Private Equity – Penta hits fund-raising trail

The five executives who resigned from Royal Bank Development Capital (RBDC) last year 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 ($165 million) or more to be deployed in later-stage mid-market deals in the UK and Ireland. Penta has already secured substantial support from Bank of Scotland (BoS), which will act as cornerstone investor in Penta Fund 1. The new firm will operate out of Glasgow.

The argument in favour of mid-market funds is by now well-rehearsed: the drift to bigger deals as independents have raised larger funds has 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

($123 million) transaction value. “We believe that this segment – albeit still competitive – is where the most attractive returns are,” says Begbie.

Thus far, Penta’s focus is closely in line with that of the executives’ former outfit. But the mid-market is a broad church, and Penta has evolved a two-pronged strategy which, the team believes, will serve to differentiate the new group from other players in its market segment. On its home turf’ of Scotland and the North East of England, the Penta team is sufficiently well plugged in to be confident of seeing virtually all GBP10 million-plus ($16 million) 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; IT/communications, particularly the services side; and business-to-business services. These are areas where RBDC has scored some notable successes with transactions including Direct Holidays, Big Beat, Kingston Telecoms and Orion.

Phillips makes a good case for Penta’s bias towards services and business-to-business, observing: “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 overall will fall within its preferred industry groups.

Since Bank of Scotland provided the debt for more than 50 per cent of the Penta team’s deals at RBDC, it is not entirely surprising to find the bank in place as Penta’s cornerstone investor: “They have seen us with our sleeves rolled up,” says Begbie.

Although it is evident that the Penta team had a gameplan formulated prior to their departure from RBDC, market sources report that they received more than one approach from institutions looking to establish proprietary in-house private equity groups. According to Phillips, Penta presents a mid-market solution for would-be new entrants, since the team are particularly targeting investors who want to dirty their hands’. With such groups in mind, Penta Fund 1 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.

Penta, which has scheduled a first close for the first quarter, reports some six strong irons in the fire’ in addition to Bank of Scotland. Earlier market rumour cited Royal Bank of Scotland itself, Norwich Union and Standard Life alongside Bank of Scotland as likely supporters of the Penta fund.

The Penta team, whose average age is only 34, boasts more than 30 years’ combined experience of the private equity market. To augment and complement the investment team’s skills, Penta plans to institute US or Scandinavian-type industrial advisory clusters’, one for each of the firm’s preferred sectors. The composition of these clusters is yet to be announced, but Penta intends to bring successful entrepreneurs and leading industry figures on board, who will have active involvement in deal evaluation and post-investment care and who will be able to buy into the deal stream on sweet terms. “We are aiming for a strong networking infrastructure and vibrancy,” explains Phillips. “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.”