August 5, 2022
The boom in private equity has historically been driven by traditional “blind pool” private equity funds. This remains very popular and is a well-trodden path with demonstrable success. However, in recent years, across the international investment landscape we have seen a huge increase in the number of “deal-by-deal” PE managers providing access to direct investments in target companies to their investors.
Some deal-by-deal operators have emerged out of necessity, where they have been unable to raise a traditional blind pool fund. However, others entered the fray to either serve an investor base with an appetite for greater control over their investment decision making (and risk), or indeed to address deals, and/or deal structures, that traditional PE funds cannot fulfil, or deliver on.
Investors are allocating an increasing portion of their private equity commitments to direct investing, backing what, in the US, is referred to as a “fundless sponsor”. Here in the UK, we have seen a number of market entrants successfully provide investors with access to lower-mid-market and mid-market deals on a deal-by-deal basis over the last decade.
Years ago, we identified that certain investors, particularly the more private investors such as family offices, and Ultra-High/High Net Worths, have fluctuating liquidity (which is a factor), and also wanted to have greater control over the investments they choose to get involved in. Deal-by-deal sought to address this, allowing them to pick and choose when to participate to suit their own cashflows and their investment appetite at the time.
However, over the years, what also became clear was that having total flexibility, unencumbered by the traditional PE fund “rules” (set out in the fund investment agreement with LPs) meant being able to be more creative about deals. Its less a case of having to force our square peg into someone else’s round hole – need high yield debt or fixed return preferred equity?… no problem, need minority investment for an eight-year hold period?… no problem – the fact is the investors themselves get to decide what works for them in a given scenario, which makes the deal-by-deal operator more flexible.
This works the same way with sector limitations too. We recently had a business on our desk involved in defence (a sector which for obvious reasons is in a current period of strong growth) – which the PE funds had universally declined based on ESG concerns, and in most cases forbidden by the “rules” of the Fund. Not bound by these same limitations, a deal-by-deal operator can consider a deal like this and leave it to investors to determine whether they wish to participate in it. The end investor can take their own view on the ESG matter, rather than having a blanket approach. This could be the same in a plastics business, a sex toy business, or a CBD products business, all of which have crossed our desk with the same problem for blind pool PE funds.
And certainly, the rise of the direct investment class has brought a whole new generation of investors into the asset class. Where private equity would historically have been the domain of institutions and the super wealthy, some managers have made it possible for investors to participate in deals for a few thousand pounds. This provides access to a whole new cohort of investors, which some would argue is increasingly democratising the asset class. Some deal-by-deal operators have investor databases which run into thousands of names.
Investors have also told us that they like that, as a deal-by-deal manager, we are more aligned with their interests because our economics come from co-investment in sweet equity – we sit in the same instruments as our investors. We don’t need to “trigger carry” in a fund or sell businesses at a sub-optimum moment to provide the exit credentials needed during the fundraise for the next fund. We sit alongside our investors maximising returns for them on a specific asset – and investors seem to like that. Added to which, deal fees are also deal-specific – investors tell us this is preferred rather than the AUM fees of a traditional fund. That said, we do see some deal-by-deal operators charging comparatively high deal fees, but like all things this will have a way of finding its market norm (much like it has for traditional funds).
There are undoubtedly pros and cons for both the model of a traditional fund and the deal-by-deal model, but both are here to stay and the continued growth of the latter may provide new tools and opportunities for vendors, shareholders, management teams and intermediaries on deals, and with that, greater opportunity for a wider and deeper pool of investors. Interesting times indeed!
Del Huse is Founder and CEO of deal-by-deal investor Roycian Ltd. www.roycian.com
Bluebox Corporate Finance, a ‘full-service’, award-winning corporate finance practice established in 2012 by former-dragon James Caan and corporate financier Paul Herman, sits seamlessly alongside Bluebox Capital, founded in 2022.
Bluebox Capital is a leading early-stage investment organisation supporting high-growth, UK-based businesses across all sectors, with cheque sizes of between £50,000-£250,000 of capital as well as guidance and expertise.
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Richard Millward, Former Client
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Helen Dickinson, Former Client
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Hugh Morris, Former Client
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Laurence Seward, Former Client
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Mike Minett, Former Client
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David Stokes, Former Client
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Jeff Weinstein, Former Client
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Bill Ballard, Former Client
Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.
Alan Montgomery, Former Client
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Nigel Parsons, Former Client
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James Caan, Investor
We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.
Marten Nielson, Former Client
We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.
Paul Duckworth, Former Client
I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.
Peter Bennett, Former Client
Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.
James Averdieck, Gü, Former Client
The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.
Jon Parslow, Former Client
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Simon English, Former Client
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Henry Braham, Former Client
Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.
Matt Evans, Former Client
The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.
Victor Lewis, Former client
Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.
Simon Hulme, Former Client
Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.
Michael Clapper, Former Client
I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.
Mark Rodol, Former Client
I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.
Steven Davies, Former Client
With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter
Clive Hillier, Former Client
The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.
Harpal Singh, Former Client