Penta Capital Markets Fund I –

GLASGOW, U.K. – The five executives who resigned from Royal Bank Development Capital (RBDC) last summer to form Penta Capital have begun formal marketing of their first independent fund. Steven Scott, Rod Begbie, Torquil Macnaughton, Mark Phillips and David Calder are shooting for GBP100 million ($164.1 million) or more to invest in later-stage mid-market deals in the United Kingdom and Ireland. Penta already has secured substantial support from Bank of Scotland (BoS), which will act as cornerstone investor in Penta Fund 1.

The argument in favor of mid-market funds is by now well known: a growing interest in larger deals by independents raising larger funds has thinned the ranks of private equity providers focusing on the middle market, leaving it primarily served by captive or semi-captive houses. Penta intends to stick to deals of less than GBP75 million ($123.8 million). “We believe that this segment – albeit still competitive – is where the most attractive returns are,” Begbie said.

Two-Pronged Strategy

Thus far, Glasgow-based Penta’s focus is closely in line with that of RBDC. But the mid-market is a broad church, and Penta has developed a two-pronged strategy which, the team believes, will serve to differentiate the new group from other players in its market segment. On its “home turf” of Scotland and Northeast England, Penta’s team is sufficiently well plugged to identify all GBP10 million-plus ($16.4 million) deals. Elsewhere, Penta will rely on a sector-focused approach to secure nationwide deal flow without opening regional offices. The team’s sectors of choice are leisure; IT/communications, particularly the services side; and e-commerce business-to-business services. These are areas where RBDC has scored some notable successes with transactions including Direct Holidays, Big Beat, Kingston Telecoms and Orion.

Phillips makes a good case for Penta’s bias toward services and business-to-business, saying,”In the gold rush, the men that got rich were generally those who sold the picks and shovels to prospectors, not the prospectors themselves.”

While Penta will not rule out opportunistic plays outside its home region, the executives anticipate two-thirds of the firm’s deals overall will fall within its preferred industry groups.

Inasmuch as Bank of Scotland provided the debt for more than 50% of Penta’s deals at RBDC, it is not entirely surprising to find the bank in place as Penta’s cornerstone investor: “They have seen us with our sleeves rolled up,” Begbie said.

Although it is evident that the Penta team had a game plan prior to its departure from RBDC, market sources report that they received more than one approach from institutions looking to establish proprietary in-house private equity groups. According to Phillips, Penta presents a mid-market solution for would-be new entrants because the team is targeting investors “who want to dirty their hands.” With such groups in mind, Penta Fund 1 offers preferential terms to investors coming in at the ground floor with substantial chunks of capital. The fund also permits direct co-investments.

Plans in the Works

Penta, which has scheduled a first close for the first quarter, reports “some six strong irons in the fire,” in addition to Bank of Scotland. Earlier market rumors cited Royal Bank of Scotland, Norwich Union and Standard Life, alongside Bank of Scotland, as likely supporters of the Penta fund.

The Penta team, with an average age of only 34, boasts more than 30 years’ combined experience in the private equity market. To augment and complement the investment team’s skills, Penta plans to institute United States or Scandinavian-type industrial advisory “clusters,” one for each of the firm’s preferred sectors. The composition of these clusters is yet to be announced, but Penta intends to bring on board successful entrepreneurs and leading industry figures with active involvement in deal evaluation and post investment care. “We are aiming for a strong networking infrastructure and vibrancy,” Phillips explained. “As an independent house focusing specifically on the mid-market, Penta combines strong sector focus with an operating model which the captives are unable to provide.”