Aberdeen Murray Johnstone Private Equity

It has been a year since Aberdeen Asset Management was confirmed as the victor in a two-month battle to buy rival Scottish fund manager Murray Johnstone from South African financial services major Old Mutual with a bid in the region of GBP150 million. Although the deal was not signed and sealed until December 2000, following the requisite approvals from Aberdeen shareholders and relevant regulatory authorities, by October it had become clear that Aberdeen had seen off a pack of ten bidders. This was reduced in the final round to three who had stepped forward when Old Mutual announced in August 2000 that it wanted to sell Murray Johnstone, which it had just acquired as part of its $2.2 billion takeover of United Asset Management of the US.

Comment at the time revolved around the clear determination of the board of Aberdeen, a leading independently-owned UK-based investment management business, not to be outbid for Murray Johnstone, seeing that a deal would bring another GBP4 billion of funds under management to take Aberdeen’s total to GBP27.3 billion. Certainly, Aberdeen Asset Management was keen to buy Murray Johnstone, particularly for its private equity operations. It had wanted to expand its private equity operations beyond Scotland and realised this could be best achieved by acquisition. Further, a successful bid would create an enlarged group that would be the fourth-largest manager of investment trusts in the UK and a leading provider of open-ended funds. In the end, Aberdeen’s determination saw it through.

Of Murray Johnstone’s GBP4 billion of funds under management, its private equity operation accounted for GBP370 million, or nearly ten per cent of the total. These funds would be subsumed within Aberdeen’s private equity business (where GBP90 million of funds were managed) though, unusually for an acquired company, the Murray Johnstone brand would be retained in the merged venture capital business, with the creation of Aberdeen Murray Johnstone Private Equity (AMJPE).

Jonathan Diggines, a former lawyer who had joined Murray Johnstone in 1989 and who had led the firm’s private equity operation for the previous three years, was put in charge of the merged entity as AMJPE’s managing director. Aberdeen says it is “very keen to support the private equity operation and this is best illustrated by our significant financial commitment to the limited partnership fund we are currently raising”. Diggines reports to the Aberdeen chief executive, Martin Gilbert.

AMJPE now manages a total of GBP495 million in funds, comprising limited partnerships, an investment trust, venture capital trusts and several segregated portfolios. Diggines said merging of the two private equity businesses “had required a great deal of sensitivity and planning and through this we have ensured that things have gone really well”. The process was helped, he said, by the fact that both outfits knew each other’s operations well and that the Murray Johnstone staff was amenable to a merger, anyway.

Both firms shared the same target market small to medium-sized companies and each possessed a strong UK regional focus. It made sense, said Diggines, to play to each other’s strengths. “Although Murray Johnstone was a Scottish operation, based in Glasgow,” he said, “we were stronger and more active in England, where we had four offices; Aberdeen was always strong in Scotland.” The organisation that emerged from the fusion of the two operations reflects the regional focus, with AMJPE now operating from seven offices: Aberdeen, Glasgow, Inverness, Manchester, Birmingham, Leeds and London.

Naturally, both Murray Johnstone and Aberdeen had brought long-standing links with clients to the merger, for instance with the Greater Manchester Pension Fund and the Aberdeen Pension Fund, respectively. Would a merger jeopardise such relationships? “One could always have envisaged with this merger that close client relationships might give rise to problems; I am pleased to say that it has all gone to plan,” insisted Diggines. In fact, he added, relationships have been strengthened and enlarged. Since the deal last December, AMJPE has gained GBP39 million of new funds, with the addition of the GBP15 million West Yorkshire Pension Fund and the Aberdeen Growth venture capital trust of GBP24 million.

“VCTs are just one of several private equity products that we manage. VCTs are a strong business area for AMJPE. We are one of the largest VCT managers. Our strong and large regional network gives us access to significant and increasing deal flow and, as we manage several VCTs, they are able to co-invest together enabling larger transactions to be completed.”

AMJPE is also the manager of the White Rose Technology Seedcorn Fund (WRTSF), a GBP6 million venture capital fund owned by the Universities of Leeds, Sheffield and York. The fund was set up in 1999 to assist the commercialisation of their intellectual property. In September, the fund made its eleventh investment via the GBP250,000 backing of CreditScorer Limited, a company established by Leeds Innovations, the commercialisation arm of the University of Leeds, and Professor Nick Wilson and Paul Wetherhill of the Credit Management Research Centre (CMRC). CreditScorer enables companies to check the payment behaviour of potential clients before they do business on the back of a unique, real-time credit benchmarking service.

Diggines says that “being part of a large group like Aberdeen certainly helps to open doors for us; and there are nearly 18,000 companies in the category of GBP10 million to GBP100 million turnover from which we can choose.” Diggines feels the way forward lies in keeping things simple, playing to strengths and what he describes as “sticking to the knitting”. AMJPE keeps to what it knows: arranging equity finance for expansions, MBOs, MBIs, acquisition finance, refinancing bank debt, rescue/turnaround, secondary purchase/replacement capital and occasionally, start-ups all of UK companies.

