Where is the smart money going in Support Services?June 2012
MethodologyIn the second quarter of 2012 Grant Thorntonand mergermarket interviewed 40 private equityinvestors on their ex...
ContentsIntroduction                                                                        2Executive summary            ...
Introduction                                                                            David P Ascott                    ...
Executive summary•	 Private equity deals in the support services sector totalled 86 transactions worth £3.1 billion in 201...
4	   Where is the smart money going in support services?
What constitutes support services?Support Services is a broadly defined sector that encompasses awide range of subsectors....
UK support services in reviewIn 2011 the UK support services industry registered                                 Buyouts86...
One of the key factors allowing for the sector’s            Strategic acquirers are also eager to tap the sector’s       U...
SURVEY FINDINGSGreat expectations for 2012We asked respondents to share their expectations for           What are you expe...
“Private equity continues to be at the centre of transactional            There is still a silver lining for private equit...
Breaking down support services:a closer look at industry subsectorsRespondents were asked to                              ...
CASE STUDY                                                                                                                ...
Consulting and advisory services                                     CASE STUDY                                           ...
Facilities management                                                                 Facilities management has long been ...
Popularity of target sub-sectors                                     Operational support                                  ...
“Complex higher margin activities with strong contractualunderpinning, such as BPO in the Financial Servicessector, attrac...
Value drivers and safe havens“Despite the chaos and the rhetoric of the last few years,the UK public sector continues to o...
Which are the sector’s key value drivers?                                                                                 ...
A smooth exit?Buy-and-build potential is one of the main reasons for the support servicessector’s resilient exit market. I...
EBITDA outlook                                                                                        100%                ...
Public vs private“At Grant Thornton we have first-hand experience of           “Major public sector reforms are underway w...
As for the public sector, UK spending cuts are already       Do you prefer to invest in companies that                    ...
Which private sector client bases do you view as most attractive?                                                         ...
Outsourcing still dominates the list of market drivers in   In the public sector client bases do you view as most attracti...
Mind the gap                                                                                                              ...
What are the most significant challenges for private equity investors?                                                    ...
Navigating through uncertaintyThe past few years have been a trying                     Have you adapted your investment s...
GT - Where is the Smart Money going in Support Services 2012
GT - Where is the Smart Money going in Support Services 2012
GT - Where is the Smart Money going in Support Services 2012
GT - Where is the Smart Money going in Support Services 2012
GT - Where is the Smart Money going in Support Services 2012
GT - Where is the Smart Money going in Support Services 2012
GT - Where is the Smart Money going in Support Services 2012
GT - Where is the Smart Money going in Support Services 2012
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GT - Where is the Smart Money going in Support Services 2012


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As a follow up to our 2010 report, Grant Thornton commissioned mergermarket to undertake a survey of 40 PE houses active in the support services sector for their views on expectations for the sector over the next 12 months and key issues affecting the market in 2012, including financing market conditions, exit trends and portfolio company management strategies.

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GT - Where is the Smart Money going in Support Services 2012

  1. 1. Where is the smart money going in Support Services?June 2012
  2. 2. MethodologyIn the second quarter of 2012 Grant Thorntonand mergermarket interviewed 40 private equityinvestors on their expectations for the UK supportservices sector over the next 12 months. Respondentsdiscussed key issues affecting the market in 2012,including financing market conditions, exit trendsand portfolio company management strategies.All respondents are anonymous and results arepresented in aggregate.
  3. 3. ContentsIntroduction 2Executive summary 3What constitutes support services? 5UK support services in review 6 Great expectations for 2012 8 Breaking down support services: a closer look at industry subsectors 10 Value drivers and safe havens 16 A smooth exit? 18 Public vs private 20 Mind the gap 24 Navigating through uncertainty 26Case study: Q&A with Richard Swann, Investment Director, Inflexion Private Equity 28Case study: Q&A with Claudio Veritiero, Managing Director, Kier Services 29Top deals 2012 – year to date 31About us 32 Where is the smart money going in support services? 1
  4. 4. Introduction David P Ascott Partner, Corporate Finance Grant Thornton UK LLPThe support services sector has long been a mainstay of private equityinvestment in the UK, regularly accounting for 25% or more of deals.But, bashed by recessionary forces in the private and public sector, how has itsappeal to private equity fared? In an age of austerity how can an investment inthe sector contribute to growth?In the two years since our last survey of the sector, life has undoubtedly been toughand recovery hesitant yet deal volume has remained fairly resilient in support services.The recurring revenue model has underpinned attractiveness to private equity in the sectorand this has not been lost on the large corporates. Well capitalised public companies, likeCapita, MITIE and Compass, have provided a healthy source of exits for private equitybacked companies but also strong competition for scarce new deals. The search for growth has taken the PE firms towards markets driven by legal andregulatory change with major transactions occurring in areas such as environmentalconsulting energy management and legal services. At the same time, consolidation throughbuy and build has proven a challenging strategy in a flat-lining market. So, dynamic companies seeking growth and private equity backing in the sector areincreasingly looking at new strategies to create value – operational improvement is keyand entrepreneurial management is rising to the challenge.2 Where is the smart money going in support services?
