Company Profile: HSBC Private Equity – HSBC makes its mark

HSBC Private Equity (HSBC PE) moved into the top five private equity fund raisers last year. It topped the GBP1 billion ($1.6 billion) mark, putting it hot on the heels of firms such as Doughty Hanson and CVC Capital Partners in the European fund-raising stakes.

In the past, the firm has tended to be associated with the upper end of the deal arena, and the size of its fund would seem to facilitate its presence in that part of the market. However, it is perhaps an indication of how much average deal sizes have risen in recent years that managing director Ian Forrest sets his sights no higher than the mid-market arena. “We’re concentrating on what is often deemed now to be the middle market, which is deals in the GBP20 million ($33 million) to GBP350 million ($570 million) range. We are not bidding for GBP500 million-plus ($815 million-plus) businesses unless we have a specific angle on the transaction.”

Forrest agrees that, rather than HSBC PE having adopted a different strategy, the definition of the mid-market is becoming more elastic. While new entrants to the European market – such as certain US houses – have added to the competition at the top end of the market, the smaller end has seen an advance into the hi-tech sector and venture capital trusts. Therefore, a traditional generalist’ such as HSBC PE finds itself naturally in the middle ground.

Forrest is modest in his assessment of the firm’s achievements over the last 12 months, describing its activities as sticking to the knitting’ ie, pursuing its traditional strengths. But in terms of deal type, it has shifted away from management buyouts towards recapitalisations and development capital transactions. Examples of deals completed by the firm over the last year include: Ashbourne Pharmaceuticals; Cintex; ColArt; Flagship Foods; Lyndale Foods; M&M Medical; and TM Group.

The firm has undertaken an active disposal programme, at a time when many private equity houses are finding it difficult to gets sales of investee businesses away due to the indifference of the stock market. In the last 12 months it has exited ten businesses for an average profit of around two times the initial investment.

Perhaps the most successful of these exits was AM Paper Group, a supplier of retailer brand soft tissue based in the north-west of England. In late 1997, HSBC PE arranged a GBP145 million ($236 million) refinancing package for the business, which enabled it to double its existing capacity with new plant and machinery and to commission a new GBP30 million ($49 million) mill producing TAD (through-air-dry) tissue.

Last year, HSBC PE provided follow-on capital to enable AMP to acquire Pennington Paper Products, a company supplying facial tissues that provided an excellent strategic fit with AMP’s existing range of products.

In August 1999, the business was sold to SCA Group of Sweden for Skr2.55 billion ($308 million). The purchase was part of SCA’s strategic growth plan in Europe, aimed at becoming a leading supplier of brand-name products as well as retailer brand products.

Having held the investment for just 20 months, it is reported to have delivered an IRR to HSBC PE of around 68 per cent. This was against a reasonably difficult background in the north-west, where activity was not asprolific as it had been for the previous few years.

Phil Goodwin, who led the deal on behalf of HSBC PE, says: “AMP is a tremendous success story and it has been great to be a part of it. Our investment, which has been one of the largest in the north-west, is a testament to the role that private equity has to play in developing private companies to their full potential.”

Another successful exit achieved by the firm towards the end of last year was the sale of ANC, the nationwide express parcel carrier, to PPM Ventures in a deal valued at GBP75 million. The firm was the subject of a GBP50 million buyout from Securum that was led by HSBC PE in 1995.

While Goodwin scours the northern UK for deals, the bulk of the firm’s southern UK and European resources are based in London. Over the last year, Matt Lyons has joined from Fuji Bank: Nigel Hammond has been appointed a director, having joined the firm in 1995 and Nick Jamieson has joined as an executive, having spent a year on secondment, from PricewaterhouseCoopers.

In addition to the UK, HSBC PE has offices in France, Germany and Sweden, and operates a hub and spoke’ strategy to cover other continental European markets from its London base.

As the continental European buyout markets continue to mature, Forrest feels it is vital to have an on the ground’ presence to avoid potential transactions slipping through the net. “If you look at the UK model, it used to be the case that most deals over GBP10 million

($16 million) would come through London, now it’s only deals over GBP30 million ($49 million) or thereabouts. The rest are regional-based. It will be the same elsewhere in Europe – at the moment they all come through the UK investor and adviser network if they’re north of say,

GBP50 million ($80 million). But as continental markets grow, they are likely to be marketed locally rather than through the network,” asserts Forrest.

HSBC PE is attracted to the Continent by the restructuring among large corporates. However, the firm’s attitude is one of cautious optimism and it claims to be in no rush to do deals. Forrest acknowledges that Germany has been an active market over the past year, but also feels that prices of assets there are high as investment banks make their presence felt via efficient auction processes.

In France, the market has been relatively quiet over the last 12 months in terms of new deal activity, but the team now headed by Mathieu Guillemin has completed the successful realisation of Manoir Industries, one of the largest deals completed by the firm in the French market.

Thus HSBC PE has laid down roots firmly throughout Europe and should benefit from what Forrest maintains is a healthy outlook for the industry as a whole.