Scotland is awash with funds

Scotland’s early stage venture capital market is awash with funds. In June this year Penta Capital, the mid-market buyout focusing on deals in the UK and Ireland, launched Pentech Ventures. This fund has some GBP12 million – possibly between GBP15 million toGBP20 million depending on the final close -, to spend on early stage investments in the UK. Craig Armour of Penta Capital believes investments by Pentech will inevitably have a Scottish bias given that technology entrepreneur Eddie Anderson and David Armour, formerly a partner in corporate advisory firm AMCo, are locally well connected.

Pentech, which is expected to focus predominantly on software investments, aims to see its investee companies succeed in the US and to this end the five strong advisory board boasts two experienced American investors. They are Robert Thomson and Donald C “Smokey” Wallace. Thomson founded and was CEO of Nasdaq-listed Hyperion Solutions and is an active business angel on the US East Coast and in Scotland. And Wallace has worked in Silicon Valley for 29 years and in the computer industry for 38 years and is co-founder and senior vice president of development at MercuryImmediate.

Also new this year to Scotland’s early stage investor grouping is West Coast Capital. This is a GBP200 million fund that will invest in retail, property, leisure and technology. Tom Hunter, who sold Sports Division for GBP290 million in 1998 and collected GBP260 million from those proceeds, has invested his money in the vehicle which will work with a range of institutions and what have been termed “major Angel investors” on a co-venturing basis.

Some GBP20 million worth, at cost, of investments made in the previous two years from Hunter’s personal investment vehicle TBH Trading have been rolled into the West Coast Capital fund, which will invest in businesses on the west coast of Scotland.

Officially new in January this year, but having crept quietly into the market to do one deal in October 2000, is Royal Bank Ventures. This team is split between Edinburgh, where Bill Troup is based, and London (Mark Danby). Troup heads the unit and is supported in Edinburgh by investment manager Doug Fleming. This is a change of focus for Troup, who until the acquisition of NatWest by Royal Bank of Scotland last year, was busy running Royal Bank of Scotland and Bank of Scotland’s joint venture Caledonian Capital. The rationale for Caledonian capital, which was to give Royal Bank of Scotland and Bank of Scotland increased underwriting power by drawing on both books, disappeared for Royal Bank of Scotland when it acquired NatWest and in so doing became Europe’s seventh largest bank.

In contrast to his remit at Caledonian Capital, Troup only focuses his attention on deals in the GBP1 million to GBP10 million range now that he is wearing his Royal Bank Ventures hat. The team is working from the bank’s balance sheet and Troup is clearly chuffed to be in the enviable position of not having any portfolio legacy issues to address and not having to raise external funds. As with the rest of Royal Bank of Scotland’s private equity operations, which report into Mark Nicholls, the head of Royal Bank Private Equity, Royal Bank Ventures will build its track record and if it seeks to raise external funds this will not be for another three years or so.

To date Royal Bank Ventures has made four investments in the tech space and has put some monies from its GBP150 million fund into Lothian Investment Fund and Strathclyde Investment Fund, both of which are operated to achieve a commercial return. As Troup points out, if these two funds are investing funds into certain areas within their constituent the investments may well qualify for supplementary EU funds. Both Lothian Investment Fund and Strathclyde Investment Fund make investments in the sub GBP1 million bracket, which further diversifies Royal Bank Ventures’ portfolio.

Like Lothian Investment Fund and Strathclyde Investment Fund Scottish Equity Partners started life in the public sector. Scottish Equity Partners origins go back to the early 1990s but unusually for the time it too took on a remit to invest for a commercial return. Calum Paterson leads the team at Scottish Equity Partners, as it became last year following its buyout from Scottish Enterprise. Scottish Equity Partners independence was swiftly followed by a second fund raising of GBP100 million. “With our increased fund size the capacity that we to follow companies is now much greater,” says Paterson. Under the auspices of the Scottish Enterprise the Scottish Equity Partners team raised its first fund for GBP25 million, which was structured as a limited partnership, in 1996 and continues to manage that portfolio which still houses some 30 investments. Four investments have already been made from Fund II.

In addition to its two funds Scottish Equity Partners also manages the University Challenge Fund of the University of Strathclyde and the University of Glasgow. Those two Universities jointly bid for the GBP40 million (since increased) made available in 1999 to 15 UK University’s and University consortia out of the 24 that applied. The University of Strathclyde and the University of Glasgow’s Challenge Fund was awarded GBP3 million and is what Paterson describes as a “proof of concept” fund. Both the University of Strathclyde and the University of Glasgow are strong in opto-electronics.

Also in Scotland a consortia led by the University of Edinburgh and including The Moredon Foundation, the Roslin Biotechnology Centre, The UK Astronomy Technology Centre of PPARC, and The Edinburgh Station of the British Geological Survey successfully secured GBP2.25 million under the Challenge Fund scheme. Of the GBP40 million initially made available under this scheme GBP20 million was supplied via a UK government grant, GBP18 million came from the Wellcome Trust and GBP2 million from the Gatsby Charitable Foundation. These schemes have provided good opportunities for investment for venture capital firms as Universities are encouraged to put their intellectual property into a separate, commercial company. In the past there has been an understandable tendency to go the quick but immediately financially rewarding route of licensing intellectually property to large corporations as has so often resulted in the past.

