Review of the year 2017

It’s hard to believe it is ten years since Nevis was set up to bring something different to the deals market. As I look back on our tenth year, I think it is fair to say that we celebrated it in style with one of our most interesting and eventful years yet.

 

Deals

Before I jump into the story of 2017, first let me take you back to the Summer of 2015. It was then that we were first introduced to Robbie Horne, the 3rd generation owner and operator of Merkland Tank. Merkland, which was established in the late 19th century to service the Glasgow shipyards, has evolved to provide specialist industrial tank services to a range of sectors (www.merklandtank.co.uk). Robbie and his team of long serving employees have built a first-class reputation for quality and customer service and the business generates consistent profits. You couldn’t paint a better picture of the type of business we like here at Nevis.

Robbie had started to consider selling the business and that just left the small issue of getting him comfortable that we were the right home for it going forward. Fast forward a mere two and half years and we’re pleased to say that we completed a deal to buy it in October 2017! In all seriousness, selling a family business is a very emotive and difficult decision and we were only too happy to spend the time with Robbie to understand what was important to him.

Firstly, he obviously wanted to be sure he was getting the right price for the business and in truth that didn’t take long to agree. The more important part for Robbie was ensuring that it was the right time for him to sell and that we were the right partner to continue the Merkland story.

Robbie wanted to step back from leading the business as soon as the deal completed and that meant we had to have a new Managing Director ready to start the day the deal signed. That’s no simple task with notice periods to navigate and the uncertainty that surrounds any deal before it is signed. Essentially, we had to offer someone the job of MD in a company we didn’t yet own! The candidate had to trust that we would get the deal done and be happy to hand in their notice for their current employment. Thankfully, in Robert Gibson, we found someone who fitted the bill perfectly and we were prepared to take the risk of employing him long before the deal completed.

We were also fortunate that Robbie has traded with many of our portfolio companies for years and was able to reference us with their management teams. All of these factors gave him the confidence to choose us, to retain a minority shareholding and to take on a new role with the business as Chairman.

All in all, we couldn’t be more pleased to get the deal done. Although Merkland has a long and successful history, together with Robbie and the rest of the management team we believe that there are many more good years to come.

In last year’s review I mentioned that we look to own businesses for the long term – not to be short term investors. Having an owner’s mindset means that we’re always thinking about how the business and its people can best achieve their potential. That means considering, for example, new methods of manufacture or service delivery or new potential markets, services and products; but it also means putting in place an ownership structure that facilitates this. Often, we see ourselves as a solution to this issue – providing the growth mindset, experience and money to replace exiting shareholders – but this year we also recognised a situation where we needed help.

One of our portfolio, Clyde Space, is atypical of our normal investments due to the stage of its development. We are focused on acquiring established businesses with a consistent track record of profits between £500,000 and £1,500,000 but in 2010 we bought approximately 30% of Clyde Space which at the time had turnover of just over £1m and was break-even. It was, however, an early entrant in the emerging New Space market for small satellites and had an enthusiastic team of 16 people. Over the last seven years, we have supported the company to achieve turnover of more than £7m; to grow to a team of nearly 80 highly skilled people; and to establish itself as a global player in the market for nanosatellites.

At the beginning of 2017, we worked with the board on a detailed strategic review, mapping out how we expected the company and market to develop over the coming years and it was clear that the potential of the business could only be achieved with significant investment. Presence in the US and Far East markets was required together with additional experienced management and funds for further investment in infrastructure and people in Scotland. That level of investment is beyond Nevis and so we began to look for the strategic partner to continue the journey.

We identified various alternatives and concluded that an £60m combination with AAC Microtec (“AAC”), the listed Swedish business, was the best way forward. AAC already has an established presence in the USA, Japan and South Korea as well as a skilled and experienced management team. They have access to capital markets and a real desire to further grow and invest in our Scottish operations. Nevis led the deal and after an intensive few months we were delighted to sign a deal on the 21st of December to merge the businesses. The Clyde Space shareholders will own 49% of the combined group which is well placed to continue this success story.

 

Portfolio

In addition to Merkland and Clyde Space, we have three further portfolio investments. In September 2010, we partnered with Paul Moore at Dieselec. Paul has been fantastic to work with and it has been a successful partnership to date with sales more than doubling and profits up five-fold. Everything comes with its challenges, though. Together with Paul and his team, we spent many months working on projects to support the UK power capacity market only for the regulations to change in the week before the deal completed. Frustrating? Yes, but much more so for Paul and his team. Thankfully, they’ve built a very solid core business and their continued dedication and skill ensures the business moves from strength to strength, with full year profits expected to be up by more than 10%.

