New private equity fund hunts for fast-growing SMEs

Brisbane-based private equity firm Blue Sky has a launched a new $50 million fund that will attempt to take advantage of a shortage of bank finance by targeting profitable SMEs with solid growth potential.

Blue Sky Private Equity, which holds investments in eight companies including toilet rental business Viking Rentals and national food chain Lenard’s Chicken, is currently conducting meeting potential investors in the fund, with a focus on wealthy individuals, family offices, self-managed super fund trustees and financial planning groups.

Managing director Tim Wilson says interest in the fund has been good, with interest particularly strong from former entrepreneurs who are looking to support up-and-coming entrepreneurs but do not want the responsibilities attached to a direct investment.

“One of the exciting things for us is that we targeting a channel that hasn’t exposure to private equity.”

While raising money for a private equity fund is more difficult in and just after a downturn, Wilson says history shows that private equity investments made during these times tend to outperform, partly because company valuations are lower and private equity firms can get more bang for their buck.

“The multiples of businesses on definitely down, so you are buying cheaper,” Wilson says.

The fact that companies are having trouble accessing bank lending is also playing into Wilson’s hands, as the pool of potential investment targets is bigger than it might ordinarily have been.

“The banks are actually playing to us. There are good businesses out there that just aren’t getting funds.”

The Blue Sky model involves injecting “expansion capital” into a business and then working with management to grow the business.

Wilson says the firm steers clear of the start-up, early stage and biotech sectors, and concentrates on profitable companies with strong cashflow, good growth prospects and good management teams.

“We will spend a disproportionate amount of time getting to know the people,” he says.

“When we are actually putting money into someone business, we are backing them to keep doing what they do.”

Lenard’s Chicken (which Blue Sky bought into in 2008) and Viking Rentals (which Blue Sky invested in back in 2007) are the jewels in the company’s private equity portfolio, which has delivered average annual returns of 30% since its establishment in 2006.

Wilson says these investments highlight the other thing that Blue Sky looks for – businesses that have something unique about them.

In the case of Lenard’s, the chain is the only national fresh meat chain in Australia, and unique in most parts of the world. In the case of Viking, Wilson says the company’s model of cleaning its toilets every two weeks sets it apart from its competitors.

“It actually it is a big deal. Cleaning toilets every two weeks is something that is not done in the industry. They charge a bit more, but their reputation is so strong.”

These two businesses will be rolled into the new fund, to be called the EC2010. This will allow current Blue Sky investors to exit their investment, although Wilson expects most will roll at least part of their current investment into the new fund.

 For entrepreneurs looking for money to expand, Wilson has a clear message: get in touch.

But be warned – Wilson says it sees more than 100 deals before he decides to invest in one, so companies really need to have their pitch in order.

As well as having a strong business, Wilson says entrepreneurs need to be prepared to work with Blue Sky and need to have a clear idea of their exit strategy.