  5. 5. Executive summary• Private equity deals in the support services sector totalled 86 transactions worth £3.1 billion in 2011, reflecting an increase in volume from 2010 but a decline in deal value – looking ahead, 2012 is already off to a strong start with 16 deals worth a combined £1.7 billion.• PE investors are bullish with regard to deal activity: 83% of respondents expect private equity investment in the UK support services sector to increase in the next 12 months.• As was the case in the 2010 edition of this report, respondents identify buy-and-build growth potential and recurring revenue streams as the two most important value drivers in the support services sector.• The next year will not be without its challenges: 45% of those polled cite the financing environment as the top obstacle facing the private equity community this year, followed by regulatory changes or budgetary pressures.• ... But private equity investors are no strangers to a difficult environment. Challenging market conditions have caused 95% of respondents to adapt their investment strategies in recent years, largely by focusing on operational improvement of existing businesses (76%) or by seeking buy-and-build opportunities (55%).• When it comes to specific support services subsectors, business process outsourcing (BPO) tops respondents’ list: 83% of respondents view this as the most attractive subsector for private equity investment followed by operational support (48%), consulting and advisory (48%) and facilities management (40%).• One of the stand-out findings of this year’s study is respondents’ starkly optimistic take on the exit market: the majority (63%) believe the exit market is improving, and their optimism is coupled with high expectations for valuations. Looking back on the past 12 months, just 5% of respondents said EBITDA multiples of 7x or more were the norm. Looking ahead to the next 12 months, this percentage has increased about sevenfold, to a remarkable 36%.This more bullish view on exits and valuations supports further growth in the sector. Where is the smart money going in support services? 3
  6. 6. 4 Where is the smart money going in support services?
  7. 7. What constitutes support services?Support Services is a broadly defined sector that encompasses awide range of subsectors. It is generally defined as the provisionof services to private or public sector organisations that enablethem to focus on their primary or core activities, or thatenable the client organisation to perform key functions moreeffectively. For the purposes of this survey, we have dividedthe sector into four major subsectors:• Facilities management• Consulting, advisory and compliance services• Business process outsourcing (BPO)• Operational support Where is the smart money going in support services? 5
  8. 8. UK support services in reviewIn 2011 the UK support services industry registered Buyouts86 private equity deals worth a combined £3.1 billion. 30 3000This marks an increase in volume and a decline in value 25 2500compared to 2010, which saw 66 deals worth £4.1 billion,although the 2010 figures are inflated by the £1.7 billion Number of deals 20 2000acquisition of Worldpay Limited, an internet payment Number of deals Deal value £m Q1services company in which Bain Capital and Advent 15 1500International acquired an 80% stake from Royal Bank of Q2Scotland Group (RBS) that year. So far 2012 has already 10 1000 Q3outstripped 2011 in value terms with 16 deals worthapproximately £1.7 billion mid-way through Q2, led by 5 500 Q4the £950 million secondary buyout of legal outsourcingcompany CPA Global Limited by Cinven, from Electra 0 0 Deal value £mPartners and Intermediate Capital Group1. 2005 2006 2007 2008 2009 2010 2011 2012 Zooming out to look at historical private equityperformance shows the industry’s remarkable resiliencethrough the crisis. Private equity deal volume in the UK Exits 25 1600support services sector has been rising steadily each yearsince 2009, when the drying up of the credit markets 1400 Number of deals 20brought deal flow to a virtual halt across the board. 1200 Q1That year there were just 35 private equity deals worth Number of deals Deal value £m 15 1000£1.1 billion, marking a 46% drop in volume and a 36% Q2 800drop in value from 2008, but even so this decline was less 10 600 Q3severe than the fall witnessed in other UK sectors. 400 5 Q4 200 0 0 Deal value £m 2005 2006 2007 2008 2009 2010 2011 2012¹ See Top Deals 2012 – year to date, on page 31.6 Where is the smart money going in support services?
  9. 9. One of the key factors allowing for the sector’s Strategic acquirers are also eager to tap the sector’s UK economyexceptional performance is its buy-and-build growth growth potential, and will provide tough competition “By any account the economic picture in the UK remainspotential, particularly in the UK where many subsectors for private equity buyers over the course of the next challenging. Growth in real GDP measured a meagre 0.8% inremain highly fragmented. Indeed, survey participants few years. External market drivers – including increased 2011, a figure reduced by a contraction in business activityidentify buy-and-build growth potential as a key value outsourcing activity and heightened demand for in the fourth quarter, and the growth outlook for 2012 isdriver, with one respondent pointing to the “number of compliance services from large corporations – have for the same subpar rate, according to the Office of Budgetniche areas that can be tapped for significant gains” and made companies eager to diversify their services through Responsibility forecasts.another explaining: “The sector is robust, and investors acquisitions. This dynamic is reflected in the broader The projection for flat growth, however, obscures a rebalancing underway in the economy that may well becan easily mould their investments by helping companies M&A market: from 2010 to 2011 there was an 18% favourable to domestic deal making. Whereas exportsto take advantage of a fragmented market”. Looking increase in total support services M&A volume, boosted growth in 2011, its share is forecast to fall this yearat recent deal flow uncovers a number of examples, including both strategic and private equity-backed alongside stronger domestic activity with household spendingincluding UK buy-and-build specialist Sovereign Capital transactions, from 186 deals worth £9.6 billion to 220 and investment by businesses forecast to provide the biggestand portfolio company LM Funerals, one of the UK’s worth £6.3 billion, and in 2012 so far, the M&A deal impetus to UK recovery.largest groups of funeral directors. LM Funerals was activity stands at 54 worth £2 billion. As the government continues to push forward an aggressiveacquired by Sovereign in September 2003 and sold to Competition from strategic buyers is one of the top drive toward fiscal consolidation, public sector indebtedness remains a stubborn issue. And as government balanceDuke Street for £37.5 million in 2012. Under Sovereign’s concerns of respondents to this year’s survey – ranking sheet expands, the corporate sector has been steadilyownership, LM Funerals expanded through acquisitions, right alongside the more widespread macro challenges deleveraging and building up ample cash reserves.taking over many prominent UK sites with strong local like financing availability and regulatory developments. Certainly, the sluggish economic environment is a bane toreputations. All of these factors are examined in more detail in fresh investment, but may provide a spur to new business this edition of Smart Money, which draws from the opportunities in support services as the private and public experience and expectations of 40 private equity investors sector restructure operations to achieve greater financial in the UK support services sector to gauge market flexibility, offloading non-core business functions to slim down”. sentiment for the year ahead. Stephen Gifford Chief Economist Grant Thornton UK LLP Where is the smart money going in support services? 7