In 2013, we acquired the majority of James Ramsay and since then we have worked with MD and shareholder Raymond Shepherd to change and develop the business. This year, turnover will have more than doubled 2013 levels and, thanks to a huge effort from the whole team, profit margins have remained good in a very challenging market. The most encouraging development this year has been the emergence of a second tier of management to support Raymond and take the business forward in the future. I mentioned last year that we are very focused on developing the people in our portfolio companies and from management teams to apprentices we believe passionately in lifelong learning and building our teams. This year we took that a step further when Coretta Barry joined our team. Coretta is a Chartered Psychologist with 20 years’ experience working with managers and leaders to help them achieve their potential. She is doing a great job working with management in our portfolio businesses and we’re confident that this type of investment will reap benefits in the longer term.

On that note, we are interested to hear that the Scottish Government is setting up a new Scottish Investment Bank. Anything that encourages or enables local businesses to grow and flourish is to be applauded but I wonder whether SMEs might be better served not by more cash but by being given the chance to recruit better people. Time and again we have seen the value of recruiting a little bit ahead of the requirement. That might be recruiting someone whose experience in a larger organisation can drive big improvements or simply adding capacity to allow the senior team to think (as Amos Tversky puts it “The secret… is always to be a little underemployed. You waste years by not being able to waste hours”). Obviously, this costs money and we have often seen SME owners who aren’t willing to take this risk. If the Government has decided that it wants to spend money to encourage private sector growth we think that it could do a lot worse than encouraging SMEs to hire better people, earlier.

Other than Merkland, the most recent addition to our portfolio was the acquisition of Astec Precision in 2015. 2017 was a year of huge change there when a health issue forced Peter Smith, the founder and MD of the business, to leave his post suddenly. For a brief period, we found ourselves in the MD role and boy did it give us a lot of respect for anyone in that position! The American investor Brent Beshore describes running a private business as a “daily knife fight” and we got a taste of that at Astec. The business had seen its orderbook treble in the months before Peter’s departure and our first job was to gather the employees in the canteen and explain the challenges we faced in continuing to deliver what our customers needed and expected. They responded magnificently – starting early and finishing late and showing a commitment to the business and its customers that won’t be forgotten. Fortunately for us, our tenure as MD wasn’t too long as shortly afterwards we found Craig Hyslop, the “gun” we needed for the “knife fight”! Craig had previously owned and run his own machining business and is doing a phenomenal job of galvanising the team and developing the business.

 

Nevis

In our job, it is all too easy to spend our time thinking about the portfolio or new opportunities and to forget about the Nevis business. What is our strategy and how are we going to achieve our long-term ambitions?

Thankfully, this year we had reason to step back from the day to day.  A mutual contact put us in touch with Andrew Stevenson and his team at Tangent Graphic to revamp our branding and website. From the first meeting, it was clear that the project would deliver much more than a new website (although they’ve done a great job with that if you haven’t seen it www.neviscapital.co.uk) because the Tangent team asked great questions. What are you trying to achieve? What does Nevis stand for? Why are you doing what you do? These prompted a lot of debate and self-reflection and have encouraged us to be much more open and direct about what we believe in and what we think differentiates us from other equity investors. One of my Partners, Brian, uses the analogy of investing in property to best explain it.

If you think about buying a flat, you can either buy it as an investment or to live in. If it is an investment, your focus is on maximising your yield and making a profit when you sell it in a few years. Your motivation is to minimise spending on the property (is that new kitchen/bathroom/window/roof really needed?) provided you can still find a decent tenant. A quick lick of paint before you sell it and it is someone else’s problem. On the other hand, if you are buying the property to live in for the long term, then your focus is on making sure it is a great place to be for you and your family. You are quite happy and prepared to invest time and money to maintain and improve it over the long term. For us, when we buy a business, it is one we want to live in, not to rent out.

We believe that as an owner of a business you have the opportunity to earn good rewards but also a responsibility to think of it not as an investment property but as a home for you and everyone else who works there.

 

2018

Last year I wrote that our aim for 2017 was to see further growth at the portfolio companies and to add another one or two to the stable. On that count 2017 delivered. More of the same for 2018 would be perfect.

Lastly, as I was preparing to write this, Brian asked me to “mention Bitcoin – it’s topical and might get us a better Google ranking”. Glad to have obliged.