Posh crisps: private equity helped Tyrrells move upmarket

    Posh crisps: private equity helped Tyrrells
    move upmarket

    The patient capitalists: why private equity is a force for good

    14 November 2015

    Bert Wiegman places two packages on the polished conference table in a third-floor office off Regent Street and leans back with a smile. Both contain muesli and both are made by Dorset Cereals. But other than that, they are — to quote Blackadder — as similar as two completely dissimilar things in a pod.

    The newer one is a cheery reddish-brown box, its autumnal hues bearing the promise of ‘fruity and tangy’ cranberry goodness plus plenty of nuts and seeds. It is mid-afternoon, but my reticular activating system is already looking forward to filling the cereal bowl at daybreak. The older packet resembles something out of a Soviet-era newsreel, from the overinflated plastic casing to the washed-out doodle of a sea-monster on the front. Is it Nessie? ‘No,’ says Wiegman, smoothing his tie, ‘though many assume it is.’ On closer inspection, it turns out to be Durdle Door, a limestone arch on Dorset’s Jurassic coastline.

    This, right here, is private equity as it would like to appear both to the general public and to would-be investors: innovative, far-sighted, and willing to put its own money to work to take promising but undersold British brands to the next level.

    When done as well as this, the process looks deceptively simple. In April 2005, when Wiegman’s private equity firm Langholm Capital bought Dorset Cereals, it was trapped in an obscure corner of the breakfast market. It regularly won blind taste tests and had tiptoed on to the shelves at Waitrose, but for a 16-year-old firm, sales of just £4 million hardly pointed to a sparkling future.

    Wiegman saw something in the brand, so he bought it. With healthy eating becoming a middle-class obsession, ‘We could see the benefits of introducing this is a premium product,’ he says. Peter Farquhar, an ex-army officer who had risen through the ranks at Coca-Cola GB, came in as the new chief executive. Software was upgraded and new equipment installed, transforming the look of the product overnight. For the first time, Dorset Cereals was operating as a ‘real’ company: stock-keeping, introducing new brands (it now has dozens of types of muesli, granola and porridge, against just two before), and producing goods flexibly and to order. By the time Langholm sold out three years later — booking a profit somewhere north of £40 million — annual turnover had risen from £13 million to £30 million.

    Or consider another of Langholm’s investments. When it bought Tyrrells in 2008, the premium crisp-maker was already a staple in middle-class larders. It was also a testament to British stubbornness and against-the-odds entrepreneurial spirit. Herefordshire potato farmer Will Chase founded the firm after crisscrossing America learning the skills of small-batch crisp-making. He returned with potato broilers and washers and set to work in a shed. Tyrrells was a trailblazer from the outset, charging a premium price and adorning its packets with endearingly retro photographs.

    Yet that wasn’t the end of the story. When Langholm came over the horizon, Tyrrells, for all its initial success, had hit premature middle age. It had a small following overseas, but exports as a share of overall sales were frustratingly low. And Chase had famously fallen out with Tesco, giving the brand cult status among some shoppers but blocking its access to millions of others.

    A new chief executive, David Milner, arrived from New Jersey soup-maker Campbell’s. He mended fences with the big UK supermarkets, then targeted key export markets. To his surprise, Tyrrells was a smash hit in France, a country often sniffy about British produce, as well as Germany and America. In so doing, Chase (first) and Langholm (second) not only invented an industry sector — premium crisps — but also succeeded in tying its fortunes to the notion of Englishness.

    ‘We grew the distribution of the brand faster than it would have otherwise happened,’ says Milner. ‘Tyrrells used to have a nonexistent export business; now, overseas markets generate a quarter of all sales.’

    Two genuinely positive stories: so it’s curious that despite these and many more, private equity still occupies a sinister place in the minds of the British public. Buyout firms, as they are also known, have acquired a reputation as avoiders or manipulators of a tax regime which is relatively generous to them in the first place, and as ruthless asset-strippers. At the very least, the broad consensus is of an industry inhabited by overpaid number-crunchers in search of a fast buck.

    Private equity insiders tend to be baffled by this prevailing view, seeing their work as an expression of capitalism at its most fertile; but they also acknowledge that the sector has often been its own worst enemy.

    ‘First and foremost, the industry has never frankly been the best at communicating the good things we do,’ says Mark Redman, head of the private equity division of Canadian pension fund Omers, which bought the cinema chain Vue for £650 million in 2013. While private equity typically owns assets for three to five years, he notes, the average tenure of share ownership in the UK is barely six months. ‘I describe our type of private equity as “patient capital”. We’re in it for the medium- to long-term.’

