Inflexion’s Whileman: Minority stakes will play bigger part in private equity

Inflexion launched its dedicated minority fund, Partnership Capital, in 2015. Partner David Whileman explains the strategy.

Inflexion announced the sale of its minority stake in Phenna Group to Oakley Capital at the end of August, in a deal that valued Phenna at more than £1 billion ($1.2 billion; €1.2 billion). Phenna is a Nottingham-based group of specialist businesses focused on the testing, inspection, certification and compliance sector.

Acquiring smaller stakes is not new for the London-based private equity firm – Inflexion made its first minority investment in 2006, and in 2015 launched its dedicated minority fund, Partnership Capital. The Phenna exit was the first from Inflexion’s Partnership Capital Fund II, which closed in 2018 with commitments of £1 billion.

PE Hub Europe caught up with David Whileman, a partner at Inflexion, to learn more about why the minority business is booming, and what benefits and drawbacks can arise when taking smaller stakes.

What is minority investing?

Minority investing is bringing all those benefits of private equity, but to entrepreneurs where they still get to stay in control of their business.

What we often find is that by having a minority investor on board, the company almost gets a new lease of life, and occasionally the entrepreneur breathes a sigh of relief. Because even though they’re still in control of the business, they feel like they aren’t alone anymore. That means sharing any potential problems too, as well as having access to support for growth.

Why is minority investing on the rise?

When times get uncertain people seek to diversify their risk and they want to make sure their businesses are well funded. You often find that this is a time where people think it’d be good to realise some value and have a partner on board, who can bring additional resources and market insight.

Other drivers include the IPO market being quiet, which generates more minority investment activity too. We certainly get calls from people who are considering floating, but they’ve realised the market is currently tough. Therefore, they’re looking for a minority investor with the idea of maybe floating later.

Are certain sectors experiencing more minority investing than others?

The answer to that, believe it or not, is no. I think from our point of view, there are always sectors that are more interesting and are at different points of the cycle than others. But I think the reason why people do a minority transaction, or want a new investor on board, tends to be sector agnostic. There aren’t some sectors that do more minority deals than others. It’s more around crystallising value or diversifying the shareholder base, which drives appetite.

Are there drawbacks to taking non-controlling stakes?

There are positives and negatives. The positives are you can sit down with the entrepreneurs, and you can give them choices around all the resources we have to help accelerate their growth and expansion. We can also introduce them to other likeminded entrepreneurs who have gone on a similar journey, maybe in an adjacent industry. You hit the ground running, and the best response I can hear is: ‘Wow, we hadn’t thought about that.’

The flip side of it is, if they’ve never had an investor on board, it might involve embracing more transparency and governance. For example, being accountable for having a well-organised, efficient board meeting – rather than key issues being discussed ad hoc and at length over a beer and a sandwich.

What does the future hold?

I think minority investing is going to increasingly become a bigger part of the private equity community. It gives entrepreneurs more choice, and their number will grow as people become more aware that there are other options to reach their personal goals than just selling their business. Yes, there is bound to be a short-term boost due to the economic cycle, but the reasons and the trend for more minority investing will continue into the future.