Once the poster child for private equity’s success, with a funding structure that was the envy of many, as the financial crisis hit Candover soon became “the poster child for everything that went wrong in private equity”, in the words of one LP. The reversal of fortune was swift as listed feeder vehicle and the firm’s cornerstone investor, Candover Investments, found itself unable to honour a €1bn commitment in March 2009.
Yet as Candover’s funding structure unwound, so some of the investments it had made turned sour, too. It wrote off its investment in Italian yacht company Ferretti, and lost control of gambling business Gala Coral (as did fellow investors Cinven and Permira) in 2010 in what was one of the longest-running restructurings in Europe.
To compound these problems, the firm seemed to be dysfunctional. With power evenly distributed between Marek Gumienny and Colin Buffin, and the firm distributed across offices in Western Europe and Asia (and with talk of expansion into Eastern Europe), it was becoming hard to manage. “It had a fragmented physical base with a co-head structure that was not collegial in nature,” says one LP. “This made decision-making difficult.” There were also fundamental disagreements between those two heads. It is believed they didn’t speak to each other for two years.
From the flames
The writing appeared to be on the wall for one of the UK’s best-known private equity houses. Most believed it to be impossible that Candover would survive as Candover Investments decided to go into run-off. So the news in 2010 that part of the Candover team, led by John Arney, was in discussions to spin out was met with some scepticism. Yet in April 2011, that is precisely what happened. Arle Capital Partners bought itself out from Candover Investments, with Pantheon backing the team in a £60m (€71.6m) deal for the management company and a 29 per cent strip of the investments. Pantheon is believed to have contributed £56m, with the Arle team putting in the rest.
Pantheon had originally acquired secondary positions in Candover’s 2005 and 2008 funds, as it did not already have commitments to these. “However, over time, we liaised with John about what was happening at a portfolio and team level and that led to discussions about where the firm was going,” explains Francesco di Valmarana, partner at Pantheon. “We had a good relationship and so we offered to back a spin-out.”
“We were able to start with a blank sheet of paper,” explains Arney. “We had the raw materials to create a business: a management company, four investment partners who had led 25 investments over their careers and exited 21 of them, and a portfolio to manage. We wanted to create a new firm with a very different investment strategy from that of Candover, but also from other private equity houses.”
The result is a focus on what Arle refers to as the “North Sea Rim” – the UK, the Nordics, Benelux and German-speaking Europe – and on three sectors: energy, industrials and services. All this comes under the tagline: “Private equity for a new era.” The firm is also, in the words of Arney, “very much a partnership”.
Arle has clearly gone to great lengths to distance itself from Candover’s past. Few of the original team have transferred and new faces have joined. Arle has also been keen to get operational veterans involved. It has just taken on Sir George Buckley, former chairman, president and chief executive of 3M, as chairman.
The firm is also keen to stress its “active ownership”. This is partly reflected by what it calls “the ORB” (operating review board), comprising a “cadre of very accomplished industrialists with investment professionals” which meets to “challenge and encourage each of our businesses to improve operational performance”, according to Arney.
So a year on, is it working? Does the market see Arle as a new firm with a fresh purpose and direction? As one might expect, Pantheon’s view is that the firm has been able to start afresh. “We liked Arle,” says Di Valmarana. “We like the fact that everyone is motivated, that they have all put money into Arle, that the team has not made significant money from previous funds and so it is hungry and there is a high level of alignment with investors. We could also see that there was real value in the portfolio – it could have been wound up, but there was a lot of money in the ground yet to be harvested.”
“The team is experienced but relatively young,” adds an LP. “This helps it create a divide between the old Candover and the new team.”
Others in the market are positive about the fact that the team has a lot to prove. “In this industry, when people have their fingers burned they often come back stronger,” says one GP. “Look at Doughty Hanson. It had a poorly performing fund, but the next one did very well. One reason Candover fell apart was that succession wasn’t handled well and so management is likely to have been a key issue. If, with new faces, these issues have been resolved, that should help the firm move forward.”
But it is early days. Since spinning out, Arle has made one significant exit – Capital Safety Group – to add to the realisations of Ontex and Equity Trust made before the firm became independent. It has also sold part of Expro – the Connectors & Measurements business.
It has also yet to make a significant investment. As might be expected of a firm that has taken on a legacy business, much of its work has centred on building its existing portfolio, so bolt-ons have been the focus – at Stork, Parques Reunidos and DX most notably.
“I haven’t heard much buzz and excitement around them,” says one IR professional. “But then I haven’t heard anyone say they haven’t got
a hope in hell. I think the market is watching and waiting to see how things pan out.”
Some are, however, a little sceptical of the North Sea Rim focus. “It sounds to me that they have come up with a focus that suits what investors are looking for at the moment – many are looking to invest in what are believed to be the safer markets of Northern Europe – so it may be that LPs will be a little suspicious of this,” says one observer.
Arney counters by saying that these markets were chosen by the firm to reflect the team’s experience and contact base, as well as where Arle’s people have made the best returns.
Ultimately, the firm’s success will rely on convincing LPs that its legacy has been well managed – “they need to turn good numbers into cash”, says an LP – and that it has the right strategy and team in place for the future. Arle is not set to hit the market for a little while yet, although Arney says that the team has already identified some interesting targets. He is said to be considering all funding options, including a traditional LP fund. In a highly competitive market, that may be an uphill struggle.
“I wish them all the best, but if I were an LP faced with the choice of a firm with a legacy and one without, I wouldn’t go for the one with the legacy,” says an IR professional.
Yet, says one observer, if the team “can articulate what it is that is different about them from before and can demonstrate that they have done a good job of turning around the portfolio, they may well succeed”.
The oilfield services group specialises in well flow management, particularly in technically challenging deepwater environments – an area set for increased demand. Its early days in the portfolio were less than promising as Candover had paid £1.8bn only to see oil prices plummet in the teeth of recession. Since then, however, Expro has announced a series of contract wins, including in Brazil, Iraq and the North Sea. And since the Arle spin-out, the company has undergone an investment programme and a strategic review, which saw the sale of its Connectors & Measurements business to Siemens in March 2012. The company’s valuation was written down in 2011 as the protracted recovery affected activity, but Arle LPs suggest that Expro could provide a good future exit.
In what was Arle’s first deal following its spin-out, engineering group Stork acquired Scottish oilfield services business RBG from 3i last May. Stork was taken private by Candover in 2007 in a €1.6bn transaction. In 2010, 3i acquired part of the business, Stork Materials Technologies, for £130m. The company is set to be split into Stork Technical Services, which provides services to the oil and gas, power and chemicals market, and Fokker Technologies, the aerospace division. It is also believed that an IPO could be on the cards as an exit for the Stork business at some point in the future.
One of the world’s largest leisure park operators, Parques Reunidos has 71 amusement parks. Candover acquired the Madrid-based business in 2007 in a deal that was believed to be worth just under €1bn. Since then it has made nine acquisitions, including Slagharen in the Netherlands and Noah’s Ark in the US, both in March this year. Candover had tried to sell the business in 2010, but failed to reach the €2bn it had expected so pulled the sale.
Candover acquired UK mail services company DX Group in 2006 for £349m and merged it with portfolio company Secure Mail Services. However, by 2010 Candover had been forced into a debt-for-equity swap, which saw lenders take a 49 per cent stake and the firm inject £15m into the business. The management team was also changed. However, under Arle’s ownership the business has seen increased investment, with the opening of a new distribution centre in Warrington as well as the acquisition of competitor Nightfreight this March.