Welsh in on the deal

UK mid-market firm ECI Partners marked the end of April by selling Nuaire, an industrial ventilation manufacturer based in Caerphilly in South Wales, to Electra for £80m. ECI was introduced to the business by Cavendish Corporate Finance, because, says Chris Watt of ECI, “it was not really on our radar”, something which can no doubt be said of many private equity firms’ attitude towards Wales. But the overcrowded UK market is forcing GPs to look in more unusual places. “You have to get to know these businesses before they get to market because the market is so competitive at the moment,” says Watt. “We thought Nuaire looked like a good business at first but it wasn’t until we went down there to meet them that we saw what a great business it really was.” ECI backed a £38m buy-in management buyout (BIMBO) in March 2004 and over the next three years revenues grew by 30% and profits by 70%. “For a business in the manufacturing sector that is pretty good going, and certainly ahead of its competitors,” says Watt.

The second Welsh exit in the past month saw Gresham Private Equity make a 12x return on its investment in Penn Pharmaceuticals, based in Tredegar, South Wales. It’s a story that started with a £12m MBO back in September 2000, with Gresham de-merging the business shortly afterwards and selling part of it, Penn T, to US oncology company Celgane, in October 2004. The story ended in late April this year with sale of the other side, Penn Pharmaceutical Holdings, to LDC in a £67m deal. Penn became an international brand during its years under Gresham, growing at a rate and generating profits in excess of sector averages and increasing turnover fivefold, with profits multiplying by a factor of 10 and employee numbers doubling to 200.

The success of the business means a lot for South Wales, which suffered in the post-coal mining era, and again more recently with the downsizing of many blue-chip companies. Creating jobs is a vital part of the remit of Finance Wales: it is aiming to assist 4,000 businesses in the country and either create or safeguard 10,000 jobs. Established by the Welsh Development Agency and the Welsh Assembly Government to encourage the growth of small and medium-sized businesses, it receives funding from both public sector bodies – such as the EU and European Structural Funds – and private sector investors – like Barclays Bank and the Royal Bank of Scotland.

Headquartered in Cardiff and with regional offices throughout Wales, Finance Wales provides more than just money to up and coming businesses, it will also help them to understand how commercial funding can help them achieve their growth ambitions and facilitate their access to such funding and commercial expertise. To date the company has invested over £73m in 1,500 Welsh SMEs, which has resulted in an additional £180m of private sector investment in these companies. As it’s been investing since 2001, it has started to see some realisations – five so far, three this year alone – the most recent coming in March with the AIM listing of Swansea-based technology company, Enfis Group.

“South Wales is a cracking area”, says Simon Inchley, managing director at Gresham, who led the Penn deal. “We spent a lot of time there looking for businesses and shortly after we backed Penn we invested in MMS, a maker of specialist cushion, pillows, chairs and beds for the healthcare sector, which was sold to Invacare of the USA in 2005.”

It is a part of the UK which has a bedrock of privately owned companies. Following the demise of the traditional industries, new companies are springing up, and the limited availability of funding presents opportunities for private equity. “There are no incumbent private equity suppliers, which compares favourably to other over-fished city areas,” says Inchley.

The Welsh economy has witnessed a transformation in recent years and is now doing well in a range of sectors, including software and IT services, creative industries, automotive, aerospace and financial and business services. Wales is witnessing record employment levels, good business survival rates and business investment is gaining momentum. In terms of its attractiveness to private equity funds, commercial funders’ interest in Wales is still growing and in reality they currently face relatively few competitors and the emergence of high-growth businesses, some with AIM potential. Crucially, Wales has also witnessed the emergence of high-growth businesses, particularly in the high tech sectors such as software, telecoms, life sciences and electronics.