Barclays Private Equity

"There is no gap in our message. When we say 'yes we can do it', that's what it means." —Tom Lamb

Tom Lamb, Co-Head of Barclays Private Equity says: "In our business, winning deals is not necessarily a matter of writing out the biggest cheque. Although our money is the same as everybody else's, the difference is in the transaction process and what comes with it. When we look at potential investments, we have a very clear idea as to what sort of deals we want to do and how we do them. So there is no gap in our message. When we say 'yes we can do it' that's what it means. We focus on deliverability. For us it also doesn't make sense to try and chase a few percent off just for the heck of it, because we could not only lose the deal but it would also reflect negatively on our reputation."

This clarity of behaviour also extends through the deal-negotiation process. So for all its transactions, there is an investment committee, with three people at its core.

"For instance," says Lamb, "if someone from our investment team is considering an investment opportunity, we can arrange a committee meeting at short notice, where we sit down and make a decision. Our sanctioning process doesn't get twisted around in some hierarchy where one would need to wait for weeks for an answer."

As the due-diligence proceeds, it isn't just a simple 'yes' or 'no' decision. There are lots of twists and turns. Things change, new factors come to light and so on. Typically, when Barclays Private Equity gets a business plan that looks interesting, the investment executives working on the deal have a preliminary internal discussion at an early stage with the investment committee, which looks at the various aspects of the deal, such as the price, the strengths and weaknesses and areas that need to be worked upon.

Explains Lamb: "At this stage our people who are running the deal go back to the vendor and the buyout team and inform them as to approximately what we would be willing to pay, our terms and what our key issues are. Our people then compile a detailed investment report, having done all the due diligence, including the market, the financials, detailed interviews with the management team and the main legal aspects of the transaction. Although this might involve four to six weeks of actual work, it often takes longer due to various factors such as waiting for information, or a response from the vendor, etc. For instance, it occasionally happens that the precise analyses we want are not available off the shelf. Sometimes there are issues regarding the concentrations of skills in a few people, for example the sales director might control all the important sales relationships or the managing director might have particular relationships with key suppliers and so on. So there are different aspects and challenges in terms of getting to understand the business. Getting the deal done often seems like a huge mountain to climb in a relatively short timeframe but it is, in fact, merely the start of a relationship that carries on for a number of years. Therefore, for us, it is important to agree with the management team on the objectives regarding the strategy development of the business as well as the exit plan, before we invest. Even within the management team there are usually people with different priorities. There may be someone close to retirement and somebody else who wishes to stay with the business for many years. So we need to take all their personal and business objectives into consideration and see how they can be aligned with ours. An investment is actually like a marriage with the pre-investment process representing a very short engagement period to get to know each other"

"This is why," he further adds, "it is important for the management team to pick an investor and, more particularly, people that they feel comfortable with. For instance, when a management team is looking for private equity, they generally evaluate a number of different offers but should usually be able to get the best deal from the person they really want to work with. If you get five offers and you go to the private equity house you like best and tell them frankly: 'your offer is not the most attractive but we prefer you as people, and this is what you have got to do to win the deal,' in most cases the private equity house would be willing to go that extra mile. In our business we are all using the same IIR models and targeting approximately the same returns. So winning the deal, particularly in the mid-market, is more about the relationship than anything else."

The way Barclays Private Equity operates is, above all, about creating and maintaining a collaborative environment. The vendor and the buyout team interact with a handful of people and not an external army of lawyers and accountants. This creates an atmosphere of trust in which issues can be discussed openly and frankly. It is also a period of getting to know each other, including those people who would later serve on the investee company's board.

"As an investor, we always have our deal-doer on the board in a non-executive capacity," elaborates Lamb. "We see our role in helping the management stay on track, implement its strategy, develop the business, and so forth. Where we get particularly involved is when the company makes acquisitions or divestments. Buying and selling companies is our core business and we can add value there. Occasionally the company may not be performing according to plan. In such cases we can also help in the negotiations with the bank. If necessary, we might even look at ways to enhance the management team by getting new people in or redefining their areas of responsibility. From our point of view, this is all part of good corporate governance and is especially relevant for mid-market companies where the management teams may lack breadth or depth or may not have encountered a particular problem before."

