In 2017, Leo Casey got a call from the recruiter Marcus Kelly. A chartered accountant and former investment banker, Casey was working as a financier with IBI, the grand old dame of Irish corporate advisory. He had worked on some of the biggest Irish corporate deals – from the Madison Dearborn buyout of Smurfit to the flotation of drinks company C&C. He had also had a ringside seat of the sale of Aer Lingus to the parent company of British Airways.

Kelly, however, was trying to tempt him to switch gears. A new investment house was opening in Dublin, and Kelly felt Casey was a perfect fit. Casey, however, initially thought otherwise. “I had seen dozens and dozens of private equity firms setting up in Ireland over the years – or talking about setting up,” he said in this week’s podcast.

However, the more he looked at the new entrant, the more he felt it was different. Growth fund BGF was Britain’s biggest investor in small businesses and regarded itself as a firm as opposed to a fund. It championed patient capital, prioritised strong growing businesses with a proven record of profitability, and generally eschewed the high risk, high reward model of venture capital.

Eventually, Casey buckled and agreed to import the BGF model into Ireland, and then lead its Irish office. Since then, the company has deployed €97.5m across 13 investments (and secured two exits). It has backed everything from housebuilders to nursing home operators to a creche chain. Earlier this year, it invested €12.5 million in Galway-based food supplement maker, Revive Active and took a minority stake in the Dublin Meat Company in return for around €10 million.

Other investments include Croom Medical, which designs and makes precision components for the medical devices industry, Tigers Childcare, and Dublin-based aerospace engineering business TEAM. Casey acknowledges that the portfolio might appear scattergun, but to counter that they are unified by being founder-driven and all profitable, growing businesses.

More deals are likely. The firm has received backing from the state’s sovereign wealth fund Isif, as well as the main Irish banks, and it has a €250 million war chest to invest in scaling Irish businesses.

“Look, we’re mandated to be a volume investor, and nothing has changed.”

The long-term nature of its financing, added to its institutional investor base, has insulated it from the current wobbles in the private equity market, something that Casey acknowledges.

“A nice attraction for me and for the team is that we are not having to look over our shoulder and worry about running out of capital,” he said adding that this was a huge distraction for a number of private equity firms and venture firms at present. “It’s great to be able to focus on building the business and managing the portfolio.”

Over the course of a lengthy interview, Casey talks about the type of companies the firm is willing to back, the sectors it prefers, and the size of the cheque it can write. We begin, however, by talking about the slowdown in dealmaking this year, frothy valuations and the headwinds facing the economy.

Investment headwinds

Ian Kehoe (IK): If we were having this conversation six or even three months ago, the markets, and sentiment, looked an awful lot different. There has been a purge of valuations; an awful lot of private equity firms seem to be getting the jitters. Just what’s happening out there at the moment?

Leo Casey (LC): There is definitely a chill in the air, so to speak. There was a journalist in The Financial Times who put it well recently when he said the days of easy investing have come to an end. I’m not sure it was ever easy. But I understand where he was coming from. The headwinds are obvious. And we all know what they are. And, of course, nobody’s immune. And they’re all front of mind as we think about investing from this point on. But it isn’t all bad in a relative sense.

The Irish economy is still in a good place, we would say. There’s still a lot of quality business out there looking for capital, and the kind of cocktail that BGF brings to the table – supportive partner, de-risking, shoring up the balance sheet and making sure you’re really well capitalised – a lot of those ingredients almost play into some of the headwinds we’re facing. So, you know, BGF is at least as relevant now as it has been heretofore. And I’d also say that maybe some of the frothiness to characterise the market – it’s not all unhealthy – that some of that has dissipated. But don’t get me wrong, it’s all gotten tougher. And the bar is clearly higher, and investors have to think deeply about risks as we consider investment theses going forward.

IK: Has the mood shift damped your expectation for deploying capital going forward?

