Hiring Circle meets Gessica Howarth, Investment Manager at CBPE: Part 2
Gess discusses life at CBPE, doing deals, the exit of Xceptor, and plans for Fund X.
You began at CBPE in June 2020. What was it like joining in the midst of lockdown?
CBPE managed the dynamics of joining during lockdown really well. From my first week I was put on deals to ensure I was engaged from day one. I had said I was interested in getting more tech experience and I started on a tech deal in my first week – I voiced that and they listened. The team were good at keeping me involved in lots of activities. They organised lockdown lunches – people would log in for an hour and have a chat. The benefits of this working situation have been evident but on the flipside – we are a people business, and a lot of our IP is in that intangible personality side of the business. We need people in the office to maintain that culture and I imagine that a balanced approach is the likely answer going forwards.
You mentioned you worked on a tech deal in your first week. Can you tell me more about your general day-to-day and more specifically about the deals you’ve worked on since joining?
I've been really lucky in terms of deal flow since I joined. I’ve been at CBPE for 8/9 months now and worked on 3 deals that have completed. As well as that, I’ve worked on quite a few initial stage deals too.
There are a few different areas to the day-to-day job. There's the execution of deals and going through that whole process, there's the early stage assessment of investment opportunities when an info memorandum comes across your desk, there’s portfolio management and finally origination.
I feel like it’s important to tell people about the day-to-day. When a new investment opportunity comes up, (if it’s not a completely off market process which means there aren’t a large number of funds being introduced) normally you will be given an IM which can be anywhere from 15-100 pages summarising the company so you will read that and form a few high-level opinions and decide if it is something you want to look further into. We are given quite a lot of autonomy – if we want to press forward, we will assemble a team of at least 3 from different levels of seniority. At this stage I quite like to do a brief SWOT analysis – thinking through what my investment thesis would be and what do we need to believe for this to succeed as an investment, what makes it a good opportunity and what do we need to do to take it to the next stage. It’s a great way to summarise your thoughts and challenges about the investment.
Then if we want to continue, this is when the execution process starts. We meet the team and start doing all the due diligence of different areas of the company and take it through the investment committee (IC) stages. At CBPE there are three stages of IC which is quite normal for most funds – each one requires a different level of intensity and rigour. I've done that up to various stages over a number of opportunities and sectors; industrials, consumer, healthcare, tech, business services – I’ve had a great range of experience there.
Since I joined I’ve worked on three completed deals:
- The Key - The business has two main divisions – one providing education content and tools online for school leaders and the other side is management information systems and back office resources for schools. I started working on this on my first day! I enjoyed this deal as I hadn’t worked in much tech before. Due to its complexity we mobilised a large deal team– two Investment Managers (me and one other), an Investment Director and two Partners. It was complex as we were investing in two businesses simultaneously and then bringing the two together but it was a great way to work with lots of members of the team, especially for my first deal at CBPE.
- Aquaspersions - The business produces water-based additives for the global polymer industry which is an exciting area because of its environmental aspect (it is a more environmentally friendly solution than the historic organic solvent-based solutions). Sadly I can’t claim this as a full deal as I got Covid over Christmas and was working on it alongside Mindera. I could have been kept onto both deals but the team were thoughtful about how much I could take. However, it is now one of the portfolio companies that I monitor and work with on an ongoing basis.
- Mindera - This is a software development business. This one was different because it is a more people-based business rather than tech and industrials as in the others. It was interesting as there was lots of work to do with the management team on building and understanding the financial model and this was made even more complicated because Mindera has lots of different businesses & offices across different countries. It really shows the variety of work we can get involved in.
You can see how very different each of these companies are and I have really enjoyed the variety of working on all of them. I think having this variety will only help me to build my skills. You can start to bring different insights from each industry into the companies you work on in the future.
There are also different complexities across all of these transactions; The Key was completing and then bringing together two separate acquisitions, whereas Aquaspersions had two geographical divisions (Malaysia and UK) and a wide range of products across markets, so there were quite a few dynamics that made it quite complex. In comparison, Mindera operates across multiple countries with less developed financial systems. They were all at different stages of growth too which makes it interesting – Aquaspersions was more stable but Mindera was experiencing 40% revenue growth.
"I think having this variety will only help me to build my skills. You can start to bring different insights from each industry into the companies you work on in the future"
On the whole, deals and execution have been the majority of my day to day because of the deal flow over the past year. But over the past month since completing Mindera I’ve had more time to focus on other things, for example being brought onto the Aquaspersions portfolio team. As part of that, I have been working with the management team, getting to know them, attending board meetings as well as working on the post-acquisition plan. This is the plan we put together alongside management straight after acquiring a company – it addresses what our strategic objectives are that we need to cover in our first year of ownership, what the management team want to achieve, where they need to support etc. Often this is where recruitment in strengthening the management team comes in – ie investing in the business to support them further. This has been a great contrast to deal work and is where I really get to work with management, add value and learn very different skills to those in execution.
The other element I’ve spent time on is the bottom-up origination side – I'm interested in healthcare & pharmaceuticals so I’ve been doing market mapping in certain subsectors – I really enjoy this and it makes you realise how much there is to learn.
What makes you particularly interested in healthcare pharma sector?
