Q&A: Value Creation

Real Deals talks to Dominic Dalli, Managing Partner at Sovereign, about value creation

Broadly, what have been the key changes to how PE firms approach value creation over the last 20 years?

I think the specific change has been around how hands-on private equity firms have become in taking ownership for value creation. It doesn’t just happen by accident anymore and equally, it’s not just down to the core analytical skills that one would expect from PE investors. Actually, there’s a whole host of other skills we now have in-house including teams that help our companies with talent, tech, branding, marketing, integration, ESG and more.

In terms of talent, 20 years ago, private equity firms would typically hire a new CFO and possibly a chair and that’s all they did. Now, we do both of those things in addition to hiring CTOs, chief sales officers, sales and marketing directors and staff in other roles, as well as assisting with succession plans for owner founders.

In our own investor pitch, we highlight the whole value creation piece and talk about all the areas in which we are much more active. Specifically, we have been successful in tech enablement and sourcing talent. For tech-enablement, for example, we’ve got a few examples of what I would call, “old economy businesses” that we have been able to successfully put through a tech journey to drive growth within our ownership window.

For Agena Group, (formerly Premier Park), a parking business, which had already adopted ANPR (Automated Number Plate Technology), we supported them in acquiring a software business enabling significant workflow automation, as well as the organic development of a suite of business intelligence tools to deliver real time business performance analysis and presentation. This has contributed to significant client growth and margin expansion.

How is value creation considered during the due diligence process?

There are probably two or three value creation-focused areas that we particularly focus on during due diligence. One is ESG, and our ESG team has been absolutely instrumental in helping us assess the benchmarks that the companies are achieving pre investment.

Given the considerable transformation agenda we are seeing across all sectors, we have also identified the opportunity for prospective investments to benefit from nearshoring opportunities. For example, we invested in digital transformation business Zenitech just over a year ago. They have already nearly doubled their software engineer resource base across their three operational locations of Romania, Lithuania and Hungary. Given the squeeze on labour we are now all seeing, both the quality of Zenitech’s hiring processes and the underlying talent availability in these geographies were key areas where we saw upside during the diligence process.

While each deal is approached individually, which areas of value creation is Sovereign best placed to assist with? Where can you add the most value?

Dalli: Fundamentally, the majority of our people are M&A professionals, so buy and build is still very meaningful for us. Over our 20 year history, we have supported over 400 buy and build deals and if you were to assess it statistically and quantitatively, that’s probably where we add the most value. And it’s both buy and build. We don’t want to be deal junkies and focus only on hoovering up loads of companies in the sector. It’s really important that we are strategic, that we’re able to add value and that we’re able to filter acquisition ideas. It’s not just about acquisitions, but also helping our companies integrate seamlessly with add-ons and roll out organically as well.

How has Sovereign’s buy and build strategy developed over the years?

Dalli: We started in the sectors that we’re still in today. What we noticed was that they were cottage industries - very fragmented, very owner-managed, and that there was an opportunity to create a consolidator in those markets. Due to our main capability being M&A, we identified the real value that we could add here and help create that consolidator and that has become a core part of our offering. We didn’t know how big it would become!

In terms of the strategy’s evolution, we’ve become a lot more strategic in how we support acquisitions. If I cast my mind back to 15 years ago, we were quite cookie cutter in how we were supporting our companies. Now, we assess our companies and engage with their shortcomings and strengths to improve and drive value. For example, we identified that Outcomes First Group was very good at care, but didn’t have the strong education offering that would generate a premium on exit. So, we made a transformational bolt-on acquisition (Options Group) to improve the overall offering. And, we knew that would be what would encourage strategic trade buyers to ultimately pay a premium when we came to sell it.

With regards to the size of prospective strategic bolt-on acquisitions, I don’t think that in 2002 or 2003 we would have had the nerve to do a £50m bolt-on, but come 2016 when we did the Options deal, we were a lot more confident that this was going to add a huge amount of value.

Internationalisation through buy and build has also been a really nice evolution for us. Via buy and build, we work to make strategic acquisitions that increase businesses’ value and geographical reach.

ESG has become a key feature of value creation. How does Sovereign approach ESG in its portfolio companies?

Julie Sieger, Communications Director: We created the Sovereign Sustainability Network as an umbrella for our work in ESG. This provides a framework that enables us to both undertake very structured and stringent ESG due diligence pre-investment, giving us a good snapshot of where the business is with ESG now, and an approach to successfully develop and implement initiatives throughout the investment period.

We have also created an ESG onboarding programme, which is delivered with the support of ESG consultancy Ensphere, the cost of which is met by Sovereign. The key outputs of this are a three year ESG plan that is tailored to each portfolio company, the implementation of which is driven at board level, and a carbon footprint calculation that is undertaken annually.

What’s really rewarding and fantastic to see is that the portfolio companies are seizing the opportunities around ESG and want to do more!

Dalli: I think when we all started this ESG journey, it felt like the right thing to be doing, but something that would be administratively burdensome. However, the industry has now seen the positive business benefits and there has been a switch in people’s heads that this [ESG] is not just good, but it’s going to help us grow as a company.