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De- mystifying Direct Co-Investment – The Ethos Approach

As Private Equity Fund Managers, investors often assume we are raising a fund or we are asked about capital deployment of dry powder.  We wanted to take this opportunity to break down some common misconceptions and provide our transparent approach to how we invest at Ethos Partners in this FAQ.

Ethos Partners is a deal-by-deal investor, we look to make £2-£10 million equity investments into growing UK businesses on behalf of investors on a self-select basis.

What is your fundraising process?

Our investment model is deal by deal, self-select; i.e. our investors have full discretion to pick and invest in whichever deals they wish.  Investors can commit anything between £25,000 and £250,000 per deal in multiples of £25,000. Our Principals, Brian and Julian commit personal funds into each deal on the same terms to ensure alignment of approach. 

Allocations into investment opportunities are on a first come, first served basis.  Once we begin fundraising for a deal an initial two-page summary will be circulated to outline the highlights of the opportunity, allowing investors to register their interest.  Typically, a week later a full investment paper will be issued at which point investors have an opportunity to review the information, ask questions and pledge their commitments (in multiples of £25k). Once our diligence is complete (assuming all is in order) we will issue a pre-completion update outlining key findings and requesting transfer of funds to Mainspring (our nominee and custodian) ahead of completion.

What is your fee structure?

As we are investing in direct deals and not a fund structure we charge 3% arrangement fee, which is based on the invested amount (i.e. until you invest, there are no fees payable. A £50k investment would entail a one-off £1.5k arrangement fee).  Additionally, 20% profit participation subject to 8% annual hurdle. Investments will typically yield a paid coupon of 8%. In addition, Ethos Partners will typically charge a monitoring fee of 2% to the investee company, such that if Ethos Investors have acquired 40% of the equity then in effect they would indirectly be paying a 0.8% annual management fee in this scenario.

How are direct investments made and could a potential investor achieve a running yield of c. 8%?

Our Investments are structured as a typical PE strip, including a mix of loan notes and ordinary equity (e.g. a typical £5m investment would likely be structured as c.£4.9m of 8% yielding loan notes and £100k of ordinary equity which delivers the capital gains at exit.)

What are the tax implications for investors? 

At Ethos, we do not give tax advice and recommend all investors seek independent tax advice.  However, as our investments are made directly into equity and loan notes of unquoted limited companies it is capital and provided certain criteria are met (e.g. not a director/ employee) they should benefit from investor relief (10%)  in respect of capital gains tax as well as business relief for inheritance tax.

What are you Co-Investment terms?

Investment Type: MBOs and Growth capital investments in the UK

Deal Structure: Direct investment in underlying company through nominee company

Estimated average investment hold: 3 to 5 years

Investment Commitment: In multiples of £25,000

Fees: 3% arrangement fee, 20% profit participation subject to 8% annual hurdle

Subscription Process: Customer Agreement and Anti-Money Laundering verifications

Post Investment: Ethos Partners will take a seat on the investee company board, provide regular portfolio updates and have discretion to manage investments through to exit.

How long is the investment period of a typical Ethos investment? 

We normally expect to hold investments for 3-5 years, however as we invest on a deal-by-deal basis we are not subject to fund pressures and have flexibility to exit sooner or later where appropriate.

What is Ethos Partners business model?

Our business model and strategy is to execute 3 direct deals per year of £2 – £10m equity – with businesses which possess these characteristics:

Size:  £3m – £10m of private equity funds, Minimum EBITDA £1m, Enterprise value £5m – £30mTransaction Type: Management Buy-Out / Acquisitions/ Growth Capital/ Replacement / Succession Capital

Characteristics: All Sectors dependent on the merits of the opportunity.  Ambitious management teams and experienced CEOs, Growth Potential, Recurring or visible income streams, ‘Something special’ (e.g. discernible point of differentiation or competitive advantage), Potential for profit through arbitrage to a higher earnings multiple at exit

Equity Holdings: Comfortable with minority and majority investment positions. As we are investing in equity deals sub £10 million there is greater opportunity and attractive competitive dynamics. We seek to acquire businesses with favourable dynamics and attractive EBITDA multiple entry pricing compared to larger MBO transactions. Lower mid-market private equity has consistently outperformed comparable listed asset classes, producing returns of 16.2% pa compared to 7.7% pa*.  Both Brian and Julian as Principals are aligned with our investors as they are committing their own capital into each deal.

We are looking to build an investor network of like-minded individuals looking for enhanced investment returns. We provide investors with access to proprietary deals alongside the principals on an aligned basis.  We do not blind pool invest – we raise funds on a self-select deal-by-deal basis.

We hope you found this article interesting, should you have any further questions or would like to learn more please do not hesitate to contact Nadiya Siddique – Investor Relations Manager [email protected] 

* BVCA Private Equity and Venture Capital Performance Measurement Survey 2016, Industry Performance; An analysis of UK private equity fund performance against the public markets, Sep 2014, BVCA Report

2018-09-18T13:49:51+00:00