Private Equity – ECI goes back to the future

ECI Ventures has rejoined the independents, with its executives agreeing an MBO from NM Rothschild. Rothschild had put the firm up for sale last September as part of its drive to refocus its private equity business on the international rather than the UK market. Terms of the deal were not disclosed, but sources close to ECI fund participants revealed that the transaction was funded by ECI’s dozen or so managers, in contrast with Duke Street Capital’s buyout from Hambro, where the firm’s investors backed the management team.

It was widely known that a buyout was the preferred option both for ECI’s managers and their investors, although Rothschild had indicated that it would favour sale to a third party.

In practice, of course, private equity firms are difficult businesses to sell without the co-operation of management since, without the full support of the incumbent team, their value to a buyer is hard to quantify. Nor are fund investors likely to be particularly enthusiastic about the sale of a manager to a head-on competitor. So, although Rothschild did institute a limited auction, the eventual outcome was what the majority of observers had predicted.

Five bidders reportedly participated in the auction. One, Murray Johnstone Private Equity, competes directly with ECI in the smaller to mid-sized buyout and development capital market segments. Another was Commerzbank, which was clearly hopeful of securing a ready-made presence in the UK mid-market. In the end, according to chairman Sir Evelyn de Rothschild: “[Rothschild] decided that ECI’s business and its investors would best be served by returning the management company to its former owners.”

The Rothschild group and its affiliate Continuation Investments will now concentrate on private companies engaged in international businesses, particularly in the telecoms, IT and natural resources sectors. Rothschild will, however, retain some interest in the ECI portfolio through elements such as its cornerstone holding in the ECI6 fund, the only vehicle raised by the team under the Rothschild banner.

When Rothschild acquired ECI, the private equity firm believed that the Rothschild label would prove a valuable asset when fund raising. Since 1996, however, investor sentiments, particularly among US groups, have crystallised in favour of independent managers rather than semi-captives or captives which might be subject to conflicts of interest. ECI senior partner Stephen Dawson declined to comment directly on the buyout other than to say: “We are independent again – and intend to stay that way.”

It will be interesting to gauge the degree of US support ECI Ventures attracts for its next fund-raising exercise, scheduled for formal launch during the second quarter. The group’s seventh fund is targeting GBP150 million

($247 million), a significant advance on the GBP106 million ($174 million) amassed for ECI6. Nevertheless, as Dawson says, even at this higher level, the fund keeps us firmly in the small- to mid-sized market’.