Mercury Private Equity – Broadening its horizons

Mercury Private Equity’s management buyout, which was announced in July last year, was finally completed in December. The transaction involved Mercury Private Equity (MPE) becoming a new and independent entity.

At the same time, the firm also entered into a fund management agreement with its former owner Merrill Lynch Investment Management (MLIM), which will continue to offer clients private equity funds managed by MPE.

In its lifetime, MPE has raised three pots of capital and is in the process of fundraising for its fourth fund, for which the first closing is imminent. The first fund of GBP30 million was raised in 1987 with a separate account, (the beneficiary of which cannot be named) alongside that fund of GBP30 million for investment. This was followed by a GBP141 million fund in 1989, with a GBP90 million separate account and a GBP213 million fund some time later in 1997 with another GBP220 million alongside it for investment.

The 1997 fund is fully invested in 21 deals of which six have already had realised. At the time of the launch of its third fund, MPE incorporated a sector-focused approach. Originally a tool to generate deal flow, it has become something much deeper and defines how MPE’s resources are configured. Armitage says: “Eighteen months ago we made a decision to go sector exclusive that is the people in our sector teams can only do deals in their respective sectors. They must publish internal white papers (research notes), and they have to run industry seminars and change their list of contacts.”

MPE has identified four industry sectors of focus: healthcare; business to business services; information & communications technology; and media, where it finances buyouts and provides growth capital. In addition, it has a general buyout team that covers all other sectors, but focuses on those buyouts that require “some heavy lifting”, such as strategic repositioning or major operational change to a business.

Armitage cites a successful MPE deal, which delivered a healthy IRR and money multiple, but which all at MPE felt could have produced a much better outcome with a firm commitment to a well researched strategy, executed with real aggression. Armitage says: “We thought we could be doing more with our investments, so we looked at some of the best US firms such as Bain Capital, and included some of their features into our model.”

MPE has expanded its firm to include a team of strategy consultants and analysts who have three functions. Research, to identify the better companies in their chosen sectors; transaction support (working on deals) and finally to work intensively with portfolio company management to produce well-crafted, strategic plans which then form the base for a raft of operational improvement plans. “This gets everybody onto the same page and provides a set of forward-looking financial targets and operational milestones against which progress can be monitored,” says Armitage.

As far as deals are concerned, MPE has quite a good “departure lounge” at the moment, with a couple of exits on the horizon, according to Armitage. Recent successes include the sale of Braitrim Holdings to Spotless Group in March for EURO180 million. Braitrim provides complete design and project management solutions for retail packaging worldwide. MPE acquired a majority stake in Briatrim in 1998 and also provided the company with expansion capital valuing the purchase in excess of GBP85 million. Since it was acquired by MPE the company has grown revenues from EURO80 million to EURO150 million and has diversified its client base through aggressive growth in Germany, France, Scandinavia and Hong Kong.

March also saw the flotation on the Alternative Investment Market of Patientline at a value of 175 pence per share, representing a market capitalisation of GBP104 million. Patientline is a leading provider of bedside entertainment, communication and information services in UK and Dutch hospitals. The flotation was arranged despite difficult market conditions. At the flotation price, the company will produce a return in excess of three times and an IRR of 45%. MPE will retain a 19 per cent stake in the business and continue to help driving it forward.

New faces

Strengthening the investment team was a major issue that has been given priority over the past 18 months. The MPE team has expanded to 42 with 22 investment professionals. Several new professionals were hired last year and most of these were younger and less experienced than the core team of sector leaders who between them have 100 years of private equity experience. Armitage, who has spent 22 years in the industry, leads the team.

This is a significant change of focus from the team in 1990 when the business had an investment portfolio of 80 companies run by just four people. Today, there is much closer attention to each individual deal and the quality of work being done, says Armitage. Today there are 30 active direct investments and 30 fund investments and also quoted holdings.

Historically, MPE always had senior professionals handling the bulk of transaction work and senior people were still covering the bases, running models and executing due diligence in a very hands-on fashion. This, says Armitage, is not always the best way to do things. “We are spending a lot of time and money on our new people with training and mentoring schemes. We believe these new recruits will be our future great investors.” Hence the decision to recruit not only investment professionals but also a pool of analysts that will in time grow to investment professional status.

The new media team was set up earlier this year to benefit from the growth potential of this sector, which has secured investments of EURO1.9 billion over the last two years. Private equity opportunities MPE is targeting in this sector include early stage investments in Internet-linked media outfits; a large number of privately-owned niche printing firms; large groups disposing of non-core divisions; and many of the listed printing firms that are undervalued by the stock market presenting public to private opportunities.

Stefan Winterling was chosen as associate investment director and has helped to establish the new media team.

There is one more addition to the team that is being made later this month and then the recruiting will assume a more moderate pace. “The pace of hiring will slow down,” says Armitage. “We are pretty much done now. We now have a big enough team and resources to manage our money.”

As well as developing its European strategy team Armitage says there are plans to open another office at the turn of the year, probably in France. As for the rest of continental Europe, he says: “The team has researched Southern Europe. We are watching the market and keeping an eye on activity there, but there are no immediate plans to set up offices there.” MPE set up an office in Frankfurt, Germany in 1999. Martin Block, a new director focusing on buyouts, was added to the team there a few months ago.