Part of my interest was sparked as I’ve got a friend who works in pharma / healthcare origination – it’s so ground-breaking and there are so many areas of research. There are companies out there doing such interesting things which you’ve never thought about, for example cell and gene therapy. The potential outcomes from those businesses or discovering new drugs can change how the world works. It can be revolutionary. There's nothing that I find boring to be honest about any sector but that one really strikes a chord with me. It’s the tangibility of it – whilst you don’t really understand all the science, the impact is clear. The scope for growth in new areas of pharma is immense.
Despite Covid, it sounds as though it’s been an incredibly busy period for you. What impact has Covid had on you and CBPE?
The main impact on me personally is that I just haven’t been in the office (especially as I’ve been dealing with a few of the lasting post-COVID effects). The only thing I haven’t done is experienced as much of the social side as I would have in normal circumstances. But deal flow has been strong.
"...overall the CBPE portfolio has shown robust performance throughout the [Covid] period and dealt with the various challenges arising due to the pandemic very well"
Obviously there has been some impact on businesses coming to market – ie the timing of various businesses depending on how they have performed over the last year and pricing across different sectors have changed. But on top of this has been anticipation of changes to capital gains tax driving business owners to sell. This impacts our area of the market quite acutely as so many of the businesses we deal with are founder owners, so they will be impacted more than the larger corporates.
The businesses we have invested in have held up really well throughout the pandemic, helped by the fact that we have been deliberately targeting resilient sub sectors. Mindera grew at 40% last year! And overall the CBPE portfolio has shown robust performance throughout the period and dealt with the various challenges arising due to the pandemic very well.
As well as making some great investments into your new fund, you have had some excellent exits recently too, for example achieving 10.8x return on sale of Xceptor to Astorg. Tell me more about that and why was it so successful?
I didn’t actually work on the Xceptor exit as that happened soon after I joined, but it’s incredibly interesting and a classic example of a CBPE investment.
Xceptor is an international software business automating critical processes in financial services firms – it helps drive efficiency and cost saving. CBPE invested in 2017 and, over the four years of our ownership, worked closely with the management team to build and improve the business in a variety of ways.
Geographical expansion was a key component of growth at Xceptor and is a feature in many of our investments. We often invest in businesses that have seen a good level of growth in their core region but are looking for that next level of growth through expanding into different regions and / or broadening their product range.
"The Xceptor exit is incredibly interesting and a classic example of a CBPE investment"
We also consider ways that we can enhance the management team of our businesses. We generally adopt a close partnership approach with our management teams: we are often working with founders or CEOs who are absolutely core to the culture and operations of the businesses. These individuals will often remain involved with the business under our ownership, potentially realising a bit of cash through the transaction but also rolling a proportion of their proceeds alongside us to make sure we are aligned. And we will look to build a strong and resilient team with plenty of depth around them.
In the case of Xceptor we recruited a new CFO and COO to work alongside the incumbent CEO, as well as making a number of hires across senior sales and marketing professionals to support the growth of the business. Overall, we more than trebled the headcount of the business over four years.
In all of our investments we take a partnership approach of working closely with management to achieve the plan, whilst not micromanaging them, and leverage our respective strengths and experience. This requires chemistry and a strong relationship and that is one thing I think CBPE does particularly well.
We always consider ways that we can invest in and improve the operational infrastructure and systems of a business. Most of our investments are “primary” transactions – this means that we are the first institutional investor – so there is often a lot that we can do here. At Xceptor, our main focus was back-office infrastructure and the ERP technology systems. But it can be through things like capital expansion plans, investing in new facilities or enhancing manufacturing systems and processes. All of these can help generate cost savings and efficiencies and help you drive throughput.
"In all of our investments we take a partnership approach of working closely with management to achieve the plan. This requires chemistry and a strong relationship and that is one thing I think CBPE does particularly well"
And once we have the right management team and operational infrastructure in place, we look for growth! This may be organic or through acquisition. A benefit at Xceptor was that it followed a SaaS model – software as a service – and this gives you a high degree of recurring revenues and that provides the business with more stability and more visibility.
All in all, Xceptor was an outstanding investment for CBPE and a business that the team hugely enjoyed working with.
What are your plans for newly raised Fund X?
Fund X closed on capital commitments of £561m – which was the hard cap. It is just over £100m larger than our prior Fund. We were fortunate enough to receive fantastic support from our existing investors in our earlier Funds, and introduced a few top tier new investors.
Our investment strategy has not changed. We look to invest c.£25-75m in UK headquartered businesses with EV’s up to c.£150m.
We are selective about what we devote our time and resources to; we do a fair amount of desktop research at an early stage to determine if an opportunity is likely to be of serious interest before we go down the road of devoting money and resources. There aren’t many deals that I’ve worked on to a late stage that haven’t gone through and that’s due to this model. People value our time – when we are staffed on something it’s because we think we have a high likelihood of it going through, which is definitely not the culture everywhere. There's a level of maturity and respect.
"Above all we are very good at forming management partnerships. The management team is absolutely critical to making an investment a success"
In terms of the types of investment we make, we tend to focus on deal and business dynamics. We are particularly strong at corporate carve outs, or businesses requiring a high degree of operational improvement and professionalisation. We always look to how we can accelerate the growth of the companies we invest in, which could be entirely organic, for example through local or international expansion, or acquisition. And above all we are very good at forming management partnerships. The management team is absolutely critical to making an investment a success. Yes - you have to have a supportive market, the right competitor dynamics and potential for growth - but I would rather have a strong management team in a declining market than a weak management team in a growing market because you know that a strong team will drive growth by whatever means possible.
The Fund is already off to a great start with two investments completed already – which are a complete fit for this strategy.