As Credit Crunch “Mark 2” appears to be bearing down on the global economy, the closing of Endless’ third turnaround fund of £220m could prove to be extremely timely for businesses needing support in continuing troubled times. In an undoubtedly tough fundraising market, two of Endless’ investors provide their thoughts on Endless’ recent fundraising success and the markets in general.
In July this year, three and a half years after completing on our first institutional fundraising, we closed our third turnaround fund – Endless Fund III. This was our second institutionally backed fund and a significant milestone for the business. With backing from a range of international investors, both new and existing, Fund III was closed at £220m, a figure which could have been significantly exceeded due to demand from potential investors. Given the uncertainty in the markets, both credit and more widely, why was there such appetite?
Having invested in Endless Fund II in 2008, what factors helped you decide to invest in Endless Fund III?
AD:
In less than 3 years, Endless had been able to establish itself as the leader in UK turnaround. They completed many transactions when many stayed on the sideline, some investments have already shown great results like Crown Paints and Amco. Their footprint has been extended to the London area and the South. The team also proved their ability to partner with some of the UK leading banks and, most importantly, developed a very high degree of maturity in investor relations. Transparency and a high level of integrity are key for turnaround players to manage institutional money.
JF:
First and foremost, the performance of the existing fund is truly exceptional in terms of return and capital realised. Even more important in our assessment of Endless was the manner in which the Endless Team has generated the early returns. The best example is Crown Paints. This journey from the date of the investment to the ultimate exit was anything but straight forward. The ultimate outcome is totally attributable to the decisions made by Endless during their ownership. I mention this example to illustrate that we don’t see Endless as a market momentum investor but as a hands-on value investor who has a strategy and skills to perform in different kinds of economic cycles.
What role do you see in the UK and Europe for turnaround/special situations funds in the current economic climate?
JF:
The opportunity for turnaround deals across Europe should be strong in the years to come. Given the limited economic growth prospects for the UK and Europe in the foreseeable future, our aim is to deploy more capital in the turnaround and distressed area. From an investor point of view, our challenge is to find groups in the sector who are well positioned and equipped to execute on such a strategy. There are only a very limited number of firms who have a proven track record in turnarounds in Europe. In the UK for example, Endless stands out as the only group, in our view, who has such a track record combined with a very strong reputation in the market as a “fair” investor.
AD:
At Access we try to balance our portfolio. In this respect, turnaround funds are a keystone in building value in down cycles since they use different value creation levers than plain vanilla buy-out funds or capital expansion funds. Besides, Access has a passion for companies and entrepreneurs and is particularly sensitive to the general situation of European companies. Turnaround funds are not always well perceived which is quite unfair, since they actually take risks other investors are no longer willing to take. Endless has demonstrated their contribution to the real economy in the UK in many instances: businesses they invested in have been able to expand production and open new outlets.
What are your thoughts on the current PE fundraising market?
JF:
Some funds get raised in a “heart beat” while others are struggling to get their funds closed. As we are coming out of a recession (and may go back into a recession again soon), the track records of firms have been severely tested. There is a huge difference in how different firms have managed themselves through the crisis. Investors, like ourselves, value if firms have shown investment disciplines in the run up to the “burst of the bubble” (i.e. not invested all the capital in high priced deals in a short timeframe) and have taken advantage of the available opportunities when the markets corrected. As we have seen with the Endless fund raising, there is still a lot of investor demand for groups who have stayed disciplined and delivered on the promised strategy. We would expect that not all the large mega offerings that are coming to the market in the next 12 months will receive a similar reception and that some groups will have to accept significantly smaller funds, or in some situations they won’t be able to raise any capital at all.
AD:
The current fundraising market has slowly recovered over the past 6 months. However, with the growing concerns over European sovereign debt and the risk for a broader economic downturn, the fundraising climate could rapidly deteriorate again. Many of the long term PE investors are stretched and /or anticipate additional regulatory pressure and may again consider a defensive pullback on new commitments until markets stabilize and the economy becomes more predictable. In stark contrast with the prevailing situation, Endless fundraising was very quick and successful. It includes a very complementary list of highly regarded limited partners from Europe and the US. These have been carefully selected for the value they can bring to the table.
What expectations do you have for Endless Fund III?
AD:
In terms of returns, we expect a lot!...On a more serious note, we expect Endless to continue helping businesses currently facing operational or financial difficulties to become the leaders of tomorrow again. To achieve this, the team needs to continue to do what they do best, i.e. identify “falling stars” early enough (before it is too late), focus the management on cash and inject fresh money. Then, once the situation is stabilised, help the management reposition the business on the path for growth.
JF:
We have full confidence that Fund III will be a continuation of the experience of Fund II. The firm made the wise decision to maintain a fund size that is very well fitted for the opportunity. Knowing the Endless principals, we expect them to further refine their model and also innovate their approach in terms of sourcing and deal types. We are fully aware of risks and volatility of the turnaround investments and hence are fully prepared for unexpected surprises from time to time. However, we have full confidence in the Endless team to deal with challenging situations and make the right decisions. For the next 10 years we are in partnership with each other and we look forward to that.