    For another example of patient capital at work, look at the international success of Tommee Tippee, a baby accessories brand owned by Northumberland-based Mayborn Group. When Britain’s largest buyout group, 3i, invested in the firm in 2006, a simple strategy was launched:
    to labour day and night to introduce the brand to American consumers. And it worked: Tommee Tippee toys are now available nationwide in 4,000 Walmart and 7,000 Walgreens outlets. ‘When we invested, Mayborn’s centre of gravity was Britain, with sales split 70 per cent UK, 30 per cent global,’ says 3i partner Pete Wilson. ‘Those numbers have now reversed, with over 60 per cent coming from international markets.’

    Then there’s the industry’s reputation as a slasher of costs and destroyer of jobs. Wiegman notes that Dorset Cereals doubled its staff to more than a hundred while Langholm was there. ‘We are focused on taking small British-branded businesses and increasing their sales and profits so that they create jobs and pay more corporation tax,’ he says. Charlie Johnstone at ECI Partners, which has offices in London and Manchester and owns brands such as Evans Cycles and York-based Great Rail Journeys, admits that people still equate private equity with cost-cutting. But he adds: ‘We want to help businesses grow, and you can only do that in a sustainable way. You can’t sell a firm that you’ve run into the ground: no one will want to buy it.’

    To some extent, the industry’s failure to project a positive image of itself is not so much a matter of bad PR as the aftermath of the long-gone investment super-cycle that preceded the financial crisis. Vast amounts of capital seeking outsized returns was shoehorned into buyout firms, which in turn borrowed heavily to support highly leveraged deals, placing invested businesses under excessive stress in terms of the extraction of cash and servicing of debt.

    And that’s usually where the problems started. Debenhams, the department store chain which was taken private in 2003 and re-listed in London three years later, remains a business-school case study of reputational damage in the private equity game. A trio of investors including Luxembourg-based CVC Capital Partners shared a profit of £1.2 billion from the re-flotation. Yet investors were left reeling when Debenhams issued three profit warnings in a year and the firm has never fully recovered. In October, following a string of poor results, chief executive Michael Sharp said he would leave next year. The same day, Debenhams shares closed at a shade under 84p, down from 195p at float.

    The Debenhams deal and its denouement have followed the industry around like a bad smell ever since. One private equity executive recalls floating a leading food and drinks firm in London two years ago: the process wasn’t easy or pleasant because ‘everyone was still harking back to Debenhams’, he says. ‘The public market definitely felt they’d been sold a pup.’ Will bad deals poison the market again? Almost certainly — as soon as another investment super-cycle begins, as it ineluctably will.

    And that’s a pity, when private equity has so much to give. It can offer talented middle managers at FTSE-listed firms the chance to join a growing brand, make their mark, and earn, says Wiegman, ‘life-changing money of £5 million or £10 million’ — more than enough entirely to pay off mortgages and school bills.

    Perhaps more importantly, cash from private equity can reverse the fortunes of firms with fundamentally good products that have lost their way, or transform local stars into winning international brands. It’s about a lot more than getting rid of the ‘sea monsters’ on the packaging, but that’s a good start.

    How to buy in to buyouts

    In our low-yield world, private equity should be a great investment: according to data from the British Private Equity and Venture Capital Association, the average annual internal rate of return from buyout deals fluctuates between 13 and 16 per cent. In 2013, the BVCA reckons it was 14.2 per cent, against an 8.3 per cent return from the FTSE All-Share index.

    Yet this doesn’t make it an easy asset class to enter, and for good reason. ‘There’s just too much risk’ involved, says Bert Wiegman of Langholm Capital. ‘To invest in private equity, you need to be able to write your investment off and not to be able to feel the pain if you lose the money; it’s high-risk-high-reward.’ This means investors in this asset class are typically big pension funds and insurance firms looking for incremental zip in their portfolios — and more than able to sustain the risk.

    But rising numbers of private equity groups are now listing their own shares. KKR is one of the many big US buyout groups listed on the New York Stock Exchange, while Britain’s largest private equity firm, 3i, first floated on the London Stock Exchange in 1994. Its shares have returned 67 per cent over a five-year period, against an 11 per cent return from the FTSE100 Index.

    A host of smaller London-listed vehicles channeling capital into private-equity-led deals have also sprung up in recent years, including Dunedin Enterprise Investment Trust, Graphite Enterprise, Electra Private Equity, and HgCapital Trust, all accessible to the high-net-worth private investor. Another name in the field is Cornerstone Private Equity, a Mayfair-based firm that invests in rising UK and European corporates. But do your research carefully: be sure you know what kind of buyouts you are buying into.