It invests from GBP500,000 to GBP15 million in small and medium-sized companies, up to a market capitalisation of GBP50 million.

And such investments are made across a wide range of industry sectors, for AMJPE is a generalist operation, not a specialist house. The firm, said Diggines, will look at almost every industry sector with the aim of investing in businesses that have a trading history and demonstrably operate on an old-economy profit-and-loss model. Such a strategy helps obviate exposure to the cycle of “fashionable” investments that at any one time throw up hundreds of opportunities in, say, telecoms the most recent trend or else opportunities in pharmaceuticals or in whatever sector happens to be flavour of the month.

“We prefer to be generalist for a number of reasons, including the fact that specialists, over time, have to cope with the unpredictability of deal flow. There is considerable ebb and flow in such concentration that generalists can avoid.”

Overseas expansion is not, for the moment, a preoccupation as, historically, the private equity team has focused on the UK marketplace. However, Aberdeen has indicated a desire to expand the private equity network into Europe. This is a medium- to long-term aim and will only happen should the company find suitable local partners to work with that possess experience in the small- to mid-sized marketplace.

Given the recent telecoms fall-out, “sticking to the knitting” seems to be serving AMJPE well. Deal flow, says Diggines, “has blossomed over the past year or so”, benefiting from the broad-broom approach. The firm is second only to 3i as leading equity investor in the UK over the past five years, according to a recent survey. Yet Diggines insists on the same characteristics in any venture under consideration: “We want to see a quality management team, sustainability of cash flow, ability to deliver a profit, the dynamics of the marketplace, the scalability of the business model, the quality of the customer base, the opportunity for real growth and, of course, an exit.”

Being something of a contrarian has also meant that the firm has not followed the trend of lifting fund sizes and extending its investment parameters. By sticking doggedly to its small to mid-cap patch it has raised its profile there, developed networks, built relationships and is rapidly filling a space that some analysts feel has found its time. Certainly it is a space where there is greater potential after the departure of a number of private equity firms from this level.

As the economic downturn proceeds, big companies will look increasingly to cost cutting and a concentration on core business. This will generate spin-offs, with increasing MBO and MBI activity in the very segments AMJPE serves. Further, said Diggines, although country-specific VC opportunities in the mid-market and below have not been on the investors’ horizon over the past few years “there is enormous potential here, especially for institutions who may currently be under growing pressure to move away from traditional asset classes such as property and stocks.”

The mid-market sector has consistent deal flow and private equity returns have easily outperformed the FTSE over the past ten years. Indeed, the two component houses of AMJPE have, over the past 20 years, managed a regular internal rate of return in the region of 20 per cent on average.

More than 40 people work within AMJPE’s seven regional offices, a number that has recently grown to supply greater back-up provision, problem-solving and general portfolio management. There are investment teams of three or four people per regional office, with never less than two people working on a particular deal. Two senior regional directors report to Diggines: Hugh Little, who joined Aberdeen Asset Management in 1987, heads the private equity division in Scotland while Gary Tipper, who joined Murray Johnstone in 1993, heads the English division.

With more than 160 companies in AMJPE’s portfolio, staff are kept busy. Deal flow is strong and initiatives plentiful. At the exit end of the business, says Diggines, “things are going well; we have had some very good exits”. AMJPE’s generalist strategy has given the firm a wide spread of businesses, the better to weather an inclement economic climate than many rival houses that tend to be more specialist.

“Our companies have always been attractive targets and much less than ten per cent of our exits are via an IPO.

Our wide experience in both investments and trade sales has made us experts at buying and selling.”

A glance at some of the firm’s recent deals shows the scale and scope of its activities. In September, for instance, AMJPE featured in the buy-in, management buyout (BIMBO), for an undisclosed sum, of West Bromwich company CAP Aluminium Systems, the market leader in aluminium glazing systems for commercial buildings.

AMJPE acted alongside corporate finance advisers Invex. Fortis Bank provided senior debt and working capital facilities. CAP, established in 1983, has an annual turnover in excess of GBP20 million and is the largest of its kind in the UK. It employs more than 170 staff. Private equity funding of GBP6 million was arranged by Chris Hurley, assistant director, private equity division, at AMJPE’s Birmingham office.

Also in September, AMJPE’s Glasgow team completed a lead investor role in a GBP5.4 million syndicated investment in CITEL Technologies, the Nottingham-based Internet protocol (IP) telephony products company. CITEL has developed a solution to bridge traditional telephone systems to the new IP-based telephony. The company received more than GBP2 million from clients of AMJPE with further first-time funding coming from Gartmore Investments and TG Portfolios. Additional follow-on funding came from existing investors, including Albany Ventures and Advent Venture Partners.