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Cygnet In No Equity Secondary Buyout

3i, HSBC Private Equity and F&C Ventures have exited their investment in Cygnet Health Care Limited as the business has been subject to a secondary buyout led by management and the newly formed Debt Ventures team at Royal Bank of Scotland Leveraged Finance.

This is the first deal to be signed by the Debt Ventures group, which is led by Bruce McLaren (always a Royal Bank of Scotland man) and Howard Garland and Alastair Weinel. Both Garland and Weinel were previously part of NatWest prior to its takeover by Royal Bank of Scotland, that was completed in November last year.

More deals are in the pipeline and the Debt Ventures team is currently on the recruitment trail. Alastair Weinel notes that the Debt Ventures team is concentrating on sponsorless transactions that are both leveraged and do not include institutional private equity. The team anticipates that, far from being in competition with private equity providers, it will, among its activities, provide an exit route for some by becoming involved with secondary buyouts that might not necessarily appeal to venture capitalists because of factors like deal size and sector and growth characteristics.

The secondary buyout sees Cygnet Health Care’s management holding 75 per cent of the company’s equity while 20 per cent is held by the Royal Bank of Scotland Leverage Finance Debt Ventures team, and the remaining five per cent has been assigned to incentivise management. The company, following the Debt Ventures investment, has changed its name to Cygnet 2000 Limited, the name of Debt Ventures’ newco vehicle.

Cygnet is a provider of intensive care and acute psychiatric care to the NHS and private customers. Generating earnings in excess of GBP5 million per annum, the company operates eight hospitals principally located in and around London and two nursing homes. Cygnet also operates the UK’s largest opiate detoxification programme under the name of Detox5.

Cygnet was established by John Hughes in 1988. Together, Hughes, and Ken Wilson are the key holders of equity in the company. The Debt Ventures team intends to take a fairly active interest in its new investment, via a board appointment. The forward business plan includes expansion through incremental acquisitions and developments of between two and three facilities per year over the next three years. Cygnet 2000 has earmarked GBP5 million for the development of these new facilities, number of which are currently in the pipeline. In addition to the GBP5 million extended by Debt Ventures for development purposes, cash generation by Cygnet 2000 is expected to meet the remainder of the cost.

The management team of Cygnet 2000 has a good track record in developing its own new sites, according to Alistair Weinel. Debt Ventures has structured the deal in such a way that should ensure an exit will be facilitated after around four years.