The UK government’s 2015 Finance Bill, published in summer 2015, made a number of changes to the rules for venture capital trusts, prohibiting them from conducting management buyouts or follow-on acquisitions.
To combat limitations under the new rules, YFM Equity Partners intends to triple the approximately £75 million it manages across three private equity funds to about £300 million in the next five years, managing director David Hall said.
The lower mid-market firm is in the process of raising its 2016 fund. It expects to raise up to £50 million for the private equity fund this year, according to Hall, and plans to come to market with its next private equity fund in 2018.
He said: “[We’re] hoping to see [our private equity] funding increase and venture capital funding stay flat. £250 million to £300 million of [private equity] funds gives us sufficient capital to deploy in the market space without changing deal size.
“Small cap in particular has got an opportunity because a supply of funding has been withdrawn from the market. Half a billion less a year [is] going into the marketplace.”
Brexit, combined with the change in VCT rules, has created a “perfect storm” for lower mid-market investors in which asset prices have frozen and companies are hungry for investment, according to Hall. Small businesses, he said, can still achieve growth as “the nimble-footed…can be faster”.
“The best years we have found to deliver returns have been years immediately after a slowdown: in 2009 to 2010 there were less [deals] but there was so little capital around they had strong returns,” Hall said. “2016-17 have the same sorts of characteristics as those years. 2016 vintages might be quite strong. [It’s] certainly a good time to deploy capital.”
Companies and corporate financiers are beginning to regain confidence after initial concerns over what could get funding after the VCT rules led to a hiatus in deal-making, he added. Whereas it only did one deal last year, the firm expects to close its second transaction of the year next month and aims to close up to four by the end of 2016.
YFM’s senior management includes two former 3i directors: David Bell, who was formerly a portfolio director at 3i; and Paul Cannings, who was a director at 3i for 14 years until 2004. Andrew Marchant, a former partner at Permira and director at Cinven, is a non-executive chairman at the firm.