Dave Hall, Managing Director of YFM Equity Partners, speaks to Katherine Steiner-Dicks on how the firm's re-branding exercise was not as painful as expected, but rather useful; how the firm empowers management teams from the start and how a portfolio of 200 companies has lent a broad sector outlook on deal opportunities across the UK.

Interview by Katherine Steiner-Dicks

Formerly known as Yorkshire Fund Managers, the firm has been re-branded YFM Equity Partners. What did the re-branding process teach you and the team about the firm's ethos and investment strategy and how both of these have transformed over the past three decades?

The re-branding process was not as painful as I thought it would be. I didn't spend nearly as many thousands of pounds or millions of hours looking at logos as I expected and the process was actually instructive. It gave us a chance to talk to all our stakeholders, investors, advisors, non-executive directors to name a few, which was very useful because it informed us about our business.

We learned that whilst the finance we provide is important to people, this is only a part of what makes a company decide to select us as an equity partner. Chemistry, in addition to the way that you and your staff interact with a company's management team, is crucial. In fact, the chemistry developed in the initial stages has a huge impact on their decision process when it comes to selecting an equity partner.

If you were to encapsulate your firm into identifiable qualities, which would people associate with YFM?

The first quality would be empathy - the ability to listen rather than to talk. Another quality that has also been identified through the re-branding process is our team's ability to show a demonstrable interest in a company's business. People also place importance on speed of reaction. But that doesn't mean it has to be quick, just getting back to them in the time that you have committed to.

The other thing that came through in the process was that management teams feel that they are dealing with real people who understood their business; people that can bring the necessary long-term experience in maximising the value of a small and fast growing company.

YFM Equity Partners has a wide-net sector approach. What benefits does this greater flexibility have? And what challenges can arise for your regional teams?

We do have over 200 investments, across a diverse range of sectors. Having this number of investments alongside more than 100 successfully realised investments brings a wealth of experience to any deal, which is recognised by small businesses. We have dealt with pretty much every sector and also have specialists that we can bring in. For example, we introduce a non-executive chairman that will already have operational experience in their sector. This adds a layer of confidence for the management team since they have someone to turn to who will not only understand what the operating market risks are from day one, but also know how to respond to those market changes and challenges.

However, marshalling all the knowledge throughout our regional offices has been a challenge. We now have specialists throughout the country whose expertise can be brought to bear on any investment opportunity we receive. In fact, one of our own investments, Chippenham-based VQ Communications, has been instrumental in enabling our regional teams to interact internally and with investee companies when specific operational or sector expertise is required through video conferencing, a technical investment that has really paid off.

Where in your opinion are the best sources for proven interim or permanent senior talent in your early and later stage investments?

Clearly, being around for 30 years means we have made and realized a lot of investments. Because of that we have close to 400 direct contacts from whom we can draw sector experience. We also run specialist sector events in healthcare, telecommunications, software and retail where we encourage contacts to 'bring a buddy'. Over the years we have also used organisations such as Pilot, when we have very specific sector requirements.

Given the number of investments, how are you ensuring milestones and targets are being met while at the same time empowering management to take the reins from the onset?

The first way we can empower the management is by ensuring that they have more than adequate finance to support what they want to achieve. All of our deals are about giving companies equity headroom to enable them to cope with structures, such as covenants, that the banks can place on them. Our early talks with businesses are a lot to do with how they are going to maximise the value of the business and how our money can be best utilised to achieve that.

The second thing we do is introduce non-executive chairmen from their industry, i.e., people that have already done what the management team sets out to achieve. We like to help the management team look six months ahead, rather than six months behind so they are prepared for the tough decisions, which usually entails management changes. Lastly, we make sure that we are aligned with their objectives, which we find can be done through open discussions that address not only their objectives, but ours.

And is this early process usually the time that you might bring in interims?

We usually bring in interims for project-based work. For example, if the company was going to be sold quickly or is considering a change in the direction of the business, you could put in an interim to handle a particular role.

In the current environment does YFM look for deals where there is a turnaround or major structural change to engage with?
We don't generally use the phrase turnaround in our business. There are times when businesses are further away from realising their value than others. There are also times when management must go through changes they didn't anticipate and this is when an interim could help.

We do have a bit of money aside to invest in turnarounds. We put that money into vehicles so we can invest quickly. We set up a fund about nine months ago, but we have not found any takers for the money. I have three people assessing turnaround opportunities on a geographic rather than sector basis. It is however a very small part of our business and accounts for less than 3% of what we have under management.

If deals are hard to come by, which market drivers do you believe will put more deals into the marketplace?

