Business

Souter Investments wants to co-invest with other family offices, but more deals are coming from the institutional world

Souter Investments, the private equity-focused UK family office, has never been interested in backing digital space shots. But tech-driven applications, post-Covid, are quite another matter.

Co-managing director John Berthinussen says: “We have struggled with bleeding-edge technology which you need three PhDs to understand, and we typically don’t see the volume of deals in any one specific tech area to be able to pick a winner from the crowd. But most, if not all, businesses have now become tech-enabled or provide a tech-based solution to a business issue. We can be very interested in those.”

Souter’s team, now comprising fourteen people with the addition of two investment executives at the turn of the year, has led around half of the 60 plus private equity deals it has completed to date.

Away from private equity, Souter has been lifting its exposure to listed stocks and a small number of Scottish property deals, where it knows the local market. It all amounts to taking measured risks to invest in growth companies to achieve above-average returns over time. 

Souter Investments of Edinburgh is owned by Sir Brian Souter (pictured above), co-founder of Stagecoach, the transport business currently in merger talks with National Express in a pragmatic attempt to deal with sector headwinds.

Souter Investments’ portfolio rose in value by 11% to £329 million in March 2021, according to Companies House. Substantial other family and charitable interests are also represented by the office, increasing the total under management to more than £400 million.

In the period since inception in 2006 to March 2019, its unquoted investments saw an annualised return of 18%.

Berthinussen became Souter Investments’ co-managing director in January alongside Calum Cusiter. Previous managing director Andy Macfie, architect of Souter’s unquoted strategy, is now chairman. The team has worked together for over twelve years.

Berthinussen says Souter is in touch with other family offices and open to co-investment ideas.

But more deals have come Souter’s way from a network of private equity firms and fundless sponsors like Buckthorn Partners, Penta Capital, Averna Capital and Ignite Growth, each prepared to act on a deal-by-deal basis.

Souter’s team, now comprising fourteen people with the addition of two investment executives at the turn of the year, has led around half of the 60 plus private equity deals it has completed to date. Over time, its average holding period is around five years although the longest duration is sixteen.

It invests through the cycle and was fortunate to sell several businesses, including a few in the transport sector, before Covid struck. In March 2021, its cash reserves, net of debt, were £63 million according to Companies House records.

Covid led to inevitable challenges and some, mainly temporary, write-downs. But, aided by UK government support initiatives, it has also led to structural change and opportunity.

Several companies have refocused their businesses, often with Souter’s help. Kura used to be active in leisure and events travel. It spent lockdown investing heavily in its own proprietary technology to maximise safety, efficiency, and well-being on shared transport journeys, and now helps more than 11,000 students travel safely to and from school every day.

Berthinussen says: “We’ve always taken the view that we need to continue to invest and work through each cycle, helping the businesses you need to support when it is sensible to do so.

“We also listen to those other important stakeholders in our businesses – our management teams. They understand the ins and outs of their business much better than us.”

At least for now, he sees strong competition and a thriving market for deals with highly supportive debt markets.

The market for selling businesses remains strong. Souter willingly takes gains when companies need more capital to grow than it can supply, or if a new owner has a different perspective on a company’s next stage of development.

In October 2021 Souter sold its stake in Celtic broadband provider Broadway Partners to private equity firm Downing in a £145 million fundraising.

In August it sold Pet Network International, a co-investment with The Rohatyn Group, to A&M Capital. Pet supplies and services have been lucrative during the pandemic, accelerating already supportive pet humanisation trends, says Berthinussen. Central and Eastern Europe, where it operates, has also seen strong growth in its consumer markets.

Looking forward, the recent surge in the price of energy prices has proved a challenge for several sectors, along with supply chain issues, microchip problems and labour shortages. Cost inflation generally is also a theme.

Berthinussen said supply chain challenges rather than demand side issues have generally been throwing up the greatest headaches.

“All this will take time to work through the system. Some companies and locations are better positioned than others. If you are in the software industry in London, for example, it might be harder to find labour than in less developed regions in the world. It is really company and location-specific, but generally, there is pressure.”

Souter’s Fullers360 travel and tourism business had the good fortune to be in New Zealand, although the Covid situation there has now obviously changed. Ashtead Technologies, Newcastle Tool and Gauge, and Coretrax all service oil and gas clients, but operate in niches that continue to see strong demand.

Berthinussen says: “We’re still looking for transactions. Our strategy hasn’t really changed, although we can take a different view on certain areas as we have grown and matured as a business.”

Fifteen years ago, Souter didn’t have much interest in technology at all because it did not have the expertise to relate to companies in the sector. Nor did it yet think that innovative energy solutions were generally investible propositions for it, albeit it did successfully invest in the buyout of biofuel producer Argent Energy.

Now, however, it has developed confidence in businesses that use technology to serve their clients. It has moved with its markets.

Growing concern over climate change is also likely to strengthen the sale of products that serve green and circular economies.

On the data front, Berthinussen cites Likezero recently spun out of PwC. Souter knew and respected its chief executive Michael Lines, a crucial factor in all its buyouts. “He has applied this kind of technology before and knows what it needs to achieve for its clients.”

Likezero offers software allowing financial firms to handle the complexities associated with financial contracts, provide trusted data outputs, and improve the quality, cost and timeliness of decision making in front, middle and back-offices. 

It was recently helping companies to come to terms with the replacement of Libor with other debt benchmarks and has helped firms in areas such as uncleared margin rules and netting.

“It seems complicated, but the business is actually incredibly simple. We believe the market is huge.”

 Top-rated DivideBuy’s technology provides access to the interest free Buy Now Pay Later market. It has just raised a £300 million loan facility.

 On the green front, Climate Care is a B-Corporation sourcing impact based carbon offset projects for mainstream clients: “It’s a company which is helping organisations to deal with their climate and Carbon responsibilities through voluntary carbon markets.”

Berthinussen is interested in other ways Souter can help to develop a circular economy by, for example, helping to install electric car charging points or using banks of used batteries to store energy for the power grid.

Portfolio company Stone Technologies Group is an independent provider of IT hardware, software, solutions and services through partnerships with companies like HP, Lenovo, Cisco, Microsoft and Intel, and has developed a strong niche in recycling and refurbishing used computers and IT equipment.

Berthinussen likes the way Stone has positioned itself: “IT asset lifecycle is an interesting place to operate. And it’s the right thing to be doing, frankly. E-waste is a massive problem, it doesn’t always get the attention it should and there is a huge amount of value in the second use of equipment that is too often simply just thrown away.”

However, management buyouts and corporate carve-outs will remain at the core of Souter’s strategy.

Berthinussen says: “We’ve got to remember what has served us well and where our skills lie, as well as looking to the future and new opportunities.”

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