Within this mid-market, which extends to companies with a value of up to €500 million, Barclays Private Equity's core investment focus is in the range of enterprise values of between €25 million to €250 million. The firm has been active in this 'lower' mid-market since the mid-1990s and that is also the area in which it has developed an excellent reputation and people-skills.

Says Lamb, "When we talk about the UK and the Continent, our core business is management buy-outs and buy-ins, essentially divestments from large corporations and transactions involving privately owned companies or helping to resolve succession issues. We focus principally on countries where we have an office-in the UK we have four offices, and one each in France , Germany and Italy . Occasionally we look at deals outside these territories, but in our business we need to have local people who understand the culture and are in close proximity to the companies we invest in."

Currently Barclays Private Equity is operating two funds. The first mid-market fund, with a size of €1.25 billion, is nearly fully invested. In February this year, the firm closed its second European fund of €1.65 billion. In the three years since the first fund was established, Barclays Private Equity has completed more deals than any other private equity house in its target market. The second fund will have a similar investment profile and, in the next four years, will be invested in up to 50 companies in the UK , Germany , France and Italy , among others.

Some of the firm's more recent investments include Gutbrod-Hugel-Holding (GHH), a leading German manufacturer of components for the automotive industry; Fives-Lille, the French industrial engineering group; Gaucho Grill, an international operator of restaurants; and Phase Eight, the UK-based retailer of women's clothes and accessories.

In terms of divestments, one of Barclays Private Equity's most publicised exits has been that of Admiral-the direct motor insurer. The company went public on the LSE in a € 1 billion flotation in September last year. Barclays Private Equity achieved a total return of 15 times its original investment and an IRR of 87% over nearly five years. In recognition of this and other divestments, such as Hobbs, Salter Houswares, edotech and GLS Educational Supplies, the firm was named 'UK Private Equity Firm of the Year,' and 'European Private Equity Firm of the Year' at the Financial News Awards for Excellence in Private Equity, Europe 2005 where it also claimed a third award-'European Disposal of the Year'-for Admiral. Barclays Private Equity was also awarded 'Exit of the Year' for Admiral by Acquisitions Monthly, the M&A and buyouts publication.

Barclays Private Equity is what the industry calls a semi-captive, in the sense that it invests funds from Barclays and also from other third party institutional investors.

"The ratio between money from Barclays and from other blue-chip external investors is roughly fifty-fifty," says Lamb. "One of the advantages of our structure, however, is that because we are part of a large bank, we have a more institutionalised management structure than many of the independent funds, which tend to be dominated by particular individuals. They raise the money and drive the decision-making. We, on the other hand, have an internal corporate governance system that is extremely robust because our management team is directly accountable to our parent company in terms of how we run the business. Our day-to-day operating procedures have to meet the exacting standards of one of the world's top banks and there are all the usual checks and balances one would expect including internal audit and compliance. However, as we manage third party funds, which we have done for over 20 years, we are independent from Barclays in terms of day-to-day operations. This eliminates most potential conflicts of interest and in cases where there could be a conflict, such as when we occasionally buy or sell companies to Barclays, we would make a full disclosure to our investors. Also Barclays doesn't have to bank our companies. When it does so, it is purely on the merits of the transaction and the competitiveness of their terms."

Historically, many institutional investors have shied away from investing with semi-captive private equity houses. Barclays Private Equity, however, considers that the institutionalised management structure and corporate governance which, as a semi-captive, it is obliged to adopt is now better appreciated by the LP community, and this was emphatically confirmed by its recent highly successful fund raising. Barclays Private Equity believes that its semi-captive status has actually helped rather than hindered its emergence as one of the top-ranking mid-market investors in the pan-European arena.