  10. 10. SURVEY FINDINGSGreat expectations for 2012We asked respondents to share their expectations for What are you expectations of private equity Do you expect to see more competition investment in the sector over the next 12 months? from strategic buyers in the next year?private equity in support services, and the feedbackwas overwhelmingly positive. The large majority ofrespondents (83%) expect the level of private equityactivity in the support services sector to increase overthe next 12 months, driven largely by investors’ desire 10% 17%for safe, stable investments. As one respondent explains, 27%“Continuous and repeated business is high in supportservices, which gives private equity investors confidence”. Taking advantage of opportunities in the sector is Increase greatlyeasier said than done, however, as corporate acquirers Increase Yeswill compete fiercely for attractive assets. Close to three- Remain the same No Decreasequarters of respondents (73%) expect private equity firms Decrease greatlyto encounter more competition from strategic buyers inthe next 12 months, and many in this group are keen toemphasise just how stiff this competition will be. As one respondent explains, “Corporate acquirers 73%have different goals for acquisitions, and they will 73%compete fiercely if a deal is strategically importantto them,” adding that these acquirers are often at anadvantage to start with. Unlike cash-rich corporateacquirers who are ready and willing to meet high sellerexpectations, private equity buyers “have to look at thefinancial aspect as the most important factor”.Another respondent weighs in here, stating that “cash-rich acquirers will not let go of an opportunity even if itmeans they have to pay high valuations”.8 Where is the smart money going in support services?
  11. 11. “Private equity continues to be at the centre of transactional There is still a silver lining for private equity groupsactivity in support services. Activity levels have been very resilient in all of this. M&A savvy support services companiesdespite the tougher transactional market and the uncertainties have a longstanding relationship with the private equityarising from the squeeze on public spending. Management teamsand entrepreneurs have dealt with this economic challenges community, sourcing some of their most lucrativeand have built some excellent businesses which have attracted acquisition targets from private equity firms’ portfolios.significant interest from private equity investors. However, One of the UK’s best known support services groupsthis interest hasn’t come only from private equity – the large – Capita Plc – sources many of its acquisitions fromsupport services ‘conglomerates’, whilst continuing to be very private equity, including the acquisition of Appliedgood homes for private equity exits, have increasingly become Language Solutions from Maven Capital Partners for upmainstream competitors for private equity. This trend is set tocontinue, especially given the limited availability of debt to fund to £68 million, and its £21 million acquisition of insurancenew deals, making it harder for private equity to compete and company Fish Administration Holdings from Inflexion.still achieve sensible returns. The larger corporates are also Capita also turned to private equity when strengtheninggearing up their resourcing to absorb and integrate businesses its presence in the healthcare market, with the £60 millionwhich are relatively smaller and less developed compared to acquisition of Premier Medical Group, a medical reportingwhat they have acquired previously. Having said that, there areand will continue to be some very good opportunities for private and screening services company, from Nomura Privateequity to back good businesses and their management teams, Equity, which backed the management buyout of Premierparticularly in those niche and value-add sub-sectors”. in 2008.Mo MeraliHead of Private EquityGrant Thornton UK LLP Where is the smart money going in support services? 9
  12. 12. Breaking down support services:a closer look at industry subsectorsRespondents were asked to Where do you see the most opportunity for growth and consolidation:indicate the most attractive areaswithin their preferred subsectors. BPO 83%The chart illustrates the most attractive Operational support (includingsubsectors in the inner circle. infrastructure and logistics) 48%The support services sector is still fragmented in the Consulting/advisory services 48%UK – even with the gradual push toward the one-stop-shop model in which support services businesses groupan array of services under one umbrella – leaving plenty Facilities management 40%of room for growth and consolidation. When asked toidentify the most attractive subsectors in this regard, 83% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%of respondents point to business process outsourcing(BPO) – placing this industry far ahead of operational Percentage of respondentssupport (48%), consulting and advisory (48%) andfacilities management (40%). Going into slightly more BPOdetail on all the subsectors listed here one respondent The popularity of BPO mirrors the rapid ascent of Group Plc, a UK-based marketing and promotionalsays: “Facilities management and operational support will outsourcing, which has helped BPO companies to products supplier. The £24 million acquisition includesgrow in the segments backed by the Government, while see phenomenal growth with private equity’s help. UK-based Brand Addition Limited and Germany-basedBPO and consultancy services will have consolidation Within BPO, respondents are most attracted to sales Kreyer Promotion Services, both providing promotionalopportunities in the private sector”. & marketing services or IT-related services, selected material products to medium to large businesses. by about one-half and one-quarter of respondents ECI backed management buy-out of Reed & MacKay in respectively as the most attractive BPO segments. April 2011 is another example of outsourced services In particular, the popularity of sales & marketing is (see case study). reflected in one recent deal from 2012, in which H.I.G. European Capital acquired two businesses from 4Imprint10 Where is the smart money going in support services?
