Sourcing quality private investment opportunities

2 months ago

Rockpool exists for one reason: private companies are an attractive field for investment, but accessing opportunities is difficult.

We set up Rockpool to make it easy for investors to get exposure to this exciting area.” – Matt Taylor

Why are private companies attractive? First and foremost, it is where you find the closest connection between entrepreneurial desire and decisive action. Investors win biggest when entrepreneurs are most driven and most able to put their vision into action.

The typical private company that we back has revenues of £5-10m, profits of £1-£3m, one or two business locations, and 10-50 staff. This size of organisation responds fast to entrepreneurial decisions. There is no bureaucracy to slow things down. That is why these companies are often so innovative and agile. They’re able to lead in emerging market segments, achieving growth rates that are rarely seen in bigger businesses. We look for businesses that are on the cusp of a transformation. You can view our portfolio here.

At this size, the entrepreneurial management team often has a big stake in the equity. This helps to drive motivation. We often see huge personal effort and sacrifices being made by the managers. For them, success means the sort of opportunity for wealth creation that most people only see once in their lifetime. On top of functional expertise, this driving motivation is the essential thing we look for.

If I had to summarise what we look for when sourcing deal opportunities, it would be this:

  • Ambition, vision, commitment, and integrity in the entrepreneurial management team, allied to functional expertise.
  • A growing niche market with signs of significant future potential, but small enough to be led by a business that meets our size criteria.
  • Strong profitability demonstrating an effective business model.

Such opportunities do not come along every day. In fact, the moment of decision, when the entrepreneurs are open to equity investment, is the culmination of a long process. It is our business to be at hand at that moment. How we do it is not magic. We know that entrepreneurs need advice along the way, so we maintain close relationships with the advisory community. These advisors are typically audit and legal firms and the corporate finance boutiques that provide specialist advice to business owners.

I meet many investors, particularly family offices, that share our belief in private company value creation. Where they struggle is in sourcing deal flow. The trouble is that if you only do one investment per year or every 2-3 years, it’s almost impossible to build these relationships with the advisory community. Rockpool plays a valuable role in helping these investors, because we complete 6-8 deals per year and our investment team is constantly talking to advisors. Our existing relationships within the corporate finance industry enable us to provide a reliable deal flow of investment opportunities.

There’s also the long and sometimes grinding process of due diligence. We need to find out as much as we can about a business before making the investment opportunity available to investors. That means spending plenty of informal time with management, getting to know what drives them and understanding their strengths and weaknesses. We complement this hands-on research with input from specialist consultants, who assess management using specialist tools and methods.

Getting to know the financials is also very important. It’s about looking back – to make sure we understand past performance – and looking forwards to test and challenge management’s assumptions. We engage reputable accountants to support the process. They bring additional technical expertise and a fresh set of eyes, quite apart from the sheer time needed to cover all the ground.

Making an investment is about having a vision about the future. We think hard about the future exit event that can be expected to crystallise gains for investors. Who might buy this business once it has grown and professionalised? What strategic rationale would make a buyer pay top dollar? Do management and investors have a shared goal? Getting this right can boost the exit multiple by 50%-100% compared to the entry multiple. In other words, we typically buy a business at 3-5 times profits and sell at 7-10 times profits. In the meantime, profits have hopefully risen with the success of the business.

Target returns are purely illustrative and are not guaranteed.

A deal generally takes 3-12 months between our first meeting with management and the day of legal completion. Getting to know management and their plans, digging into the accounts and forecasts, and fixing on the strategy for value creation are time-consuming. There’s also negotiations with vendors and management. The entry price and sharing of rewards needs to be right for everyone, and negotiations can’t be rushed.

We have a team of 10 investment professionals working full-time to get deals ready for investors and to support each investee company along the transformation journey. We supplement this effort by engaging independent advisers, to help with due diligence, strategy development, and exit planning. This all feeds into the formal investment committee process, where each major decision is discussed and challenged by the most experienced members of the firm.

Investors can access these quality investment opportunities through a variety of vehicles including the Rockpool IFISA and Rockpool SIPP. The flexibility of our approach means we offer solutions to suit the needs of the individual, providing direct access to private company investment with a choice of equity or loans to suit investment objectives.

The Rockpool model is a unique mix. It combines the professionalism of a private equity fund with the transparency and control of direct investing. And of course, zero cost and zero commitment for investors. This model has proved attractive to investors and entrepreneurs alike. In the ten years of Rockpool’s story so far, we’ve helped around [4,000] investors invest over £510m in [80] companies. That said, we are as hungry as ever to find entrepreneurial managers with passion and investors looking for something different in the private company investing arena. Together we can unlock hidden value in companies that aren’t accessible to most investors. To learn more about our approach to private company investing click the register button below.

Capital at risk and you may not get back what you invest.