Penta Capital Launches GBP100M First-Time Fund –

The five executives who resigned from Royal Bank Development Capital (RBDC) this summer have now, as Penta Capital, begun formal marketing of their first independent fund. Steven Scott, Rod Begbie, Torquil MacNaughton, Mark Phillips and David Calder are shooting for GBP100 million or more to be deployed in later-stage middle market deals in the U.K. and Ireland. Penta has already secured substantial support from Bank of Scotland, which has committed to act as the cornerstone investor in Penta Fund I. The new firm will operate out of Glasgow.

The argument in favor of middle market funds is by now well rehearsed: the drift to bigger deals as independents have raised larger funds and thinned the ranks of private equity providers focusing on the middle market, leaving it served primarily by captive or semi-captive houses. Penta intends to stick to deals below GBP75 million transaction value.

“We believe that this segment-albeit still competitive-is where the most attractive returns are,” Begbie said.

Thus far, Penta’s focus is closely in line with that of the executives’ former outfit. But the middle market is broad, and Penta has developed a two-pronged strategy that the team believes will differentiate the group from other players in its market segment. On its “home turf” of Scotland and the northeast of England, the Penta team is sufficiently well plugged in to be confident of seeing virtually all GBP10 million-plus deals. Elsewhere, Penta will rely on a sector-focused approach to secure a nationwide deal flow without opening regional offices. The team’s sectors of choice are leisure; information technology/communications, particularly on the services side; and business-to-business services. These are areas where RBDC scored some successes with transactions including Direct Holidays, Big Beat, Kingston Telecoms and Orion.

Phillips bases Penta’s bias toward services and business-to-business on the observation that, “In the gold rush, the men that got rich were generally those who sold the picks and shovels to prospectors, not the prospectors themselves.”

While Penta will not rule out opportunistic plays outside its home region, the executives anticipate two-thirds of the firm’s deals will fall within its preferred industry groups.

Bank of Scotland provided the debt financing for more than half of the team’s deals at RBDC, so it is not surprising to find the bank in place as Penta’s cornerstone investor. “They have seen us with our sleeves rolled up,” Begbie said.

Market sources report that they received more than one inquiry from institutions looking to establish in-house private equity groups. Phillips said Penta presents a middle market solution for would-be new entrants, since the team is particularly targeting investors “who want to dirty their hands.” With such groups in mind, Penta Fund I offers preferential terms to investors coming in at the ground floor with substantial chunks of capital. The fund is also structured to permit direct co-investments.

Strong L.P. Interest

Penta, which has scheduled a first close for the first quarter, reports six limited partner “irons in the fire” in addition to Bank of Scotland. Market rumor cited Royal Bank of Scotland itself, Norwich Union and Standard Life alongside Bank of Scotland as likely limited partners in the Penta fund.

The Penta team claims more than 30 years’ combined experience in the private equity market. To augment the investment team’s skills, Penta plans to institute U.S. or Scandinavian-type industrial advisory clusters, one for each of the firm’s preferred sectors. The composition of these clusters has yet to be announced, but Penta intends to bring successful entrepreneurs and leading industry figures on board, who will be active throughout the investment process.

“We are aiming for a strong networking infrastructure and vibrancy,” Phillips said. “As an independent house focusing specifically on the mid-market, Penta combines strong sector focus with an operating model which the captives are unable to provide.”