The view from the Direct Investments team – Bernard Dale Q1 2024

News: Insight & Opinion | 28 March 2024

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2024 kicks off with exciting deal completion news and a strong pipeline ahead, says Bernard Dale.

As covered in previous reviews, our recent priority has been supporting our portfolio and we have adopted a cautious approach on new investments. We now believe the market is turning and we are more open to new investments. The year has begun with some noteworthy activity on the deal completion front, demonstrating that our ability to find and deliver high quality investment opportunities to our clients remains as solid as ever. 

In February, we completed a £6.3m investment in the MBO of Winder Power, an established supplier of transformers to the UK grid. Transformers play a key part in the transition to clean energy by converting low voltage energy produced by solar and wind farms to high voltage energy suitable for transmission across the grid, and back to low voltage for domestic consumption. 

This was an appealing investment for many reasons. The MBO valuation was attractive; it is run by a highly experienced team; the sector has very favourable dynamics, as energy consumption is forecast to double by the middle of the century according to McKinsey which will require significant investment via ‘The Great Grid Upgrade’ to improve the UK’s electricity infrastructure as part of the drive to reach net zero by 2050. 

The 100-year old, Yorkshire-based company is well-placed to capitalise on this investment, via supply of transformers. We are confident it has what it takes to go from strength to strength, with a c£49m order book supporting a c£42m revenue forecast for year ending March 2025, up from c£35m anticipated in March 2024. The investment proved very popular, with clients supporting the fund raise within a week of issuing our Investment Proposal.  

In general, practitioners in the private equity market anticipate a more active 2024 than 2023 when KPMG Research, using Pitchbook data, indicated only 234 new private equity investments were made in the UK (along with 440 bolt-on investments) by companies in the mid-market (defined as companies of Enterprise Value of £10m-£300m). Our prospective investments-in-progress pipeline is certainly promising: we have one new deal in exclusivity with terms agreed, for anticipated release to clients in the near future, and a good list of potential opportunities lining up behind. 

We have several exit prospects in view for later this year, and we’ll be aiming to maintain our record of 2.8x investment returns realised across our 12 direct private equity exits achieved to date. 

The general outlook for the current portfolio is also positive. Our lead private equity portfolio now shows an average of £29.2m revenue and £3.1m EBITDA, up from £17.3m and £1.7m in our year of investment. This uptick is matched by an investment valuation at 1.8x cost (all live and exited private equity investments at December 2023). I am pleased to say, that after a bit of a pause in 2022 and 2023, we are now seeing a general upward trend in trading performance, which should be music to our clients’ ears and shows that the portfolio valuations are moving in the right direction.