  13. 13. CASE STUDY Danwood Group Holdings Ltd Founded 40 years ago by its current MD Colin Daniels, the Danwood Group has grown to become the largestCASE STUDY Operational support independent supplier of printing equipment, consumables and associated management services in Europe. In 2010Reed & Mackay Operational support services – which covers document the Lincoln-based business ranked 158 in the Sunday Times management, parcels & mail, and logistics & distribution – HSBC Top Track 250, up 83 places from the previous year.Established in 1962 Reed & Mackay is a leading provider also warrants a closer look, particularly as public sector Over the last decade, a core part of its growth strategy hasof strategic travel management services to the corporate demands for such services are set to rise in the near-term. The been to gain critical mass via acquisition. In the main, thissector. They provide high quality, high-touch business travel widespread austerity measures and resulting cuts in government strategy has been funded from free cash flow, and additionalservices with a significant focus on the legal, insurance spending will likely cause large organisations to revisit their funds raised in 2008 through the sale of a minority equityand financial services sectors where it has developed a operational support contracts and consolidate suppliers in this stake to the London-based private equity group Bregalstrong market share though their high quality and value field. When asked to identify the most attractive area within Capital.added services. ECI and ISIS Equity Partners completed the operational support, 63% pointed to document management.secondary MBO of Reed & Mackay in April 2011 and backed In recent years, Danwood’s management have built a strongthe incumbent management team led by Andy Hibbert and Another noteworthy area within operational support services relationship with the Admiral Group, a leading UK supplier ofsales director, Tracy Baumfield, and also supported by David is logistics: in 2011 Exponent Private Equity agreed to acquire print solutions, and in the middle of 2010 formal discussionsMaloney as Chairman. Using previous experience in the Pattonair Limited, a UK-based supply chain management surrounding an acquisition were opened. Initially, Danwoodsector, Grant Thornton were able to provide travel sector support company servicing the aerospace and defence markets, planned to fund the acquisition by raising a new debt facilityoperations and technology experts, who reviewed the Reed from Umeco Plc, the UK-based distribution and supply chain from its two existing senior lenders and Grant Thornton UK& Mackay business systems and processes and performed management company, in a deal valued at £146 million. LLP was tasked with providing financial and tax due diligencethe financial and tax due diligence, operational and IT due on the target, as well as a reviewing the enlarged groupdiligence, tax structuring to ECI and ISIS and tax advice to forecasts for the house banks.management on the transaction, with debt funding from While early meetings with the banks’ key relationshipLloyds TSB Corporate Markets. managers were very positive, it soon became clear that the continuing caution being demonstrated by lenders’ credit committees would make it difficult to have the loans approved within the timeframe dictated by the vendor, and the focus of both Danwood and its advisors had to shift to finding an alternative source of funding. In the event, Danwood’s flexibility paid off and the company was able to raise the necessary funding from its existing private equity partner Bregal Capital. Where is the smart money going in support services? 11
  14. 14. Consulting and advisory services CASE STUDY “We have seen both the professional and vocationalIn the consulting and advisory sphere, respondents are most training sectors being fertile ground for corporate Driver Hireoptimistic in their outlook for training with more than half acquirers and private equity investment. Transactions Based in Bradford and operating nationally, Driver in the these sectors have ranged in scale and scopesaying this area is most attractive. General recruitment and Hire was established in 1983 and is one of the UK’s from Sovereign Capital’s investment into a joint ventureenvironmental advisory services also rank highly. As far as this and Ireland’s largest specialist transport and logistics partnership with Lifetime Training Group Limited, one ofindustry is concerned there are a lot of niches for private equity recruitment companies and is the leading provider of the UK’s largest providers of vocational training to thefirms: the acquisition of Ascend Worldwide Ltd, a UK-based temporary and permanent personnel to the logistics and health, fitness care and hospitality sectors, in Augustcompany providing comprehensive information and analysis distribution industries. Driver Hire services around 5,000 2011 to Apollo’s acquisition of BPP in August 2009.on the aerospace industry, was acquired by Reed Business corporate customers nationwide. Major structural changes However, with the acquisition by Montagu Private EquityInformation (RBI) for an undisclosed amount in 2011 after being in the logistics sector, such as the increase in just-in-time of the College of Law in April 2012 (and conversion fromspun out from the broader Ascend Worldwide businesses in a manufacturing processes and the growth of home delivery charitable to profit making status) we are now seeing andeal backed by Lloyds TSB Development Capital in 2010; under from ever-increasing online retail sales, require logistics expansion of mainstream private equity activity into theprivate equity ownership Ascend evolved into a data business. operators to be far more flexible, driving demand for adjacent higher education sector. This is a trend worthAnother deal that illustrates the attractiveness of the subsector short-term, temporary drivers. As a result, in its latest watching as we may well see more financial investorsis the £587 million acquisition of Environmental Resources financial year, Driver Hire’s total network turnover rose entering the higher education sector as the Government’sManagement (ERM) by Charterhouse Captial partners in 2011 22 % to £66.5 million. austerity measures bite and education budgets are– in the deal’s announcement the company cites market driversincluding increased regulation and a sharper focus on corporate Grant Thornton had maintained a relationship with the squeezed”.social responsibility. management team at Driver Hire over a number of years so when they indicated that they were looking for a new James Robson equity provider to support the company’s growth strategy Director, Corporate Finance and potential international expansion, Grant Thornton Grant Thornton UK LLP was able to introduce LDC. Led by its Leeds office, LDC has invested an undisclosed sum for a significant shareholding, providing an exit for Spirit Capital who backed the business in 2004 (as Aberdeen Murray Johnstone Private Equity). Debt funding was provided by Yorkshire Bank Corporate and Structured Finance.12 Where is the smart money going in support services?
