Time to grow

A consortium that invests its members’ skills as well as their money takes a long-term view of its acquisitions. Adrienne Margolis reports

Chief Executive Partnerships is an investment consortium with a difference. Where most advisers in industry use other people’s money to acquire and expand businesses, this group of senior industrialists and financiers uses the funds of its own members.

Not only finance but the specialist expertise of individuals in the group supports and enhances the original management. ‘The expertise and finance are in the same place,’ says Nicholas Garrow, founder and chairman. The group has a longer term view than most investors, so the company has time to grow without pressure for a quick return. Chief Executive Partnerships is now looking for engineering acquisitions.

The idea of a different approach to nurturing small and medium-size businesses occurred to Garrow in the early 1990s. ‘The plan was driven by the recognition that both the management and the financial side are important, and that executives were starting to earn enough money to enable them to build up their own pot of finance,’ he says.

Garrow has a background in banking, which includes experience of raising venture capital finance, and facilitating management buyouts. ‘This whetted my appetite, but I wanted to see if superior returns could be achieved, while still safeguarding an investment in a company.’

In 1993 he brought together 18 people as an investment group. The first takeover target was Leada Acrow, a construction services company acquired through a management buyout from BET. It was bought for £8.5m and sold for almost double that about three years later.

Following an acquisition, existing management is left in place, and the consortium focuses on areas such as improving skills. One recent example is the £5.3m acquisition of specialist engineering company GT Tools in November 1996.

David Houghton, a member of Chief Executive Partnerships, was brought in as chairman. Houghton, formerly a divisional chief executive at GKN Sankey, guides GT Tools through the day-to-day running of the business, while Garrow assists with financial advice.

‘We do not look on ourselves as a venture capital group – we do not have the same time horizons,’ Garrow stresses. ‘We are driven from an industrial base. Rather than putting finance first, our interest is in supporting companies and adding value to the management.’

Chief Executive Partnerships is now 40 strong and growing. The investor members are all chief executives or top directors of major companies. When the consortium started off, each acquisition was free-standing, with each backer directly putting funds into a specific project. Since 1996, money has been pooled.

Now, apart from GT Tools, the group owns two plastic extrusion firms, a farm management company, and an international air courier. There is a rolling programme of acquisitions, and about £7.5m to spend.

The consortium is interested in taking on more engineering companies valued at between £5m and £15m. ‘A prerequisite is that the company is capable of being cash-generative,’ Fraser Marcus, Chief Executive Partnerships managing director, explains. There must also be common interest between the shareholders and the employees.

Another feature of the consortium is that investing directors hold ordinary rather than preference shares in the companies they acquire. Forms of employee participation like share ownership are also encouraged. ‘We have lots of incentive schemes to motivate people,’ Garrow says.

Stability and good management are other criteria sought in potential purchases. ‘We pay a lot of attention to the service element of businesses and customer needs,’ Marcus says. With this in mind, Chief Executive Partnerships does research to identify takeover targets, as well as investigating companies recommended by members of the consortium. Larger venture capital groups like 3i and CinVen are sounded out regularly for candidates, along with major accountancy firms such as Coopers & Lybrand and KPMG.

With the takeover scene becoming increasingly competitive, the consortium is looking to owner/manager companies in the private sector, rather than divestments from big conglomerates. In sectors like engineering, the group reckons it may find interested companies. ‘The strength of sterling and uncertainty over the performance of the export sector means the outlook may not be quite so rosy for some businesses,’ Marcus suggests.

‘We are making approaches to private owner/managers who may want to cash in some of their investment.’

Engineering companies are of interest because there is ‘a high level of competency in the sector,’ Marcus adds. ‘In the UK there are some exceptional skills in this sector, and we have experts like David Houghton to help guide us through.’ The range of in-house expertise is particularly useful when the consortium is conducting due diligence enquiries prior to a potential purchase. If an expert from the partnership is not happy with a target company, a deal will not be done.

Chief Executive Partnerships aims to increase the number of acquisitions to between 10 and 15, and the group of investors to about 50. ‘Our formula is a proven success,’ Garrow maintains. ‘We have a very focused approach, doing two to three transactions a year, where larger players are doing between 50 and 75.’

The ultimate aim is to produce good returns for investors, as well as improving the businesses acquired. Garrow admits that there is an extra incentive to make acquisitions perform well, because investors have taken a stake in them. But he also stresses the importance of flexibility over time horizons. ‘Our first acquisitions were sold on much quicker than we anticipated. But we are quite happy with a timescale from three to 10 years,’ he says.

New life for GT Tools

Alan Thomas has been elevated to the board of GT tools since the Chief Executive Partnerships takeover. He has worked for the company for 25 years, and was production manager under the two original owners.

‘The company had gone as far as it could. The owners were not backward in putting money in, and we were at the forefront of technology,’ he recalls. But the business needed cash to expand.

Staff were nervous about Chief Executive Partnerships. Thomas says: ‘They assured us we should have no worries, and in the first year they injected an additional £750,000m.’ The plan was to expand through a customer-driven approach, conducting tool trials for the company’s products, and for other people.

The investment funded an extension to house a mould press. High-tech machinery has also been bought. Thomas says there have been changes in management style. ‘I used to organise the work but not deal with the finance side. Now I am allowed to see everything. Aided by Nick Garrow and David Houghton, I can plan better.’

The workforce is being reorganised into teams which ‘own’ the part of production they are involved in. ‘It is happening everywhere,’ Thomas observes. ‘The fact that David Houghton has been in a large engineering company is a big bonus.

‘We are benefiting from his experience, and learning to be more flexible. But we recognise that the changes are not going to show results overnight.’

Thomas is reassured that GT Tools is not under pressure to show spectacular results in the short-term. Employees are being encouraged to put their money into the company, as members of Chief Executive Partnerships do.

More muscle power

David Houghton came across Chief Executive Partnerships when he was a divisional chief executive at GKN. In 1995, he helped it acquire plastic extrusion company Econopack for £6m.

‘That purchase, and the purchase of GT Tools, illustrates the consortium’s approach,’ he says. ‘It’s different – they are not looking for companies to turn around, but for businesses with a good track record. Although they might have a good cashflow, the companies stand to benefit from senior management experience and more financial muscle.’

Houghton says the change in regime can help companies look forward ‘in an active way’.

At companies like GT Tools, the management never imagined that they might be invited to become shareholders. ‘They have not quite taken in what it is – that they too can participate.’

Houghton believes the consortium could find more engineering acquisitions, particularly in the West Midlands. He says an advantage of the group’s approach is that there is no pressure for a quick exit. ‘There is no pressure for disposal.’