Cap10 founding partner Fabrice Nottin sees only potential upside for his firm’s new acquisition Sureserve Group in the UK’s push towards net zero – despite the government “massively underfunding” the transition so far, he told PE Hub Europe.
Sureserve, a compliance and energy services group based in Dartford, became Cap10’s first announced deal in a take-private completed in July. The 125p per share offer valued the company at £214.1 million ($275 million; €250 million) on a fully diluted basis, with the enterprise value between £200 million and the equity value, said Nottin.
While London-headquartered Cap10 sees value for Sureserve as the UK attempts to decarbonise, the deal came at an uncertain time for UK environmental policy amid a cost-of-living crisis. Conservative prime minister Rishi Sunak said in late July that progress towards net zero must be “proportionate and pragmatic”, while the opposition Labour Party, favourite to form the next government, has scaled back plans to borrow £28 billion a year to invest in the green economy.
“Right now they’re massively underfunding,” said Nottin.
Nottin cited a government target for all social housing – the sector Sureserve focuses on – to have an energy performance certificate rating of ‘C’ by 2030.
“At the rate we’re doing, we’ll get it by 2100.”
Government funding – or a lack of it – has little impact on Sureserve’s business currently, with only around 10 percent of revenues dependent on government grants, said Nottin.
While government spending on net zero could go lower, he said, “the probability they do more is much greater than they do less. And if they do less, the impact on the business is not that material. If they do more, it is pretty material.
“Once the government get its act together and starts funding properly the whole energy transition, they’re going to need a lot more people to do the work. That’s where Sureserve is uniquely positioned.”
Public sector focus
Sureserve was a case of “good business, wrong owner”, said Nottin. Being publicly listed meant it didn’t have the capital to execute its plans. “Because it wasn’t trading very well, it was very hard for it to raise equity,” he said. “It’s a self-fulfilling prophecy because you’re selling a strategy you can’t execute, and then you trade even worse.”
On top of its potential part to play in the energy transition, Sureserve attracted Cap10 thanks to its provision of non-discretionary services and a-cyclical, long-term contracts – advantages in a down cycle. That the company does not outsource any of its services makes it particularly attractive to public authorities, which “will not even get you to tender if you subcontract”, he said.
Cap10 will also focus on integrating the parts of the business to become a “one-stop-shop” for its customers, said Nottin.
M&A will also play a part. While Sureserve is the “clear leader” in the fragmented market for gas compliance in social housing, there are geographical gaps, as there also is in energy transition, he said.
Valuation change
The acquisition of Sureserve itself was straightforward, said Nottin, even though it was Cap10’s first announced deal. Nottin had experience of UK public-to-privates from his 20 years in private equity, where he was most recently a partner at Apollo before leaving to create Cap10 in 2020.
Cap10 invests in businesses with a valuation of €100 million-€500 million. It announced the first close for its inaugural fund with €300 million of committed capital in December 2021.
After a quiet first half of 2022, “the environment changed quite dramatically and some of the deals we had been discussing in the past came back at materially a more attractive value”, he said.
Sureserve was one, Cap10 having first talked to it towards the end of 2021. The price Sureserve wanted resulted in a multiple that wasn’t to Cap10’s taste, but when talks started again around a year later, the same price offered a more attractive multiple.
Sureserve’s revenue increased by 27 percent year-on-year to £275.1 million in 2022, and EBITA grew by 36.6 percent to £16.8 million, according to its 2022 annual report.
In April, Cap10 and Sureserve announced they had agreed an all-cash offer of 125p per share. That was a premium of 38.9 percent to the previous close, 44.8 percent over the previous 60 days average and 18.2 percent to the all-time closing price, set on 12 June 2015, a few months after its IPO.
Investors liked the premium – 99.97 percent voted in favour.
That the deal came when it did fit with Cap10’s desire to invest in both the up and down sides of the cycle, with interest rates and inflation having shot up since the original talks in late 2021.
Cap10 worked with several credit funds and direct lenders before getting a “very attractive offer” from Pemberton, which financed the whole transaction.
“The beauty of direct lenders is the funds have a long-term capital commitment as well, which means that in a down market there’s more available than in the past when you were dependent on institutional markets,” said Nottin.
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