Like Scottish Equity Partner, Albany Ventures is another team of venture capital players at the early stage end of the investment spectrum that has recently emerged from a buyout. The team at Albany Ventures was formerly known as British Linen Equity, which was part of Bank of Scotland and invested directly from its parent’s balance sheet. Like Scottish Equity Partners, Albany Ventures looks for investment opportunities across the UK. Albany Ventures looks to invest primarily in software and healthcare, which can range from biotechnology companies to medical devices. It continues to manage the portfolio built at Bank of Scotland from late 1998 onwards, which is now contained within a limited partnership called BLS Holdings Partnership. And, since the buyout, which was supported by BancBoston Capital, it has managed a GBP8 million limited partnership fund called the BancBoston Capital Pledge Fund, which should be fully invested by the end of this year.

As well as investing the Pledge Fund and managing the BLS Holdings Partnership Albany Ventures is in the throes of fund raising a third limited partnership from external investors. Interestingly it was the arrival of Raymond Abbot and John Morrison as British Linen Equity, as was, in late 1998 that precipitated Ivory & Sime’s exit from the Scottish market.

The one player at the early stage investing end of the venture capital market in Scotland that has not undergone a transformation in the last year or so – at least not domestically although the firm as a certainly has – is 3i. In its results for the year-end to March 31, 2001 3i Scotland invested a record GBP195.2 million across 89 deals.

The sector split was technology GBP94 million (Scotland GBP63 million/ Ireland GBP31 million); transactions GBP27 million; oil and gas GBP74.2 million. Of the total invested GBP100 million went into existing businesses to back their growth plans.

As well as supporting early stage companies a considerable chunk of this money was invested in small later stage buyouts. Buyout players in Scotland have had an interesting year or two. Penta Capital was set up by five disaffected Royal Bank Development Capital private equity specialists with good personal reputations in the market.

As a result of those reputations four eventually went on to raise a GBP130 million first time fund, which has made four investments to date in mid market buyouts. Like everyone doing buyouts from Scotland Mark Phillips at Penta Capital notes that there are not enough opportunities to invest only in Scotland and as such Penta will look at deals in the whole of the UK and Ireland. Penta has also recently branched out with the management of the Pentech Ventures fund, mentioned earlier.

After the guys who were to become Penta left Royal Bank Development Capital Joe McGrane, who led the team, soon left the bank. Royal Bank Private Equity has a mid market buyout team in Scotland, which trades under the NatWest Development Capital name – the only part of Royal Bank Private Equity to retain the NatWest name. NatWest Development Capital, investing off Royal Bank of Scotland’s balance sheet, targets buyout and expansion opportunities in the GBP2 million to GBP20 million range. So it fills the gap between the aspirations of Royal Bank Ventures and Royal Bank Private Equity, which has GBP30/50 million to GBP300 million preferred deal size in the UK and continental Europe. As one reappears another exits.

The exit is by Bridgepoint Capital, which gained its independence following Royal Bank of Scotland’s acquisition of NatWest. Bridgepoint Capital, which was formerly known as NatWest Equity Partners, has pulled out of Scotland, increased its target deal size and has spent much of this year building teams on continental Europe in a change of focus post independence.

Dunedin Capital Partners, a mid market buyout specialist, has stepped up its presence both in terms of personnel and assets under management this year. In April it launched a successful bid, via the Dunedin Enterprise Investment Trust, which it manages, to take over Group Trust. And just six months ago the team at Dunedin Capital, which is led by Ross Marshall, completed its own management buyout. Among new recruits at Dunedin Capital is Nicol Fraser so Dunedin Capital has benefited from the closure of Bridgepoint Capital’s Scottish office where Fraser was based.

The new recruits have come on board to assist with the investment of Dunedin Capital’s current fund raising – it’s first fund raising in ten years. It was initially thought that around GBP40 million would be raised but a good response means that figure is likely to rise to GBP75 million by the time the fund has a final close at year-end.

In recognition of the limited number of quality buyout opportunities in Scotland, Dunedin Capital is to open a London office. Marshall says that initially the office will not be staffed full time but concludes that if things progress well to recruit London-based team members is the logical conclusion. Dunedin Capital is not alone in this respect. Penta Capital took the plunge by buying a flat cum office in central London last year.

The other significant player investing in mid market buyouts with a presence in Scotland is Aberdeen Murray Johntone Private Equity. Since 1993 Murray Johnstone, of which Murray Johnstone Private Equity was a part, was an autonomous subsidiary of United Asset Management. When in early 2000 Old Mutual successfully bid for United Asset Management it decided the Murray Johnstone would be sold. Murray Johnstone was eventually put up for auction and bought by Aberdeen Asset Management.

Aside from needing to roam the whole of the UK rather than staying closer to home Scottish mid market private equity investors appear to be happy with their lot. The legal support from local firms is said to be good and the understanding of private equity high Dickson Minto gets a special mention on fund structuring. The only perceived gap in the market is the absence of boutique advisory firms. While the big five accountancy firms are not faulted the flair of a boutique is missed. Rutherford Mason Dowds, which was bought by Deloitte & Touche in January 1999, which was a nine partner accountancy and advisory firm with offices in Edinburgh, Glasgow and Aberdeen is still missed by some.