  15. 15. Facilities management Facilities management has long been on the radarCASE STUDY of private equity groups in the UK, due largely toFacilities Services Group Ltd its flexibility, says one respondent: “In facilitiesBased in Aylesbury, Buckinghamshire, Facilities Services management, there are no significant barriers toGroup (FSG) is a leading UK provider of hard facilities outsourcing projects and there is a lot of potential tomanagement services, specialising in the physical diversify service offerings. Private equity investors canmaintenance of buildings and equipment, with a particular encourage portfolio companies to diversify theirfocus on clients operating in the retail, leisure and property services, and doing this can add significant value tosectors. The group, which was originally formed in 2008via the merger of Circle Britannia, Serviceline and Atlanta an investment”.Facilities, aims to provide industry-leading value for money, Looking at recent deals in the facilities managementespecially when its core services are combined in a space shows that many companies’ services are specialisedproprietary energy management package, which can help to and tailored to very specific client bases. Garretsreduce clients’ property ownership costs. International is a prime example: the company, acquiredIn February 2011, FSG’s management team, advised by by GCP Capital Partners for £15 million in early 2012,Grant Thornton’s Manchester corporate finance practice, provides on-board catering services to ship owners andsuccessfully completed the MBO of the business fromSpice Limited in a deal supported by leading UK lower mid- ship managers. Garrets was founded in 1991 andcap investor NBGI Private Equity. The deal removes the reported revenues of approximately £27 million in 2011.constraints of corporate ownership, leaving the management Its experience and reputation serving a smaller, nicheteam free to pursue ambitious growth strategies, both market could make it an ideal candidate for a largerorganically and through acquisition. For its part, NBGI took a strategic buyer looking to diversify its service offeringmajority stake in FSG, but has also pledged further financingto provide the firm with the resources it needs to expand further down the line.its range of services. Although this is the first time FSG’smanagement team has worked directly with a private equitybacker, it is aware of the skills and benefits such a move canbring. The group’s former owner, Spice Limited, is itself nowprivate equity backed, having been taken private by largerbuyout investor Cinven at the end of 2010 in a £360 millionde-listing from the FTSE. Where is the smart money going in support services? 13
  16. 16. Popularity of target sub-sectors Operational support Consulting and advisory services Environmental Parcels & mail Logistics & distribution Property services General recruitment Training PR & marketing Consultancy Document management HR consultancy Most attractive (choice one) Very attractive (choice two) Attractive (choice three) Mechanics HR & & electrical payroll Sales & marketing Cleaning Pest control Payment services IT Fire protection Catering BPO Facilities management Washroom Fabric hygiene maintenance14 Where is the smart money going in support services?
  17. 17. “Complex higher margin activities with strong contractualunderpinning, such as BPO in the Financial Servicessector, attract the strongest private equity interest whilstmore mature and consolidated areas such as FM are moredifficult to generate widespread interest”.David AscottPartner, Corporate FinanceGrant Thornton UK LLP Where is the smart money going in support services? 15
  18. 18. Value drivers and safe havens“Despite the chaos and the rhetoric of the last few years,the UK public sector continues to offer significant The value drivers in support services are clearly well-known to the privateopportunities to support services organisations and their equity and corporate communities. We asked our respondent pool to identifyinvestors. Given the fragmentation of the marketplace, andthe visibility of the revenue streams, the public sector is well the most lucrative of these value drivers and emerging as the top three were: theplaced to offer value drivers of a high quality. Arguably, with potential to offer bundled services to a single customer base (80%), buy-and-the increasing focus on cost reduction and value for money,the time has never been better for creative outsourcing build growth potential (78%) and recurring revenue streams (65%).propositions. Opportunities are, however, likely to lie inservices which are complex and politically more sensitive – The support services sector is repeatedly described as a Development Capital (LDC) announced its £112 millionsuch as education, health and social services, which would safe haven for investors during uncertain times, with one acquisition of Pertemps Limited and its £24 millionbenefit from exposure to the private sector”. respondent saying that “long-term embedded contracts acquisition of Network Group Holdings, with the and high revenue visibility” have drawn investors to the ultimate goal of creating a diversified player in the job space and another stating that support services companies provision market by merging the two businesses. LDCStuart Black can “ensure continuous and recurring revenue”. is pursuing a similar strategy with another portfolioChairman A third respondent describes the bigger picture in stating, business, document management company SalaLakehouse Contracts “Private equity investors were quiet after the recession International, which last year acquired EDM Group – in 2008 and through 2010, watching corporate buyers’ an information management company that counts the activity and listening to the dialogues of government NHS among its top clients – for £31 million. on issues like spending cuts to control debt. Now as Success stories notwithstanding, support services the market has stabilised, support services is one of companies will still face an array of challenges in the the sectors which fared much better and private equity near term. When asked to identify the most significant investors are keen to revive their investments here”. obstacles facing the industry in the next year, the largest As for buy-and-build potential, the UK offers clear percentage of respondents (45%) cite the financing examples of the industry’s potential. In early 2012, environment, followed by the regulatory environment for instance, UK-private equity group Lloyds TSB and government spending or budgetary pressures.16 Where is the smart money going in support services?