There is not a pattern in terms of deal flow. It has a lot to do with the fact that to get the deal done, you need the banks to write off some of the money. At the moment, that just isn't happening. What we need is a good tick up on interest rates, which we won't get for a while. But when we do, the banks may be more inclined to have more people defaulting due to the rise in interest. For the time being, the interest rate situation is benign, so most people can service the interest even if they cannot repay the capital.

Are you seeing companies struggle if they have a high dependency on government funded supply chains? If so, are they being pushed to reconsider targeting new markets for survival?

There has been a real mix in terms of dealing with the public sector, which is not a homogenous entity. We have a business that, for example, supplied into the Ministry of Defence. When there were government changes in early 2010 there was an MOD spending review. At that point of the investment we anticipated there would be a four month hiatus. In the event the MOD didn't place any orders for nine months therefore the company proactively decided to re-examine its strategy. But after the nine months was up, the MOD turned the taps on and there were orders coming out of their ears.

How did the company prepare itself in the hiatus period?

At some point the MOD spending review had to finish, and it would produce something, the question was just how much. The company started to look at other companies in their sector either to merge or to acquire. In an economic slowdown it is often an ideal time to build market share, especially if you are taking a five year view. The company went down that road, but in the end they had to re-focus on hiring and re-hiring people to take up the slack from the new MOD orders that were coming through.

As another example, we have an investment supplying the NHS, which is effectively supplying to the PCTs (primary care trusts) and GPs. That has been a very difficult landscape to plot though. The spending was always going to change hands from the PCTs to the GPs, but this change over was slowed down due to yet another review. This hiatus and lack of commercial commitment has resulted in the company trying to expand its customer base overseas.

We also manage a small fund in the public sector and the contract was frozen since it was through the development agencies. The assets in that fund are now frozen, which are all in non-listed companies.

The overall level of NHS spending in four years' time is likely to be the same level it is today due to all the moratoriums. The public spending won't be going away, it's just being deferred. Businesses need to ask themselves how long they can survive while working through the hiatus.

The bigger challenges can emerge where there are policy changes. For example, in the case of the Department for Work and Pensions, which historically has had something close to 400 suppliers, could soon bring this number down to as low as six national contracts. This will be done through a large sub-contractor, most likely one of the big multinationals. Rather than the government working directly with the supply chain, the relationship has been watered down through the sub-contractor. The government's process of procurement streamlining is creating a lot of change in small businesses since they are unsure where they sit in the supply chain.

Has public sector exposure to any of your portfolio companies meant that you have had to pad up existing investments to keep them afloat during this period of uncertainty?

I have given you some of the most extreme cases of economic or public sector changes on company profits. In many cases, companies have gone through a challenge, but it has not been unmanageable. Many of these companies have come through it and become stronger businesses as a result. It makes them look at how they manage themselves and actually how efficient they really are.

Across the board we have not had to put in significant money into portfolio companies for, say, breaching bank covenants. We have been funding the portfolio over the past two years so that our investees can go out and buy other companies in their sector while pricing is attractive. By not over-leveraging our portfolio the management teams are more able to focus on building market share and value in their businesses than re-negotiating the terms of their borrowing.

You are in the business of building SMEs to greater levels of growth via international expansion, management development, etc. Therefore, as a natural progression of a company's lifecycle does this mean your exit strategy includes the private equity secondary buy-out market?

We haven't done many, probably a smaller proportion compared to other firms in the market. We did, however, sell a third of our stake in one of our more high profile investments, Go Outdoors, to 3i - a business that we had held for 13 years. We are still sticking with it with the prospect of more value to be created in the medium term.

The realisations that we did last year equated to the same amount of money that we invested. This year our realisations are 25% higher than our investment rate, at £25m and £20m, respectively.

When, in your firm's experience, have interims within private equity backed companies been truly successful? Can you offer an example of how they achieved or exceeded your expectations?

Well, I always try to manage my expectations down, but there have in fact been a number of times that expectations have been exceeded. We did have a business service logistics investment whereby we brought in a new chairman and then six months later brought in a new CEO. The business was poised for growth, but that growth had exceeded its existing management. It was a close call whether to sell the business or manage the risks at that point and pursue even more expansion. In the end, we decided to keep with the company.

What was exceptional about this CEO was his capacity to take a complicated series of problems and distill them down to two bullet points that everybody could understand. That brought immense clarity to the issues in the business around which the decision making could be focused. That set for him the operational strategy. He was complemented by the chairman's strength in recruiting the right management to see those strategies through.

Have management consultants or interims been more effective in your portfolio companies?

An interim rather than a management consultant is a person that can come in and listen to the problem and implement the changes to solve the problem, which is highly effective. We get much better use out of an additional non-executive director or chairman since they will have some skin in the game.