LC: No, not at all. Look, we’re mandated to be a volume investor, and nothing has changed. The momentum and the business are good. We’re really optimistic. But with that note of caution, obviously. We are careful about where we’ll deploy. Quality trumps. We’ll be very discerning as ever. But we are still very positive on Ireland. And there’s a swathe of really interesting, not just sectors, but themes that make for strong investment theses at the moment – anything from the whole sustainability, circular economy agenda; the great defensive plays around health care and education; tech enabled businesses, digital transformation. So, there are lots and lots of really good Irish businesses coming through, and obviously software, that are still super relevant as we look forward. We have a really good manufacturing and engineering sector, playing into some of those markets as well.

“A firm, not a fund”

Leo Casey: “It’s great to be able to focus on building the business and managing the portfolio.”

IK: Let’s take a step back and look at BGF’s entry into the Irish market. It’s something of a spin-off from Britain, where it is the largest investor in small businesses. It’s the Business Growth Fund, not the British Growth Fund – people often get that wrong. How did you come to be involved in setting up its Irish operations? And what was that process like?

LC: So, it was an interesting process, because I had a good career going in IBI corporate finance. And this was brought to my attention by Marcus Kelly of FK International, who had said, look, there’s a private equity firm setting up in Ireland. Truthfully, I was probably a little cynical at the start because I had seen dozens and dozens of private equity firms setting up in Ireland over the years – or talking about setting up. But Marcus to his credit said this is a little different. It was a different type of investment platform, and they are very serious about Ireland, and they’re playing the long game, not the short game. It kicked off from there.

And, you know, it is different. It’s a firm, not a fund. It’s a balance sheet, not a fund. What does that mean? Well, it is a permanent base of capital that’s been set up. And Stephen Welton, our chairman, said to me as you’re setting it up, he said, ‘don’t think about yourself and even your team and what you guys might achieve – think 20 years down the road, and that BGF have a place on the high street in Ireland, and as part of the establishment and the investment community’. So I liked the way they thought about things. And what I also liked was, that there is a big engine in the centre. It is not quite right to say we are a spin-off.  We’re all joined at the hip as investors, right down to economic incentives.

So, it is a properly joined up entity. But in terms of setting up in Ireland, they got – strength in the centre, but really well connected in the regions, whether that’s Edinburgh, Belfast, or Dublin, and indeed, across the country. So very clearly, this was going to be an Irish team and led by an Irish team. We’re going to be given a lot of latitude around hiring and point of presence in the market. Like all good businesses, they give you the latitude, and then you have got to deliver the result.

IK: You have €250 million to deploy. The firm is backed by BGF. But you’ve also brought in a range of institutional investors – AIB, BOI, Ulster bank, Isif. How did the capital come together?

LC: So it was Isif, and Eugene O’Callaghan, who looked across the water and saw what was happening in the UK. He liked what he saw and thought this could work well in Ireland. He invited BGF to come and talk. And essentially, that was that that was the genesis. And then Isif, as they do, they anchored the whole platform in Ireland and were key in bringing other people to the table. The banks got behind it, which is wonderful. And the UK banks invested as part of all of that, too. So we don’t just have the Irish banks – we’ve got the UK banks, Barclays NatWest and the rest of the Big Five, alongside Isif at the centre. So a range of LPs and fully funded. And another nice attraction for me and for the team, we’re not having to look over our shoulder and worry about running out of capital.

IK: Something a lot of private equity funds are doing at the moment.

LC:  It’s a huge distraction, and it’s great to be able to focus on building the business and managing the portfolio.

Cheques & sectors

IK: Let’s get down to the detail You have invested €97.5 million in 13 companies – so in the region of €7 million to €10 million per investment. Is that right?