  19. 19. Which are the sector’s key value drivers? Economic uncertainty and financing difficulties will put pressure on all businesses’ near-term prospects – andPotential to offer bundled services First preference the support services sector’s exposure to virtually all 23% 38% 20% to same customer base Second preference industries means it is bound to feel the knock-on effects. Third preference Buy-and-build growth potential 30% 12% 35% Indeed, results from the Bank of England’s quarterly Credit Conditions Survey show that spreads were reported to have widened significantly over benchmark Recurring revenue streams 28% 23% 15% rates for large and mid-sized companies in the first quarter, and slightly less so for smaller firms. Predictability of cash flow 10% 16% 18% But, in some cases, external distress will bring new business to the support services industry, particularly Provision of specialist services 8% 8% 10% when it comes to government spending cuts, as the cash-strapped public sector is expected to lean more 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% heavily on outsourcing to cut costs. “Support services companies will benefit from the ongoing trend towards local authorities outsourcing non-core activities, as a wayWhich obstacles will support services companies face this year? of maximising efficiency against a backdrop of significant budgeting cuts.”Potential to offer bundled services First most significant This trend toward outsourcing has allowed some 45% 13% 23% to same customer base Second most significant private equity groups to build up smaller outsourcing Third most significant businesses into larger, diverse players. Intelenet Global Buy-and-build growth potential 18% 38% 10% Service, an Indian business process outsourcing (BPO) company and former portfolio company of US-based Recurring revenue streams 20% 15% 23% Blackstone Group and UK-based Barclays Bank, is a case in point. Under private equity ownership, Intelenet made Predictability of cash flow 13% 18% 13% a string of acquisitions over the past few years including its £34 million acquisition of UK-based transportation Provision of specialist services 5% 8% 15% services company First Group Plc’s ticketing division. In 2012, Intelenet was acquired by UK-based strategic R&D/innovation issues 5% 15% buyer Serco Group for £385 million. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Where is the smart money going in support services? 17
  20. 20. A smooth exit?Buy-and-build potential is one of the main reasons for the support servicessector’s resilient exit market. In 2011 there were 37 exits worth £2.3 billion,representing a 61% increase in volume and an 94% increase in value from 23exits worth £1.2 billion the previous year.Looking ahead to 2012, the majority of respondents Valuation outlook(63%) view the exit market as improving and remainingrespondents are uncertain, but no respondents describeconditions as deteriorating. Those surveyed have repeatedly stress that corporateacquirers – ideal suitors for private equity sellers, butfierce competitors against private equity buyers – will 37%present attractive exit routes in the next year as theyseek to scoop up smaller targets from buyout groups’ Improvingportfolios. Deteriorating Uncertain One respondent explains: “Large players are startingto provide services in diverse categories on an integratedplatform. Smaller companies are ready to sell their stakes “This survey clearly confirms a significant upturn inas deal values have rebounded – this will give further 63% confidence in both the exit market and the expectationopportunities to large companies and will help them to of values. Whilst challenges remain such as banking, theclimb the value chain by getting stronger in small scale fundamentals do seem to have turned a corner positively for realising investment at attractive prices in the sector”.markets too”. David Ascott Partner, Corporate Finance Grant Thornton UK LLP18 Where is the smart money going in support services?
  21. 21. EBITDA outlook 100% 5%This optimistic exit outlook is coupled with high 90%expectations for valuations this year. Looking back onthe past 12 months, just 5% of respondents said EBITDA 36% 80%multiples of 7x or more were the norm. Looking ahead tothe next 12 months, this percentage has increased aboutsevenfold, to a remarkable 36%. At the same time, more 70% 53%than half of respondents say 6x to 7x multiples will be Percentage of respondentsmost common in the year ahead, as they were last year. 60% Their optimism is not unfounded. Support servicesassets have garnered high valuations even in the 50%most difficult of exit environments, with one recentexample being the acquisition of EDM Group by Sala 40% 51%International, valued at £31m and representing anapproximate 12.9x EBITDA multiple. 30% Offering some perspective on today’s valuationclimate, one respondent says: “In spite of competition 43% <5x EBITDA outlook 20%over price, EBITDA multiples will increase as companies 5x – 6x EBITDAearn more revenues at the same cost, by providing diverse 6x – 7x EBITDA >7x EBITDAservices to the same clients”. Two other respondents 10% 10%separately add that “margins have increased because of 0% 3%increased efficiency and innovative ways to providing 0%services” and that “in support services we have seen For private equity buyouts in the UK SS What are your expectations for EBITDA multiplescompanies’ ability to offer customers a bespoke ‘one- sector, what EBITDA multiples did you in the UK SS sector in the next 12 months?stop’ service, thereby increasing their revenue and see in the last 12 months?EBITDA multiples”. Where is the smart money going in support services? 19
