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.

1. Where is the smart money going in Support Services?
June 2012

2. Methodology
In the second quarter of 2012 Grant Thornton
and mergermarket interviewed 40 private equity
investors on their expectations for the UK support
services sector over the next 12 months. Respondents
discussed key issues affecting the market in 2012,
including financing market conditions, exit trends
and portfolio company management strategies.
All respondents are anonymous and results are
presented in aggregate.

3. Contents
Introduction 2
Executive summary 3
What constitutes support services? 5
UK 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 26
Case study: Q&A with Richard Swann, Investment Director, Inflexion Private Equity 28
Case study: Q&A with Claudio Veritiero, Managing Director, Kier Services 29
Top deals 2012 – year to date 31
About us 32
Where is the smart money going in support services? 1

4. Introduction
David P Ascott
Partner, Corporate Finance
Grant Thornton UK LLP
The support services sector has long been a mainstay of private equity
investment in the UK, regularly accounting for 25% or more of deals.
But, bashed by recessionary forces in the private and public sector, how has its
appeal to private equity fared? In an age of austerity how can an investment in
the sector contribute to growth?
In the two years since our last survey of the sector, life has undoubtedly been tough
and recovery hesitant yet deal volume has remained fairly resilient in support services.
The recurring revenue model has underpinned attractiveness to private equity in the sector
and this has not been lost on the large corporates. Well capitalised public companies, like
Capita, MITIE and Compass, have provided a healthy source of exits for private equity
backed companies but also strong competition for scarce new deals.
The search for growth has taken the PE firms towards markets driven by legal and
regulatory change with major transactions occurring in areas such as environmental
consulting energy management and legal services. At the same time, consolidation through
buy and build has proven a challenging strategy in a flat-lining market.
So, dynamic companies seeking growth and private equity backing in the sector are
increasingly looking at new strategies to create value – operational improvement is key
and entrepreneurial management is rising to the challenge.
2 Where is the smart money going in support services?

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. 4 Where is the smart money going in support services?

7. What constitutes support services?
Support Services is a broadly defined sector that encompasses a
wide range of subsectors. It is generally defined as the provision
of services to private or public sector organisations that enable
them to focus on their primary or core activities, or that
enable the client organisation to perform key functions more
effectively. For the purposes of this survey, we have divided
the 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. UK support services in review
In 2011 the UK support services industry registered Buyouts
86 private equity deals worth a combined £3.1 billion. 30 3000
This marks an increase in volume and a decline in value
25 2500
compared 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 2000
acquisition of Worldpay Limited, an internet payment
Number of deals
Deal value £m
Q1
services company in which Bain Capital and Advent
15 1500
International acquired an 80% stake from Royal Bank of Q2
Scotland Group (RBS) that year. So far 2012 has already 10 1000 Q3
outstripped 2011 in value terms with 16 deals worth
approximately £1.7 billion mid-way through Q2, led by 5 500 Q4
the £950 million secondary buyout of legal outsourcing
company CPA Global Limited by Cinven, from Electra 0 0 Deal value £m
Partners and Intermediate Capital Group1. 2005 2006 2007 2008 2009 2010 2011 2012
Zooming out to look at historical private equity
performance shows the industry’s remarkable resilience
through the crisis. Private equity deal volume in the UK Exits
25 1600
support services sector has been rising steadily each year
since 2009, when the drying up of the credit markets 1400
Number of deals
20
brought deal flow to a virtual halt across the board. 1200
Q1
That 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
800
drop in value from 2008, but even so this decline was less 10
600 Q3
severe than the fall witnessed in other UK sectors.
400
5 Q4
200
0 0 Deal value £m
2005 2006 2007 2008 2009 2010 2011 2012
¹ See Top Deals 2012 – year to date, on page 31.
6 Where is the smart money going in support services?

9. One of the key factors allowing for the sector’s Strategic acquirers are also eager to tap the sector’s UK economy
exceptional performance is its buy-and-build growth growth potential, and will provide tough competition
“By any account the economic picture in the UK remains
potential, 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% in
remain highly fragmented. Indeed, survey participants few years. External market drivers – including increased 2011, a figure reduced by a contraction in business activity
identify 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 is
driver, with one respondent pointing to the “number of compliance services from large corporations – have for the same subpar rate, according to the Office of Budget
niche 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 be
can easily mould their investments by helping companies M&A market: from 2010 to 2011 there was an 18%
favourable to domestic deal making. Whereas exports
to 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 year
at recent deal flow uncovers a number of examples, including both strategic and private equity-backed alongside stronger domestic activity with household spending
including 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 biggest
and 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 aggressive
acquired 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 balance
Duke 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 steadily
ownership, 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 to
reputations. 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. SURVEY FINDINGS
Great expectations for 2012
We 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 feedback
was overwhelmingly positive. The large majority of
respondents (83%) expect the level of private equity
activity in the support services sector to increase over
the 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 support
services, which gives private equity investors confidence”.
Taking advantage of opportunities in the sector is Increase greatly
easier said than done, however, as corporate acquirers Increase Yes
will compete fiercely for attractive assets. Close to three- Remain the same No
Decrease
quarters of respondents (73%) expect private equity firms
Decrease greatly
to encounter more competition from strategic buyers in
the next 12 months, and many in this group are keen to
emphasise 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 important
to them,” adding that these acquirers are often at an
advantage to start with. Unlike cash-rich corporate
acquirers who are ready and willing to meet high seller
expectations, private equity buyers “have to look at the
financial 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 it
means they have to pay high valuations”.
8 Where is the smart money going in support services?

