Systems from scratch

When a new private equity firm is born, a new back office system needs to grow up alongside it. Australia's Ironbridge Capital found this to be ‘extremely complex.’ By Andy Thomson

Anyone reasonably well acquainted with the private equity industry knows that raising a debut fund as a spinout from an existing organization is no simple task. The individuals concerned may be well known and respected and their strategy appear eminently sensible, but would-be investors will still have a longer list of questions in store for them than they likely would for an established group with a solid track record.

Numerous boxes will need to be ticked – including the one that this team’s members were indeed responsible for the deals they are laying claim to, and that their deal flow as an independent entity will not be denied them now that they can no longer leverage the old firm’s networks.

But there is another factor, easily underestimated, but which can nonetheless be a real vote winner or loser in the eyes of potential investors:the quality of a firm’s reporting and IR infrastructure. In the November 2005 issue of sister magazine Private Equity International, veteran fund placement agent Kevin Albert said:?A newly independent GP team should devote as much time and attention to planning and organizing key administrative investor service areas as they do building investment infrastructure. LPs will focus on whether financial reporting, tax reporting and investor relations are up to snuff.?

On the face of it, IronbridgeCapital passed such tests with the minimum of fuss. In May 2003, four former executives of Australian buyout firm Gresham Private Equity – Neil Broekhuizen, Paul Evans, Julian Knights and Greg Ruddock – spun out to form Sydney-based Ironbridge. The following February they achieved a first closing of their debut fund, and in September 2004, notched a final close on A$450 million (€280 million; $329 million), easily surpassing an A$300 million target – and ahead of the original schedule.

But while the successful fundraising certainly provided vindication of the decision to spin out, if you suggest to Ironbridge chief financial officer Stuart Mitchell that the process must have been a breeze, you might just find yourself being treated to some traditionally colorful Aussie language.

Among many back office challenges associated with being a start-up operation, Mitchell says the first was to implement appropriate – and tailored – investment, accounting and reporting structures for the fund’s investors. These included domestic supporters such as Industry Funds Management, Macquarie Funds Management and Wilshire Private Markets, as well as international backers numbering the likes of Alpinvest Partners, CalPERS and GIC Special Investments.

?Our fund… required extensive professional input from outside consultants.?

?Our first priority is to our customers and as they are varied in size, nature and jurisdiction, they each had different requirements which had to be balanced, negotiated and then consistently covered,? says Mitchell. ?The design of the fund’s investment structure is extremely complex, with our fund actually comprising multiple separate elements, and required extensive professional input from outside consultants in its initial creation and ongoing utilization.? He adds: ?As it is a new structure, the creation of each element of it and its ongoing expansion required the creation of a new system to encompass it. Due to the vagaries involved, large elements of this [process] have been groundbreaking for the organization.?

A qualified accountant and lawyer, Mitchell joined Ironbridge at inception after stints at the likes of KPMG and Australian law firm Moray and Agnew, as well as acting as a UK-based consultant to Deutsche Bank, Merrill Lynch and Natwest Markets ?in a range of financial, accounting, compliance and legal roles.? Mitchell’s most recent six-year stint was as CFO of Newport Capital Group, a Sydney-based boutique investment bank.

Mitchell says an added complexity for a start-up operation is the requirement to deliver tailored reports for the first time. ?Each reporting line and format needed to be created from scratch for the first time as each reporting deadline was reached. Thereafter, with useful feedback from users, we’ve developed template pro-formas for ongoing operations,? he says.

Catering for the needs of a batch of new investors and making sure their individual reporting requirements were met would have been a tough enough task withouthaving to move premises and operate on a shoestring budget: Ironbridge was confronted with both. With no management fee to provide sustenance, the firm was initially located in a small, serviced office space. Later, it moved into a larger serviced space, before then undertaking the timely and onerous task of fitting out the firm’s present location in the imposing Aurora Place building in Sydney’s central business district.

Having now been established for two and half years and ensconced in their new premises for over a year, one might have thought life for Mitchell and his firm has become a little more tranquil in recent times. The reality is far from it, he insists. Over the last 12 months, one event in particular hints at profound repercussions for the Australian private equity industry: i.e., the adoption of International Financial Reporting Standards (IFRS) by the Australian Accounting Standards Board.

Mitchell says the introduction of IFRS has ?not been universally welcomed in business circles? in the country. To some extent, this is linked to a feeling that because members of the European Union voted to adopt IFRS en masse, they have had more influence in the setting of standards. To counter this, Australia seems to be linking with its Asia-Pacific neighbors to develop a ?regional view?of the standards and give countries based in that region more of a say in their implementation going forward.

On a practical level, Ironbridge and its fellow Australian private equity firms are confronting the same IFRS-related issues as their counterparts around the world. In particular, this means wrestling with fair value methodology when valuing portfolio companies.

But this is not the only regulatory issue for Mitchell and his ilk to grapple with. A perhaps even hotter issue in the Australian private equity market has been the introduction of a new venture capital limited partnership (VCLP) structure.

Australia is rare among relatively mature private equity markets in not having traditionally embraced a limited partnership structure, but finally did so on 1 July 2003 when the VCLP was launched. However, the structure appeared to be primarily tailored to venture rather than buyout funds, and restricted the size of investments any fund using it could make to A$250 million, while also limiting investments to Australian resident companies, so that the economic benefit flows back into Australia. Hence, the tax efficiencies offered by the VCLP remain tantalisingly out of reach for many buyout firms, with a focus on large, international businesses.

Perhaps not surprisingly in light of these stipulations and others, the VCLP’s introduction has been contentious. So much so that the issue forms a central part of a current review into the Australian venture capital market by the government’s Venture Capital Review Expert Group, chaired by former JP Morgan Partners executive Brian Watson. ?We hope that the Watson report will support further reform of the VCLP structure to bring it in line with international fund investment structures,?says Mitchell.

If the restrictions are indeed lifted, the new structure might just be utilised when Ironbridge next hits the fundraising trail – which is expected to happen within the next couple of years. At which point, Mitchell will no doubt once more be pondering a fresh influx of new investors with all their idiosyncratic demands. The lot of a private equity CFO, it seems, is not only demanding in the start-up phase.

Office: Sydney

Founded: 2003

Total no of employees:9

Managing partners: Neil Broekhuizen, Paul Evans, Julian Knights, Greg Ruddock

CFO: Stuart Mitchell

Name of recent fund:

Ironbridge Capital 2003/4 Fund

Size of fund:

Size of fund: A$450 million ($329 million;€280 million)

Date closed: September 2004

No of current portfolio companies:6

No of exits: one (sold Affinity Health to Ramsey Health, generating an IRR of over 100% and over three times cash invested)

LPs include: Alpinvest Partners, CalPERS, GIC Special Investments, Industry Funds Management, Macquarie Funds Management, Wilshire Private Markets

Software and systems:MYOB Premium and inbuilt Microsoft suite databases