Vantage Asset Management has written previously about the importance of exits and the role that Private Equity managers play in generating returns through identifying the optimal path to a company sale. The other critical role that Private Equity managers play in generating return is the provision of capital and management expertise to meaningfully help a company improve its operating performance. The common misconception about Private Equity is that managers simply find companies with good cash flows, apply leverage to the balance sheet, significantly cut costs then pay down debt using those cash flows hence increasing the value of the business. In the mid-market growth/buyout segment that Vantage Asset Management invests in, this misconception could not be further from the truth. For small to mid-market sized private companies, significant value can be created by leveraging the expertise provided by private equity firms. Company efficiencies are improved, growth is accelerated through customer expansion, M&A activity, managing cash, reducing costs, attracting talent and improving IT systems.
Often these businesses see private equity as a valuable way of accessing industry experts who can assist with benchmarking, entering new markets and generally providing expertise that is not readily available otherwise. A study conducted by Adams Street Partners of the US buyout market found that the source of value creation from revenue growth through Private Equity manager intervention created 38% of the total return and multiple arbitrage (which is often a by product of revenue growth) created 33% of the return. Leverage ranked a distant third of the return drivers. This highlights the ability of Private Equity managers to bring meaningful value to private investments through the enhancements they make to businesses and ultimately the returns they generate for investors.
Case Study: SILK Laser Clinics
SILK was co-founded by its current CEO Martin Perelman in 2009 in Adelaide and had an initial focus on laser hair removal treatments. The Australian non-surgical aesthetics industry is projected to generate revenues of $5.8Bn in CY2021 however it is highly fragmented with five large specialist clinic chains estimated to account for approximately 31% of the total number of clinics (as at 9 September 2020).
Advent Partners, one of Australia’s leading Private Equity managers with a 35 years track record of investing in mid-market companies, first invested in SILK in January 2018. At the time the business consisted of 12 clinics primarily based in Adelaide whose revenue was mainly derived from hair removal procedures, a treatment which was experiencing margin reduction due to the procedure becoming more accessible to consumers. At the time SILK also offered cosmetic injections, skin treatments and tattoo removal.
Subsequent to the acquisition, Advent worked with management to put a number of key initiatives in place to grow SILK including:
- Accelerating the adoption of a refined franchise model to boost the speed of network expansion into new geographical markets
- Improve clinic productivity through a focus on cosmetic injectables which attract a higher profit margin
- Nurse training and recruitment to enhance the cosmetic injectables rollout
- Adoption of data analytics to improve in-clinic financial operating performance as well as personalization of the offering
- Acquisition of rival networks of clinics
- Launch of a high-margin proprietary skincare brand Aesthetics Rx
- Introduction of body sculpting, a new technology attractive to existing SILK clients as well as attracting new clients
These initiatives saw SILK grow from 12 clinics to 56 clinics by December 2020 achieving two-year compound annual growth rate (CAGR) of 79% and 414% to FY2020 in Network Cash Sales and Underlying EBITDA respectively.
Exit via IPO
During December 2020, the Advent Partners 2 Fund completed the successful exit of SILK Laser Clinics Australia via an IPO. SILK Laser Clinics Australia (ASX: SLA) listed on 15 December 2020 at a share price of $3.45, implying an enterprise value of $162 million. Upon listing Advent Partners 2 realised 50% of their original investment holding in SILK, representing 2.0x of the Fund’s original investment in SILK, with the Fund retaining 28% of SILK post IPO. Once fully completed the exit will deliver Advent Partners 2 investors, including VPEG3, with top tier performing returns across a 2.9-year investment period. Pleasingly SILK has continued to perform since listing up 40c from its listing price with FY21 prospectus forecasts recently upgraded off the back of continued operating success thanks to the initiatives that Advent Partners have helped put into place.
All Exits Since March 31
Across the June 2021 quarter, five underlying company exits were either completed or announced from Vantage Fund portfolios. These exits will deliver Vantage’s Funds an average gross 4.9 X return on invested capital, representing an average gross Internal Rate of Return of 73.9% per annum.
Source: Vantage Asset Management
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