11. “Private equity continues to be at the centre of transactional There is still a silver lining for private equity groups
activity in support services. Activity levels have been very resilient in all of this. M&A savvy support services companies
despite the tougher transactional market and the uncertainties
have a longstanding relationship with the private equity
arising from the squeeze on public spending. Management teams
and entrepreneurs have dealt with this economic challenges community, sourcing some of their most lucrative
and 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 groups
this interest hasn’t come only from private equity – the large – Capita Plc – sources many of its acquisitions from
support services ‘conglomerates’, whilst continuing to be very private equity, including the acquisition of Applied
good homes for private equity exits, have increasingly become
Language Solutions from Maven Capital Partners for up
mainstream competitors for private equity. This trend is set to
continue, especially given the limited availability of debt to fund to £68 million, and its £21 million acquisition of insurance
new 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 strengthening
gearing up their resourcing to absorb and integrate businesses its presence in the healthcare market, with the £60 million
which are relatively smaller and less developed compared to
acquisition of Premier Medical Group, a medical reporting
what they have acquired previously. Having said that, there are
and will continue to be some very good opportunities for private
and screening services company, from Nomura Private
equity to back good businesses and their management teams, Equity, which backed the management buyout of Premier
particularly in those niche and value-add sub-sectors”. in 2008.
Mo Merali
Head of Private Equity
Grant Thornton UK LLP
Where is the smart money going in support services? 9

12. Breaking down support services:
a closer look at industry subsectors
Respondents were asked to Where do you see the most opportunity for growth and consolidation:
indicate the most attractive areas
within their preferred subsectors. BPO 83%
The chart illustrates the most attractive
Operational support (including
subsectors 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 group
an array of services under one umbrella – leaving plenty Facilities management 40%
of room for growth and consolidation. When asked to
identify 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 respondents
support (48%), consulting and advisory (48%) and
facilities management (40%). Going into slightly more BPO
detail on all the subsectors listed here one respondent The popularity of BPO mirrors the rapid ascent of Group Plc, a UK-based marketing and promotional
says: “Facilities management and operational support will outsourcing, which has helped BPO companies to products supplier. The £24 million acquisition includes
grow in the segments backed by the Government, while see phenomenal growth with private equity’s help. UK-based Brand Addition Limited and Germany-based
BPO and consultancy services will have consolidation Within BPO, respondents are most attracted to sales Kreyer Promotion Services, both providing promotional
opportunities 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 4Imprint
10 Where is the smart money going in support services?