LC: That is kind of it. Funnily enough, it kind of marries up with the 10-year history in the UK. But within that, there’s quite a spread. It can be as low as a couple of million into an emerging, exciting business. We do talk about profitable and growing in BGF as a kind of a cult and an investment focus. But there can be relatively smaller versions of that with higher growth but lower profits where we write a smaller cheque. Then we have the ability to follow on. Two million could become 4 million, which could hopefully become ten million over time. So that’s one end of the spectrum. Then the far end of the spectrum, bigger cheques you know. We put €12.5 million into Revive Active. We could even probably go a bit higher again. So that’s the sort of spread but over time, I don’t expect the average to sort of change materially from that.

IK: You have Revive, a Galway food business. You have other food businesses. The first investment was in Brindley Healthcare back in 2019. You have invested in Tigers healthcare, Croom Precision Engineering. I don’t want to describe it as a scattergun portfolio, but what is the thought process behind it thematically?

LC: Really good question. Yeah, on the face of it, a jack of all trades and all of that. I guess there are a couple of things. First there is the secretarial piece. There’s a lot of patterns internally. Care homes were our first investment and, guess what, we’ve been in and out of four or five care home businesses successfully in the UK and we have a whole ecosystem of people and talent and door opening capability and subject matter experts and chairmen and so on. That same goes for house building. Tigers Childcare, it just so happened that we were in Kids Planet in the UK – the number three childcare player. It had been a buy and build platform. Behind every deal, there is probably a significant silo of investments off the UK platform, and they’ve got that 10-year history, which we don’t have, which is super helpful. We can map that across in a selling sense. We can say to Irish founders, you know, come and meet some of the folks in the UK, peer companies and founders who’ve travelled similar roads to yourself. But also, for ourselves in terms of due diligence and commercial due diligence and being able to assess these things. So that’s probably one aspect to the answer.

“As a general rule, I think smaller businesses, that USP has to be more concrete and better evidenced.”

The bit that transcends them all, though, is it’s all about the cult of the founder. You know, we talk a lot about the journey in BGF. If the market very simplistically is characterised by venture capital at one end of the barbell and private equity, which takes control at the other, we are the folks in the middle, and we’re all about the founders and wrapping resources and people and supporting them to make better versions of the businesses that they’ve built. That is the essential idea. We embark with a common purpose. We talk a lot about alignment, too. But it is the end of the deal. We are not the folks for the succession issues. We’re all about founders that want to drive on, but might want to, for whatever reason, like de risk a bit personally. But there’s always a trigger for growth as well, whether that’s M&A, CapEx, or are just making for a stronger balance sheet, especially in environments like this. They’re the triggers for the deal.

IK: How low do you go? How high do you go? Not in terms of the investment, but in terms of the size and scale of the companies that you invest in?

LC: So I said earlier, profitable and growing. And look, the one thing about BGF is there are no golden rules, or no black and white rules about anything. We’re a very, very flexible platform, and we think deeply about risk reward, as opposed to a sort of cookie cutter approach to a target rate of return. And therefore, so we think quite laterally about what we will invest in, which allows us to look at quite mature businesses that are large and highly cash generative, and maybe not growing very strongly, but equally, very attractive businesses where the risk reward profile means BGF can invest. And at the other end of the spectrum, maybe smaller, high growth, for example, software businesses, which are maybe only marginally profitable, or even breakeven, but where they’re investing for growth. And that could be a smaller cheque into a business like that.

As a general rule, I think smaller businesses, that USP has to be more concrete and better evidenced. The bar is higher on the smaller ones, but it could be a business turning over a couple of million making, half a million profits – but growing fast. That is right in our zone.

“A supportive junior partner”

IK: I want to talk about what sets you apart. As I said, if we were chatting last year, you would have been in competition with so many people to deploy capital. Not quite as competitive now. But it seems you bring two specific things. First, you only take minority positions, and you also have a big push on non-executive directors.