  22. 22. Public vs private“At Grant Thornton we have first-hand experience of “Major public sector reforms are underway which we Support services companies cater to a diverse range ofhow the evolving public sector can provide significant believe will ultimately create major opportunities for the clients in the private and public sectors – and manyoutsourcing opportunities in areas such as public-sector support services sector. For example, police forces companies are able to serve both groups simultaneously.assurance and support for growth companies. In March are increasingly willing to involve the private sector in2012 we became the largest supplier of audit services to undertaking tasks other than the essential elements Consultancy and information management firms,local authorities and the NHS under five year contract with of detection and arrest. Leadership changes, from the for instance, are often able to provide the same set ofthe Audit Commission. Grant Thornton is also leading the introduction of elected police commissioners, may further products and services to large corporations, banks, andCoaching for Growth consortium which is a contract to accelerate this trend. government organisations.provide dedicated and structured coaching support to up When asked which client pool is most attractive from Likewise, in England, under the Health and Social Careto 10,000 high growth potential businesses a year”. Act, the NHS is seeking to achieve cost economies an investors’ standpoint, the majority of respondents and enhanced care quality through a revised network of we surveyed (64%) stated a preference for the private commissioners. We anticipate increasing opportunity forDavid Ascott sector whilst remaining respondents are equally divided private sector providers alongside the NHS in deliveringPartner, Corporate Finance the health and social care services the commissioners between those who prefer the public sector (18%) andGrant Thornton UK LLP require. those who find both groups equally appealing (18%). That said, the removal by the Coalition of the previous Respondents also went into more detail on the most top-down, Whitehall-led approach means the pace of attractive private and public sector client pools. Financial adoption varies by sector, location and institution. services and industrial clients are respondents’ top Given this, it is unsurprising that the support services choices for the private sector, although one respondent sector remains primarily focused on the private sector, outlines the difficulty of analysing the private sector as a where opportunities are easier to access and quicker to whole: “It is difficult to classify the needs of the private generate revenues from.” sector. Each sector has different requirements for support services and you have to be mindful of this when making Neil Rutledge opportunistic investments. For example in financial Partner, Government & Infrastructure Advisory Grant Thornton UK LLP services documentation, customer services or overall BPO will be very attractive. But looking at the industrial sector, logistics support and security & safety companies will be better investments”.20 Where is the smart money going in support services?
  23. 23. As for the public sector, UK spending cuts are already Do you prefer to invest in companies that serve the private or public sector?pressuring government and healthcare systems to trimcosts, and as such both of these groups will likelyincreasingly depend on support services companies. Thisnew dynamic is reflected in respondents’ feedback, with 18%the largest portions of respondents identifying health(43%) and central government (30%) as the top two mostattractive public sector client bases for support servicescompanies. In the UK, the government is continuing its concerted Privateeffort toward fiscal consolidation with the Office of Public 18% No preferenceBudget Responsibility (OBR) projecting in the 2012budget that government spending will fall over this yearand next. Even as public spending grows in absoluteterms in the period thereafter, the OBR forecasts that 64%public spending will fall in relative terms from around48% of GDP in 2009 - 2010 to nearly 39% of GDP by2016–2017. One respondent gives some insight into how this willimpact support services: “Government manages manydivisions like utilities, safety, environment hygiene andhealthcare. Spending cuts will certainly increase theoutsourcing of services in these areas”. Where is the smart money going in support services? 21
  24. 24. Which private sector client bases do you view as most attractive? CASE STUDY Team24 Most attractive Second most attractive In May 2011 Grant Thornton advised the shareholdersFinancial services 46% 36% 18% Third most attractive of Team24 Limited in respect of the sale to Capita Group Plc. Headquartered in Surrey, Team24 Ltd provides nurses and doctors at short notice for a wide range of temporary placements across the NHS and the private sector. 18% The acquisition adds depth and breadth of expertise both Industrial 43% 25% 33% to Capita’s recruitment business and to the range of services 64% it provides to the NHS and wider healthcare market. Established in 2005, Team24 employs 80 staff and has approximately 4,000 doctors and nurses registered for placement. Capita acquired Team24 for an initialCommercial/Retail 13% 40% 48% consideration of £24 million and a deferred consideration of up to £2 million dependent on Team24’s profit performance in the year to 31 March 2012. 0% 20% 40% 60% 80% 100% 120% Commenting on the deal, Rupert Rawcliffe, Corporate Finance Director at Grant Thornton, said: “We are very pleased to Percentage of respondents have assisted in successfully concluding this deal. We ran a highly competitive sales process which attracted strong interest from a host of trade and private equity bidders.It should also be noted that the flow of new business into support services will come from broader developments Capita was prepared to pay a good price to support itsthat affect both the public and private spheres, like increased regulatory burdens in the banking system under ongoing strategy to become a leading healthcare resourceBasel III and Solvency II, not to mention the increased focus on sustainability and responsibility for large provider to the NHS and the wider public and private healthcare sector”.corporations. Another important driver will come from digitisation and technological changes, affecting bothpublic healthcare systems and private medical companies. In early 2012, for instance, the NHS signed a£7 million contact with EDM Group – acquired by private equity-backed Sala International in 2011 –to digitise millions of medical records.22 Where is the smart money going in support services?