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 largest
CASE STUDY Operational support independent supplier of printing equipment, consumables
and associated management services in Europe. In 2010
Reed & 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 has
of 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, this
sector. 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 additional
services 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 equity
and financial services sectors where it has developed a
operational support contracts and consolidate suppliers in this stake to the London-based private equity group Bregal
strong 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 strong
the incumbent management team led by Andy Hibbert and Another noteworthy area within operational support services relationship with the Admiral Group, a leading UK supplier of
sales 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 discussions
Maloney as Chairman. Using previous experience in the Pattonair Limited, a UK-based supply chain management surrounding an acquisition were opened. Initially, Danwood
sector, 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 facility
operations 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 diligence
the financial and tax due diligence, operational and IT due on the target, as well as a reviewing the enlarged group
diligence, 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 relationship
Lloyds 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. Consulting and advisory services CASE STUDY “We have seen both the professional and vocational
In the consulting and advisory sphere, respondents are most training sectors being fertile ground for corporate
Driver Hire
optimistic 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 scope
saying 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 venture
environmental advisory services also rank highly. As far as this
and Ireland’s largest specialist transport and logistics partnership with Lifetime Training Group Limited, one of
industry 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 the
firms: the acquisition of Ascend Worldwide Ltd, a UK-based
temporary and permanent personnel to the logistics and health, fitness care and hospitality sectors, in August
company 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 Equity
Information (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 from
spun 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 an
deal backed by Lloyds TSB Development Capital in 2010; under
from ever-increasing online retail sales, require logistics expansion of mainstream private equity activity into the
private 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 worth
Another 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 investors
is the £587 million acquisition of Environmental Resources
financial year, Driver Hire’s total network turnover rose entering the higher education sector as the Government’s
Management (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 drivers
including 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. Facilities management
Facilities management has long been on the radar
CASE STUDY of private equity groups in the UK, due largely to
Facilities Services Group Ltd its flexibility, says one respondent: “In facilities
Based in Aylesbury, Buckinghamshire, Facilities Services management, there are no significant barriers to
Group (FSG) is a leading UK provider of hard facilities outsourcing projects and there is a lot of potential to
management services, specialising in the physical diversify service offerings. Private equity investors can
maintenance of buildings and equipment, with a particular encourage portfolio companies to diversify their
focus on clients operating in the retail, leisure and property
services, and doing this can add significant value to
sectors. The group, which was originally formed in 2008
via 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 management
especially when its core services are combined in a space shows that many companies’ services are specialised
proprietary energy management package, which can help to and tailored to very specific client bases. Garrets
reduce clients’ property ownership costs.
International is a prime example: the company, acquired
In 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 and
successfully completed the MBO of the business from
Spice Limited in a deal supported by leading UK lower mid- ship managers. Garrets was founded in 1991 and
cap 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, niche
team free to pursue ambitious growth strategies, both market could make it an ideal candidate for a larger
organically and through acquisition. For its part, NBGI took a
strategic buyer looking to diversify its service offering
majority stake in FSG, but has also pledged further financing
to 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’s
management team has worked directly with a private equity
backer, it is aware of the skills and benefits such a move can
bring. The group’s former owner, Spice Limited, is itself now
private equity backed, having been taken private by larger
buyout investor Cinven at the end of 2010 in a £360 million
de-listing from the FTSE.
Where is the smart money going in support services? 13

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
maintenance
14 Where is the smart money going in support services?

17. “Complex higher margin activities with strong contractual
underpinning, such as BPO in the Financial Services
sector, attract the strongest private equity interest whilst
more mature and consolidated areas such as FM are more
difficult to generate widespread interest”.
David Ascott
Partner, Corporate Finance
Grant Thornton UK LLP
Where is the smart money going in support services? 15

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 private
opportunities to support services organisations and their equity and corporate communities. We asked our respondent pool to identify
investors. Given the fragmentation of the marketplace, and
the visibility of the revenue streams, the public sector is well
the most lucrative of these value drivers and emerging as the top three were: the
placed 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 in
services which are complex and politically more sensitive – The support services sector is repeatedly described as a Development Capital (LDC) announced its £112 million
such as education, health and social services, which would
safe haven for investors during uncertain times, with one acquisition of Pertemps Limited and its £24 million
benefit 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. LDC
Stuart Black can “ensure continuous and recurring revenue”. is pursuing a similar strategy with another portfolio
Chairman A third respondent describes the bigger picture in stating, business, document management company Sala
Lakehouse 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. Which are the sector’s key value drivers? Economic uncertainty and financing difficulties will put
pressure on all businesses’ near-term prospects – and
Potential 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 way
Which 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. A smooth exit?
Buy-and-build potential is one of the main reasons for the support services
sector’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 23
exits 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 remaining
respondents are uncertain, but no respondents describe
conditions as deteriorating.
Those surveyed have repeatedly stress that corporate
acquirers – ideal suitors for private equity sellers, but
fierce competitors against private equity buyers – will 37%
present attractive exit routes in the next year as they
seek to scoop up smaller targets from buyout groups’ Improving
portfolios. Deteriorating
Uncertain
One respondent explains: “Large players are starting
to provide services in diverse categories on an integrated
platform. Smaller companies are ready to sell their stakes “This survey clearly confirms a significant upturn in
as deal values have rebounded – this will give further 63% confidence in both the exit market and the expectation
opportunities to large companies and will help them to of values. Whilst challenges remain such as banking, the
climb 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 LLP
18 Where is the smart money going in support services?