LC: You’ve nailed it there. We’re forever asking companies, what makes you different? It’s good to actually flip the question around on investors and say, “Well, you know, in a pretty crowded investment market, what makes you different?” And I think I think you’ve hit kind of a couple of the key ones there. Strictly minority. Some would say, so what? Majority, minority, that’s just an economic percentage, and why does it matter? We would say it runs a lot deeper than that. It’s an economic minority, but it’s a cultural minority. And it is a legal minority. and it is how we behave as a minority investor.  that’s pretty nuanced stuff. But you know, I think, I think your readers will probably understand.

We’re about backing founders to drive on. So, they remain in control. But we’re a supportive junior partner. So it does not mean we sit back and are passive. We absolutely lean in. So it’s the sort of it’s the minority with interest. we are keen to help and to move the dial.

And then how do we move the dial? We’re very careful as minority shareholders not to over promise and under deliver. We’re not taking over the businesses; we’re not going in and saying we can run your business better than you. We’re not in the operating room. We’re not in amongst the senior management team. But we are in the boardroom and do our talking inside and outside of the boardroom. But one of the key sort of pieces of value added as part of any deal is bringing a really strong chair or non-executive director to the table in circumstances where there’s an existing chair. And every time it’s different. And that’s, there’s a chemistry piece to that. There’s a profile piece to that. But it’s always about finding somebody really strong for the given situation. We don’t force anybody in. We’ll put the menu on the table. And then it’s over to the founder or founders to sort of pick and choose.

But once that thing fuses, and once that relationship between the founder and the chair, and it’s a two-way street, once that fuses, that’s really powerful, from our perspective, both in terms of corroborating the thesis, because our chairs are very, very credible people and they’ll always write to check themselves. And once it works for the founders, you know, it’s a pretty potent cocktail. So we spent a lot of time trying to get that right. And look, sometimes it’s an Irish chair, sometimes it’s an international chair.

Playing the long game

IK: So, you’ve done two exits, so far out of the 13 investments. Do you have a typical deal length of time that you’d like to stay in? And private equity wants out after three to five years, so everyone’s working to that sort of timeline. What is your strategy?

LC: We can do either. We can play the long game, and the slow game, and it’s situation dependent. Once again, it’s back to the founders, it’s back to alignment, and that’s the journey we’re all embarking on. And we spent a lot of time talking about that before we make an investment to make sure that we’re all very clear, and everyone’s on the same page. Sometimes founders will tell you look, it’s a three year hard run to the line. And it’s as clear and as concrete as that. Sometimes it’s completely the opposite. It’s a case of look, we’re building a business, and we haven’t given an exit too much thought. But we’re all businessmen and women when the time is right, the exit will look after itself. The nice thing about BGF is we can live with a pretty high degree of ambiguity around exits because we can play the long game and the slow game. So you know, it’s called patient capital. We are happy to be impatient as well, I joke sometimes. But equally, there are plenty of situations in the UK where we’re still in a portfolio 7,8,9, 10 years, way longer than typical private equity would. But that’s a conscious thing, because maybe the business is just going to take longer.

Valuations and deal flow

“The great thing about IBI is the exposure to those big ticket deals”

IK: You have done 13 deals in a short space of time. Do you have a pipeline of deals that you want to close each year?

LC: We’re mandated to be a volume investor. What does that mean? It’s back to risk reward. We’re not looking for the perfect company. We’re looking for good, solid, growing businesses that have a good shot at, let’s call it out, you know, doubling or tripling in size over the next X number of years. That’s a very classical, BGF profile. I’m being a little bit simplistic just to paint a picture. There’s a lot of those companies out there. Go back to the comments earlier around the size of the market, we can play pretty small, and all the way through. When you also overlay the fact that we’re a minority, and multiply all of that out, we have a pretty big addressable market. So relative to the world of private equity, where it’s a much more narrowly defined market segment, we are playing into a bigger addressable market, and therefore, we would expect and do expect to do more investments. I think our run rate at the moment is about four a year. That’s something we’d like to sort of see sustained.

