the strategy of the business. I recruited Mark Kerr in Aberdeen. Mark used to be co-head of oil and gas at 3i. He knows the sector extremely well and he lives in Aberdeen. Mark brought in Kevin Binnie, a former KPMG chartered accountant and corporate adviser who worked for SCF Partners, so we now have the coverage that we needed.”

The new hires made immediate hits with three direct investments in oil and gas with Ramco Oil Services, and investment support for Bifold, the wellhead and subsea hydraulic and pneumatic valve business, based in Manchester, and Rimor, a precision oil and gas engineering business, based in Hampshire, which was concluded in early June.  “For me, the real excitement of having Mark and Kevin in Aberdeen, who are steeped in the knowledge of the sector, is that if any of the large majors decide to divest of businesses, it allows good local management teams to take over. Aberdeen has been very good at allowing businesses to grow that have come out of majors. PSN, now part of the Wood Group, is a classic example. Being close to the management teams and key people, with our ear to the ground, remains our goal.“ LDC now has a team of five trying to originate deals in Scotland, where there is real opportunity. So how does an ambitious management team – with no substantial access to equity – make sure they are getting a good deal when they sign on with LDC?  “While there is a blank sheet of paper for every deal, what it looks like in the end is that LDC has to be aligned with the company. This is alignment of wealth with the management team incentivised to share in the success. We do a lot of primary buy-outs from plcs and often the management team will invest some of their savings or gear up based on their salary. We structure the deal so they can see their upside and that they get an appropriate stake in the business.”

In secondary and tertiary buy-outs, management teams might well be rolling over millions of pounds in pursuit of even greater returns. Ramco is a typical secondary buyout involving LDC’s Mark Kerr, who has joined the board.

“We are backing Malcolm Edward and his team; they are market leaders in their field.  Malcolm was backed previously in 2005 when Sir Fraser Morrison and his family took a stake and there was an equity roll-over from this. The team believed there was still a lot of international work to take on. They are now going into new territories, such as China, which we’ve mentioned, but also into Brazil.

They have operations in Romania, and large operation facilities in Norway and in Aberdeen at Badentoy Park at Portlethen, where they have a 48-acre pipe cleaning and blasting site.“

LDC’s financing, with additional debt provided by Clydesdale Bank, has helped recruit more international sales and development people into the business. The firm has stateof-the-art pipe cleaning equipment that can be mobilised into a set of large containers and shipped around the globe.

One of LDC’s hidden gems is that it also has a ‘Chairman Network’, run by Hazel Cameron, a well-kent Scot who is a deal-maker in her own right, having spent 20 years in private equity in the UK and in the United States, with 3i Group, Bowman Capital, and Cross Atlantic Partners. For Ramco, LDC suggested David Williams, who has both specialist pipeline engineer experience and worked in 3i and other private equity firms, as the chairman.  “David has great insight into the niche pipe business and the customers which the management team were interested to have, plus he had worked in private equity before. Ramco is a business that is transitioning with Malcolm taking over as chief executive,” says Nigel.

LDC is separate from Lloyds Banking Group in terms of debt funding. Most of the staff come from private equity rather than banking backgrounds. LDC’s annual investment of around £400m is financed by Lloyds Banking Group, although LDC is not tied in terms of which bank its portfolio companies raise debt from and in line with the acquisition finance market around 30% of the portfolio is banked by LBG.

“If it is a £100m deal, we would not put in more than 50% of debt. The reason we have had fewer business failures in the past five years is debt gearing is lower than our competitors. So the equity tranche we do ourselves and with management. We occasionally work with other private equity houses, but that is deal specific.” LDC does not like to take on extra gearing, so there is rarely mezzanine finance from other banks. It is typically a senior acquisition finance facility from any of the usual banks.

Changes in the debt marker has also brought in ‘unitranche’ facilities which are senior debt funds being set up by institutions, such as the £800m BlueBay Asset Management fund, part of the Royal Bank of Canada, who are seeking a return from private equity. As an asset class, there are changes in the market.

“We need these new type of facilities because this year, next year and in 2015, we will see a lot of debt needs for re-financing across the UK. Bluebay and Haymarket are coming in doing unitranche facilities. This does create liquidity.”

Nigel Moss says he is burning the shoeleather to find the right management team in Scotland. If he knocks on your door, make sure the kettle is on.

Nigel Moss

Born in Prestwick in Ayrshire, Nigel Moss attended University of Edinburgh, trained as an accountant with Ernst & Young in Glasgow, where he ended up doing corporate finance with some of the emerging band of technology and ecommerce entrepreneurs in the late 1990s. He worked with Douglas Nisbet, who was a mentor, and with Gillian Hastings. He worked on BP’s acquisition of Arco. After five years, he moved to Bank of Scotland Corporate, which was growing its private equity through its Integrated Finance department, in New Uberior House, in Edinburgh, and in London. It was a heady time and the deals flowed. He worked with Peter Cummings, who many now feel was unfairly maligned as the HBOS scapegoat. When Nigel joined there were eight people and it grew to over 120 people.

“The first few years were very exciting when we were controlling which deals we wanted to do. Then the size and the scale was appropriate for us to handle and we were rolling out into the regions. Where it changed course was when there was a desire to do much larger deals, taking larger listed companies back into private hands, and that was a change in strategy. That’s when I moved on working directly with some of the companies.”

Viewed as a safe pair of hands, he moved from the deal-making arm of the bank to helping some of the straitened assets. In late 2006 he worked with Charles Wilson, who was brought back into logistics and food retailer group, Booker Group, which had de-merged from Big Food group plc. Nigel, who represented the bank’s investment, worked alongside Wilson and the Booker team as it was reversed onto an AIM listing and then moved on to a full stock market listing. While its turnover was £3bn, the margins were very tight.

“The learning for me was the attention to detail and getting every single part of the business supply chain right at the same time as getting the customer proposition spot on. I learned a great deal about stakeholder management. We were transforming the business by taking it back on
the market.”

After Booker, he was involved with the housebuilder Crest Nicholson, based in the south-east of England, which was on the main market from 1968 until 2007 and then taken private. It was re-floated on the market 2013. He helped restructure this over-leverage business, which has over 60 banks involved with it, preparing it for its return to the market. After this, he was asked to review the portfolio of 180 hammered assets inherited by Lloyds Banking Group from the HBOS merger. Among the sales was the Garden Centre Group to Terra Firma, and Mint Hotels to Hilton Group.

“Of the 180, over 100 have been sold over the past four years. The market has improved and a lot of it was commercial property in the London market, which has bounced back. Residential is up 17% from peak and 48% from the trough. The main thing was keeping cool and working with the companies and deciding what to invest in. The market could not have taken massive disposals, it had to be orderly. The main thing was to be up-front and honest about how you deal with people.”

Over this time, he got to know Darryl Eales, the chief executive of LDC, who asked him to come and join LDC. “It was the trading arm that was interesting for me. I’d been able to watch LDC closely and I was really impressed by the investments and the companies they have backed.
So with a young family [he and his wife, Lynsey, have a two and four-year-old] living in Edinburgh, looking for deals in Scotland, it was an
exciting prospect.”