Matt Smith, a partner in Foresight Group’s private equity team, discusses how the firm’s strategy has developed to make an impact on UK-based SMEs, the importance of investing beyond the South, and where it sees opportunity in the current market. By Jennifer Forrest
Looking outside of London and the South-East of England has been a hot topic for UK-based GPs over the past few years - as the government looked to follow through with its Levelling Up agenda, both the venture capital and private equity scenes felt primed for seizing opportunities further afield. However, with a plethora of London-based offices, some GPs admitted to struggling in winning over management teams in other regions.
Foresight Group - a long-standing investor at the regional level for both early-stage and small-cap growth capital - has spent the last year really honing in on what makes its strategy work and where it can improve, partner Matt Smith tells Real Deals.
“We see a gap in the provision of capital for small companies,” Smith says. “The gap is bigger outside of London and the South-East - the further you go out, the bigger that gap gets. Some of the most exciting small businesses in the UK are headquartered out of locations you may not expect, for historic, founder-led reasons.”
With nine offices in the UK, in addition to its most recently opened Dublin office, Foresight believes that having feet on the ground regionally is key for sourcing and winning deals.
“Small deals don’t travel,” Smith says. “The local entrepreneur, founder or CEO of the business will go to their local adviser in the local community and try to find some help. Those deals work in a very community-driven way, and to be part of the community you need to be embedded within it. We hire local people from those communities in order to help us source, execute and manage transactions. We are there for the long haul, we want to cultivate relationships with advisers, our local authority LPs and business owners and management teams.”
All hands on deck
Foresight is also aiming to differentiate itself through the organisation of its own team. Its PE team now has 50 people spread throughout the UK, with a mandate that every deal and holding period is a group task and group achievement.
This collective approach includes the investment committee. Smith, who co-runs the private equity team alongside partner James Livingston, feels it is better to have an “iterative interaction” from the early processes right through to the final decision, to avoid the IC meeting feeling like a crucial exam: “It’s important that it has got a cultural overlay, in that people feel empowered to ask the hard questions about the transaction in a very open way throughout the process. By the time we get to the final investment committee, if we’ve done our job well, we should be confirming what we already know rather than finding new things out.”
Some of the exits inked in 2022 have seen that approach vindicated. Chief among these is Edinburgh-headquartered semiconductor software business Codeplay, which Foresight sold to a US corporate buyer in May, bagging a money multiple of 16.1x. The transaction generated approximately £48m for Foresight and an IRR of nearly 100%.
“Managing director Chris Wardle was on the board for Codeplay,” Smith says. “I remember that business first coming through the door and the two of us sitting down and working out how to structure it. We could provide them with one equity partner rather than several, which is what they ultimately wanted to do.”
Overall, Foresight has inked nine exits to date in 2022. In addition to Codeplay, strong performers included TFC (with a 12.6x return), Agar Scientific and Cimteq. On the investment side, the firm has made 82 investments into SMEs in 2022 - which is up on the 2021 tally of 64 deals. The vast majority (77) of the deals done so far this year have been outside of London, according to Foresight.
Foresight focuses on early-stage and growth investments, with its most common ticket size sitting between £5-10m. Its approach to value creation typically centres around improving finance functions, R&D planning, and incorporating professionalised sales and marketing processes. “We’re as hands-on as possible without being interfering,” says Smith. “We’ll join the boards and work with the chairs.”
In the current market, with macroeconomic conditions continuing to impose higher costs and slower supply chains on SMEs, Foresight is currently seeking to prioritise reassurance for founders and management teams.
“What founders and management teams want from a partner is support and guidance as well as Foresight’s investment. To that end, we appoint and work alongside NEDs that have lived these experiences in the 1980s, 1990s and 2000s. They are incredibly important to our entrepreneurs as mentors and sounding boards. A great example is Dame Karen Jones, the hugely experienced and respected hospitality leader and founder of Café Rouge, who has worked closely with Nisha Katona, the founder of Mowgli Street Food, a very successful and differentiated restaurant brand,” Smith explains.
While the team is confident in its ability to successfully help businesses get through the current crisis, it is also the first to admit it has made mistakes in the past. One of the areas where the firm is catching up is around the importance of incorporating ESG into the investment thesis. “We now have a much clearer ESG focus and orientation in everything we do. We’ve come a long way, and the pace at which we’re developing is increasing,” Smith says.
Foresight’s approach to ESG now centres on meeting practical goals, incorporating a “synergistic” view of the ESG lens in the value creation process. “When it comes to ESG, we look at what a company can do from an outcome-driven approach,” says Smith. “We have Sustainable Development Goals driven thematics we look at, and in addition, we try to make improvements across 100 KPIs, which link to our view on core principles that a company should be looking to improve.”
Looking forward to what 2023 may hold, “more of the same” is on the cards, Smith says: “More good process, more good investments delivering more positive ESG and local impact - such as creating high-quality, local jobs – and, of course, delivering good returns for our investors.“
Market conditions are unquestionably more of a challenge than they were 12 months ago because of the current macroeconomic and recessionary picture, he adds. “However, our pipeline is in very good shape. To add to this, in the last 12 months we have launched three funds and added capital to a number of others. We have also acquired a circa £300m ventures business – meaning we now offer the UK’s leading ventures division – and increased our team AUM to £1.2bn.”
Asked if he feels that valuations are in a better place in Foresight’s area of the market given the current conditions, Smith says that by backing SMEs at the regional level – a part of the economy he feels is not being well served by private equity - Foresight does not tend to compete with other firms on price. “Is there more realism in terms of asset valuations? Probably yes, but if a business is demonstrating resilience, growth and a strong forward plan in this market, then existing shareholders can rightly expect to attract a good price,” he adds.
with additional reporting by Talya Misiri