21. EBITDA outlook
100%
5%
This optimistic exit outlook is coupled with high 90%
expectations for valuations this year. Looking back on
the past 12 months, just 5% of respondents said EBITDA 36%
80%
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%. At the same time, more 70% 53%
than half of respondents say 6x to 7x multiples will be
Percentage of respondents
most common in the year ahead, as they were last year. 60%
Their optimism is not unfounded. Support services
assets have garnered high valuations even in the 50%
most difficult of exit environments, with one recent
example being the acquisition of EDM Group by Sala 40% 51%
International, valued at £31m and representing an
approximate 12.9x EBITDA multiple.
30%
Offering some perspective on today’s valuation
climate, one respondent says: “In spite of competition 43% <5x EBITDA outlook
20%
over price, EBITDA multiples will increase as companies 5x – 6x EBITDA
earn more revenues at the same cost, by providing diverse 6x – 7x EBITDA
>7x EBITDA
services 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 multiples
companies’ 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. 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 of
how the evolving public sector can provide significant believe will ultimately create major opportunities for the clients in the private and public sectors – and many
outsourcing 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 in
2012 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 of
the Audit Commission. Grant Thornton is also leading the introduction of elected police commissioners, may further products and services to large corporations, banks, and
Coaching 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 Care
to 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 for
David Ascott sector whilst remaining respondents are equally divided
private sector providers alongside the NHS in delivering
Partner, Corporate Finance the health and social care services the commissioners between those who prefer the public sector (18%) and
Grant 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. 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 trim
costs, and as such both of these groups will likely
increasingly depend on support services companies. This
new dynamic is reflected in respondents’ feedback, with
18%
the largest portions of respondents identifying health
(43%) and central government (30%) as the top two most
attractive public sector client bases for support services
companies.
In the UK, the government is continuing its concerted Private
effort toward fiscal consolidation with the Office of Public
18% No preference
Budget Responsibility (OBR) projecting in the 2012
budget that government spending will fall over this year
and next. Even as public spending grows in absolute
terms in the period thereafter, the OBR forecasts that
64%
public spending will fall in relative terms from around
48% of GDP in 2009 - 2010 to nearly 39% of GDP by
2016–2017.
One respondent gives some insight into how this will
impact support services: “Government manages many
divisions like utilities, safety, environment hygiene and
healthcare. Spending cuts will certainly increase the
outsourcing of services in these areas”.
Where is the smart money going in support services? 21

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 shareholders
Financial 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 initial
Commercial/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 its
that affect both the public and private spheres, like increased regulatory burdens in the banking system under ongoing strategy to become a leading healthcare resource
Basel 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 both
public 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. 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 attractive
is set to increase greatly. Even small companies will not Central Government 30% 40% 25% Second most attractive
like to have their workforce taking care of documentation Third most attractive
and other administrative work. Now even very important
areas 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 a
very good chance of making good support services Utilities 18% 28% 10%
investments at good valuations”. Another comments
on unique private and public sector needs: “Health and
utilities have opportunities in all the subsectors like Local Government 10% 10% 35%
facilities management, cleaning, recruitment, marketing
and logistics, thus the potential of providing bundled
services 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 respondents
and do not require support services like recruitment,
Do you expect government spending cuts to generate more attractive
marketing or CRM”. When asked whether government investment opportunities for private equity in the UK support services sector ?
spending cuts will generate more attractive investment
opportunities for support services investors, just 32%
said yes. These results are not overwhelmingly positive
on the surface, but respondent commentary suggests
spending cuts will eventually lead to outsourcing: 32%
“As the government plans to cut funding for the
healthcare sector, I believe outsourcing will further Yes
increase here”. No
Another respondent likewise says public sector cost-
cutting will eventually lead to increased demand for
support services: “Government will not stop providing
68%
essential services like waste management and safety,
but because of spending cuts they will have to look at
cost-cutting options. Cutting costs will only be possible
through more outsourcing”.
Where is the smart money going in support services? 23

26. Mind the gap
“Private equity investors are having to look harder at
deals in order to unlock value. Each opportunity must be
The debt financing environment and the lingering gap between buy-side and critically evaluated to see where they can unlock the value
sell-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 through
facing private equity investors in support services this year. These issues are performance improvement, workforce optimisation,
leveraging thier extsing portfolio businesses or adding in
defining 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 Finance
services 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 paying
close attention to pricing trends and contract length. With the respondents warn that private equity firms struggling to Other respondents stress the importance of
increasing pricing and margin pressure, whilst businesses arrange financing will be at an automatic disadvantage scrutinising service levels and the caliber of a company’s
may 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 company
pricing 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 effective
trade 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 clients
investors 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, what
levels 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 have
what 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 close
Pete Dawson
Partner, Corporate Finance easily manipulate their order book and this can be very public scrutiny in early 2012 after healthcare budgets
Grant Thornton UK LLP difficult to identify”. On the issue of contract reliability, were trimmed.
another respondent says: “While government spending
24 Where is the smart money going in support services?

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. Navigating through uncertainty
The 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 to
economic uncertainty and market 5%
success in any business. In the support services arena
volatility 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 and
to accept low valuations and buyers reputational risk of failing to get this right, from the start
of the contract relationship, can be highly damaging for
reluctant to raise their stakes. For their Yes
No
the business”.
part, private equity firms have held
onto portfolio investments for longer Steve Rigby
Partner
than usual and collected a substantial 95%
Performance Improvement
amount of dry powder.
Against this backdrop the overwhelming majority
(95%) say they have adapted their investment strategy
in 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 their
existing 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 respondents
26 Where is the smart money going in support services?