  25. 25. Outsourcing still dominates the list of market drivers in In the public sector client bases do you view as most attractive?respondent commentary, with one stating: “Outsourcing Most attractiveis set to increase greatly. Even small companies will not Central Government 30% 40% 25% Second most attractivelike to have their workforce taking care of documentation Third most attractiveand other administrative work. Now even very importantareas like customer relationship management (CRM), Health 43% 23% 28%which is core to business development, is outsourced.In this scenario private equity investors will have avery good chance of making good support services Utilities 18% 28% 10%investments at good valuations”. Another commentson unique private and public sector needs: “Health andutilities have opportunities in all the subsectors like Local Government 10% 10% 35%facilities management, cleaning, recruitment, marketingand logistics, thus the potential of providing bundledservices are high. This is not the case for government 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%organisations, which only require specific services Percentage of respondentsand do not require support services like recruitment, Do you expect government spending cuts to generate more attractivemarketing or CRM”. When asked whether government investment opportunities for private equity in the UK support services sector ?spending cuts will generate more attractive investmentopportunities for support services investors, just 32%said yes. These results are not overwhelmingly positiveon the surface, but respondent commentary suggestsspending cuts will eventually lead to outsourcing: 32%“As the government plans to cut funding for thehealthcare sector, I believe outsourcing will further Yesincrease here”. No Another respondent likewise says public sector cost-cutting will eventually lead to increased demand forsupport services: “Government will not stop providing 68%essential services like waste management and safety,but because of spending cuts they will have to look atcost-cutting options. Cutting costs will only be possiblethrough more outsourcing”. Where is the smart money going in support services? 23
  26. 26. Mind the gap “Private equity investors are having to look harder at deals in order to unlock value. Each opportunity must beThe debt financing environment and the lingering gap between buy-side and critically evaluated to see where they can unlock the valuesell-side price expectations are considered the top two most significant obstacles in the business to have a better chance of bridging the gap between buy-side and sell-side price, be it throughfacing private equity investors in support services this year. These issues are performance improvement, workforce optimisation, leveraging thier extsing portfolio businesses or adding indefining features of the current market, and are in no way limited to support thier own and others expertise”.services. But these twin challenges – funding difficulties and valuation gaps –will be magnified for buyout groups competing with corporates for support Pete Dawson Partner, Corporate Financeservices assets. Grant Thornton UK LLP This is something respondents will watch closely in the cuts initially brought about positive movement in the next year. More than half of respondents (51%) expect support services sector, after some time these budget“The order book remains the key issue for investors competition from cash-rich corporate acquirers to be a constraints meant that many contracts did not(58% of respondents) in the support services sector when significant obstacle over the next 12 months, and many go through”.undertaking the due diligence process. Investors are payingclose attention to pricing trends and contract length. With the respondents warn that private equity firms struggling to Other respondents stress the importance ofincreasing pricing and margin pressure, whilst businesses arrange financing will be at an automatic disadvantage scrutinising service levels and the caliber of a company’smay have good contracts now, investors are aware that against cash-rich corporate. “The availability of finance staff: “It is very important to know that a target companypricing may change in the future and there is an increasing at the right time is the biggest challenge – if you miss the is well-equipped with the technology and highly effectivetrade off of length of contract vs price. Private equity right time, then you either lose the deal or end up paying workforce required to provide services to their clientsinvestors must continue to have a clear understanding of the a higher price,” says one respondent. effectively”.sector as a whole to understand what prices are now, whatlevels people are tendering at and as much as is possible, Due diligence also presents challenges to private This is a particularly timely topic as many critics havewhat the pricing trends look like for the future“. equity buyers. Reliability of contracts and order book questioned whether critical public services like healthcare are each selected by a majority of respondents as key due can safely rely on outsourcing; there are also concerns diligence issues in the support services sector, and one about outsourcing legal functions. Such concerns have respondent in this group notes that “small companies can been exacerbated by budget cuts, which came under closePete DawsonPartner, Corporate Finance easily manipulate their order book and this can be very public scrutiny in early 2012 after healthcare budgetsGrant Thornton UK LLP difficult to identify”. On the issue of contract reliability, were trimmed. another respondent says: “While government spending24 Where is the smart money going in support services?
  27. 27. What are the most significant challenges for private equity investors? What are the key due diligence issues? 100% 3% Reliability of contracts 60% 7% 9% 12% 90% 20% Order book 58% 80% 40% 30% Cash generation 48% 35% 37% 70% Workforce utilisation 43%Percentage of respondents 60% Technology 33% 52% 50% Contract accounting 20% 30% 40% 40% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 43% 38% Percentage of respondents 30% 20% 30% 23% 25% 10% 3% 13% 0% Debt financing Price dislocation Competition from Quality of Current trading environment between buy and cash rich corporate management performance sell-side parties acquirers Very Significant Significant Somewhat significant Not very significant Insignificant Where is the smart money going in support services? 25
  28. 28. Navigating through uncertaintyThe past few years have been a trying Have you adapted your investment strategy in response to more challenging market conditions?time for buyout groups. Lingering “High quality decision support, based upon a clear understanding of cost and revenue drivers, is key toeconomic uncertainty and market 5% success in any business. In the support services arenavolatility have clouded the valuation long and complex contracts and the importance of operational data, which is often outside your control,environment, making sellers reluctant make the challenge more acute. The commercial andto accept low valuations and buyers reputational risk of failing to get this right, from the start of the contract relationship, can be highly damaging forreluctant to raise their stakes. For their Yes No the business”.part, private equity firms have heldonto portfolio investments for longer Steve Rigby Partnerthan usual and collected a substantial 95% Performance Improvementamount of dry powder.Against this backdrop the overwhelming majority(95%) say they have adapted their investment strategyin response to challenging market conditions and about If so, which of the following alternative strategies have you considered?one-third of this group focused on improving theirexisting investment through operational improvement Operational improvement of existing investments 76%(76%) or by seeking buy-and-build opportunities (55%). Buy-and-build 55% Targeting distressed opportunities 47% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of respondents26 Where is the smart money going in support services?