IK: Everyone knows that there were a lot of frothy valuations out there. Are they coming down too fast? A lot of companies are doing down roads and the mood music is much different. What is going on?

LC: It is in certain quarters for sure. And I think that at the more frenzied, venture capital, super high growth tech scene, there is a big correction.

IK: And non-profitable businesses in many cases.

LC: Absolutely, and burning a lot of cash. There’s a lot of dislocation there. And obviously, there’s a whole correction beginning to play through. It’s not really our world. In the in the broad mid-market, which is our world, it’s quite different. We didn’t see the same level of frothiness creep in, so there isn’t the same dynamic playing out. These things take time to reset. We have a saying at BGF, that the really good businesses don’t need to do anything. You’re a profitable growing business, sometimes with cash on your balance sheet. It is not that valuation is not important. Of course, it is. But it has become very clear to me that you win and lose this game by virtue of what you can bring to the table – and your ability to persuade founders that actually the softer stuff does matter and that the things we can do for them will move the dial. Taking an investor on board is a very big thing. You have a good thing going, you have a fine business that’s profitable, you don’t need to do anything, you are master of your own destiny. Why would you? That’s the fascinating thing, and that’s the bit I really enjoy about it.

The IBI years

IK: In terms of your own career, you started in PWC and spent a lot of time abroad.

LC: I have a very classical profile of a fella that ended up in the investment community. Chartered accountant, did a stint abroad, which was wonderful – spent a couple of years in Luxembourg, and then a couple of years in Paris and did a bit of travelling around the world. Price Waterhouse then moved into investment banking, with Kleinworth Benson in the Paris office. I then moved back to Ireland from there and joined IBI and had a great run on IBI.

IK: There were so many deals there – everything from Madison Dearborn buying Smurfit, Aer Lingus Ryanair. Are there any deals that stand out?

LC: The great thing about IBI is the exposure to those big ticket deals – some huge personalities in the Irish business scene were involved in many of those deals and to be in the boardroom, even as a junior corporate financier, just to be exposed to all that was wonderful. As my career evolved, though, funnily enough, it’s the quieter, smaller deals that really made the difference to me personally where you could really move the dial, and you were at the kitchen table as well as in the boardroom. Some of the skills and lessons learned are highly relevant to the world of BGF, because it’s just up close and personal with founders. That was the kind of pivot from advisory into investment. It’s a very different world, but the constituencies are the same, and many of the skill sets I learned were highly relevant there. But they were the deals I took personal gratification from. So while it was great to be in the room on the big deals, actually to be able to lead in and have proper skin in the game as an advisor on the smaller ones.

Housing and talent

IK: What are your founders telling you about the state of the real economy right now?

LC: I’m very positive on the whole Irish entrepreneurial scene. I’m not just saying that because it sounds nice. I can see the relative picture versus the UK, for example – pound for pound, Irish entrepreneurs punch above their weight. And maybe that’s a function of growing up in a small island and you just have to grow fast and internationalise and all of that. Just to call that one out at the very start, and it’s only getting better. And I think we should be really positive about that. And, there’s obviously a lot of people to thank, both on the public policy side, and just the entrepreneurs themselves.

Right now, out of the street, it’s the big burning teams that you are reading about every day. It is staffing and pain points around people. It is supply chain dislocation, input cost creep, all of those headwinds are all playing into our portfolio to a greater or lesser extent now. That’s part of business. But I think that access around people and housing is a real challenge and is something we just have to get a fix on. It’s a huge pain point right now, and it’s only gonna get worse. It’s prospectively quite damaging if it doesn’t get fixed. Right across the economy – whether it’s childcare workers in the creches, right through to senior software engineers in our software businesses, those labour shortages, those pain points mean kids leave the island, because they can’t get a house here. That is not good for Ireland Inc. Our founders would echo that theme if you put them all in a room.

*****

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