LMS adds to Cityspace

LMS Capital, the investment arm of property group London Merchant Securities, has signalled its plan to make more leveraged buyouts following the sale of major investment Energy Cranes.

Close Brothers Private Equity bought the producer of cranes for use on offshore oil rigs for £142m (€178m) at the end of March. This gave LMS a return of 4.5 times on its initial investment made in 2003 and net proceeds of £83m.

In its first deal since the sale of Energy Cranes, LMS has supported the acquisition of Kizoom by portfolio company Cityspace. The latter group was founded 12 years ago and provides information and ticket sales to users of public transport in various cities.

Kizoom also delivers transport information to the web and mobile devices. Its clients include Transport for London, National Rail Enquiries and the five major UK mobile operators.

LMS managing director Martin Pexton said: “Cityspace is already a market leader in intelligent transport systems and the acquisition of Kizoom will both enhance the portfolio of products and services and open up many new opportunities.”

No financial details were disclosed. However, it is believed that it is a “multi-million pound” deal. LMS currently owns 94% of Cityspace. This stake was valued at £12.9m at the end of December on LMS’ balance sheet.

LMS is different from many mid market private equity investors in that it manages no funds for third parties, with all its investments held on the AIM company’s balance sheet. Chief executive Robert Rayne and his family are the major shareholders in the company.

“We have no plans to manage third party money at the moment,” said managing director Pexton. “The sale of Energy Cranes has given us lots of cash. The timing has been quite good.”

He anticipates that other portfolio companies will make acquisitions. “Buy and build is a good way to increase the value of an investment.”

LMS also has another long standing investment in the oil services field: Weatherford. Energy has made up a fifth to a quarter of the fund in the past. LMS has also invested money in other private equity funds.

This has proved useful for Pexton and his team in creating their own deal flow. “Our strategy has been to invest in funds that give us windows into what is happening in various areas and general market intelligence,” says Pexton. “It also gives us opportunities for co-investment”.

LMS has a strong representation in the technology space, through other investments besides Cityspace. The investor is also “actively looking” at deals in the media and leisure space. It was an early investor in British Satellite Broadcasting, which later merged with Sky to form BSkyB. Healthcare and medical devices is another active area.

At present LMS has 100 investments, many of which are minority positions in either early stage or more mature quoted companies. However, Pexton is keen to use the Energy Cranes proceeds to implement a slightly changed strategy.

“We want to back more management buyouts in the lower mid market with an equity cheque of between £10m and £25m,” he says. “There will be fewer, but larger, investment positions within the portfolio with more direct investments.”

He believes LMS’s “permanent capital” on its balance sheet could be seen as a major advantage by management seeking backing for a buyout. “We are looking to keep management on board and stay close to them by getting our hands dirty and offering advice.”

LMS currently has a net asset value of £300m, which is rather small for a buyout fund. However, the company is looking at buying other people’s funds and could expand by picking up portfolios on the secondary market.

The current tighter credit market is not deterring LMS from its new direction either. “We have never relied on highly leveraged deals and our experience to date is that debt financing will be available for the kind of deals we want to do,” says Pexton.