Inflexion takes minority stake for major results

Minority interests are not the first thing people associate with private equity investment, but Inflexion – a London-based private equity house – has shown they can be highly profitable. Its Partnership Capital funds, the first dedicated minority funds in Europe, support entrepreneurs while leaving them in control.

Inflexion was founded in 1999 and now has £7.1bn under management. It describes itself as the leading UK mid-market private equity firm, with the largest team: around 120 staff, with offices in Manchester and Amsterdam, and representatives in the US, South America, India and China.

The firm runs three fund genres. First is a traditional Buyout Fund, specialising in UK and European mid-market businesses with an enterprise value of up to £1bn. Its sixth-generation fund closed recently after raising £2.5bn, against a target of £2bn.

The fifth vintage of Inflexion’s Enterprise Fund, which targets the lower mid-market, closed in April 2019 with capital of £400m. The third genre is represented by the Partnership Capital funds, which only make minority investments. The first raised £400m in 2014, and Partnership Capital II closed in May 2018 with £1bn.

Eight portfolio realisations in 2021 returned £1.6bn to investors, a 38% average internal rate of return, the firm said recently.

Support on offer

Inflexion doesn’t do venture capital, insists partner David Whileman, head of Partnership Capital. “We invest in growing, profitable companies when they are at an inflexion point,” he says. “That’s when we can influence their development and help to accelerate it.”

What does have a whiff of venture capital, however, is the raft of growth support services offered by Inflexion to help this acceleration, which often includes international expansion. These services include the firm’s own international network, together with merger and acquisition (M&A) skills.

Supporting the growth of its investments via M&A is an integral part of Inflexion’s business. It says that its companies carried out around 100 acquisitions last year, often on an international basis. Other resources on tap for partnership investments include digital, commercial and environment, social and governance know-how, and a dedicated talent management team.

“We are providing more than capital,” explains Mr Whileman. “And we are always ahead of the curve when it comes to investing in these resources.” Another point of difference is that Inflexion does not necessarily increase its deal sizes along with its funds under management, he says. Inflexion has maintained investment levels of between £10m and £400m for each new company seeking equity capital.

“Other private equity firms, as they get more money, tend to do bigger deals,” says Mr Whileman. He explains that the fund offers a choice to entrepreneurs who can see the benefit of new investment, but don’t want to lose control of their business.

“They are looking to de-risk, but they still want to drive the business,” he explains. Often, entrepreneurs can see that their company needs new management and investment, so they sell too early. Then they sit at home, wondering what to do next. “We allow them to continue their journey for longer,” adds Mr Whileman.

Meaningful investor

The firm is now moving deeper into Europe, where it sees pockets of entrepreneurial excellence and lots of mid-market companies, according to Inflexion partner Irina Hemmers. “The business may have stayed in the family, but now it has reached its funding limit,” she says. “They have relied on cheap, government-backed bank debt, but that supply is now reduced and it doesn’t add value.”

Inflexion has the resources to help this kind of company, and it does not take control. It will take a stake of between 20% and 45%, so it is a meaningful investor: the average size of Partnership Capital stakes is 36%. It wants to be the only lead minority investor and it wants a seat on the board.

“We like to engage as a partner, so that’s an important part of the value proposition,” Ms Hemmers says.

Partnership Capital has made 17 investments to date, worth a total of £1.4bn, and the current value of its investments is more than £6bn. Of the 17 investments, four have been exited so far. One was Medivet, a group of veterinary practices, where Inflexion took a 25% stake in 2016. At the time, Medivet had around 150 sites, mostly in the south of England, and the business was said to be valued at around £300m.

Medivet CEO Arnold Levy says that the business did not need a backer. “We took Inflexion on because we wanted to de-risk and they offered true minority capital – which is rare,” says Mr Levy. “We wanted their expertise to complement us, and they helped us to get where we are now as a partner which really contributed to the business.”

Medivet took advantage of the full suite of Inflexion’s ancillary services. That included scaling the business and helping to build out the leadership team. It assisted in the search for a new chair, in the shape of former Boots director Deirdre Burns, as well as a new chief financial officer.

The group drew on Inflexion’s digital expertise, which proved invaluable after the Covid-19 pandemic struck and the firm was able to offer virtual consultations. Inflexion also helped the business expand into Spain and Germany, where Medivet had 40 and 20 sites respectively by the time it was bought by CVC Capital Partners in September 2021. The price tag was reported to be £1.25bn.

Further afield

Another recent exit where M&A had driven growth was Huws Gray, an independent chain of builders merchants founded in north Wales in 1990. By 2018, one of the founders was looking to semi-retire and raise some capital, so the company considered a sale to a trade buyer or financial sponsor.

Inflexion offered an alternative. It took a minority stake, allowing the owners to take some money off the table while keeping control of the business. It helped the company to make 14 strategic buy-and-build acquisitions – including Ridgeons, an East Anglian builders merchants business with 25 branches.

“The period of our investment saw profits increase 2.5 times, with a doubling in the number of stores,” Mr Whileman reports. The business was bought by Blackstone in 2021, for a sum thought to be in excess of £1bn. 

If this form of partnership works well for entrepreneurs, it can also serve larger corporates. FTSE 100-listed Informa, with a market cap of nearly £9bn, wanted to strengthen its FBX financial data and analytics business. It decided to merge it with a suitable competitor and asked Inflexion to help.

Novantas, a US financial data and analytics business, was identified as a suitable target. In 2021, FBX was carved out of Informa, merged with Novantas, and the combined business rebranded as Curinos, headquartered in the US, majority-owned by Informa but with a separate board.

Inflexion took a 30% stake in Curinos, which helped Informa to address funding issues. It also assisted in strengthening management and integrating the two technologies.

Getting in line

Alignment of objectives with the partner is the most important element in any deal, Mr Whileman reckons. “We will often walk away from a great business, just because we don’t think we have alignment.”

Ms Hemmers adds that Partnership Capital investments have an average life of three to five years, which is the norm for private equity. “But we are more flexible than most and will consider two-and-a-half to seven years before exit,” she says. “It’s a closed-end fund so we want to realise our investment, but the route is more tailored to the needs of our partners.”

The model seems to work for the entrepreneurs. Around half of Partnership Capital’s investment transactions have resulted from a recommendation by an existing ‘partner’. “And a number of the original entrepreneurs that we invested in have invested back in our fund,” Mr Whileman says.

Who is the fund’s biggest competitor? “Doing nothing,” Mr Whileman replies. “If Medivet hadn’t come to us, they would have still have grown.” Just not by as much.