Record close for Sovereign fund

The UK lower mid-market is attracting investors worldwide. UK specialist Sovereign Capital’s record fund close is living proof. The firm has closed its second fund, Sovereign Capital Limited Partnership II (SCLP II), above target at £275m, just seven months since its launch in late September. SCLP II had an original target of £200m.

Commitments to SCLP II come from Sovereign Capital’s existing network of investors in the US and Asia and new European investors, including Access Capital Partners, Danske Private Equity, Nordea Investment Management, Robeco Private Equity and Wilshire Associates Europe. Existing investors account for 65% of capital raised and 35% of capital comes from new investors.

Acanthus Advisers LLP acted as placement agent for Sovereign Capital in Europe and Macfarlanes acted as legal advisers.

Sovereign Capital has a team of 14 executives working on deals, which includes the senior partners Peter Brooks (managing partner), Andrew Hayden, Ryan Robson and Michael Needley (finance partner).

Commenting on the closing, Brooks said: “The pace of the fund raising and the level of interest it attracted is an endorsement of the drive, track records and investment ability of the senior partners and the quality and motivation of the entire Sovereign Capital team for what is only our second fund. Just one month after the launch, it was clear that appetite for SCLP II was strong; by final close it was considerably over-subscribed. Although we would have liked to have included all the LPs that wished to invest, it was simply not possible.

Like its predecessor, SCLP II will invest between £5m and £20m of equity in UK lower mid-market companies. The majority of Sovereign’s investments have been made in companies facing succession issues and have all, post-investment, been further developed through a combination of organic growth and focused buy-and-build and roll-out strategies. This strategy will result in investments typically being held for a longer period than the private equity industry average.

Sovereign Capital’s previous fund exceeded its target of £100m and closed on £120m in April 2002. That fund raising, however, took over twice as long to complete (18 months) due to a glut of succession planning at the time and so getting the investors on board was not that straightforward. As a result, the first fund attracted mainly Asian and US investors and had no European investors and so part of the team’s fund strategy this time round was to attract a more global investor base.

Brooks said: “We had a strategy this time of getting a balance of investors across the geographies. We focused very hard early on on getting some of the larger LPs such as Danske. It was a much more balanced fund raising. The reason it was quicker was there was not the issue of succession. Also the first fund is doing well.”

Talking about Sovereign’s relationship with its LPs, Brooks says: “We meet up with LPs formally once a year at our annual meeting. They also get regular information on deal completions, exits, quarterly fund accounts and they are welcome here any time to talk through the portfolio and its performance. We probably see investors three or four times a year face-to-face.”

Sovereign’s first fund is 79% invested and has not yet made any exits, but 40% of the cash invested has already been paid back to investors via the recapitalisations of educational specialist SENAD and care services provider C.H.O.I.C.E, generating an IRR of 77% on the two investments. Sovereign’s majority shareholding in the two businesses remains unchanged.

Sovereign’s most recent investments include the BIMBO of Pelcombe Training Limited for an undisclosed sum; the acquisition of Cliff and Silverwood Schools, an independent group of pre-preparatory schools, for an undisclosed sum; and the £26m IBO of TRACS, UK specialist residential care homes for adults with mental health needs.