Privately Speaking, Private Equity International, October 2016

03 Oct Privately Speaking, Private Equity International, October 2016

As OpCapita celebrates its 10th anniversary by holding a ‘one-and-done’ on its new fund at more than three times the size of the previous vehicle, founder and managing partner Henry Jackson tells Isobel Markham why Comet failed and GAME succeeded — even though they were treated the same

There are few names in private equity that, when mentioned, would elicit a response from the man on the street. Henry Jackson’s is one of them. The Wall Street banker turned European retail turnaround specialist has had his fair share of column inches.
Despite his successes, since 2012 Jackson’s name has been synonymous with the painfully public collapse of electricals retailer Comet which, although it left more than 6,000 people without a job, made a healthy profit for his firm OpCapita.
But when we meet in Mayfair on a sunny afternoon in early September it is against the backdrop of happier news: OpCapita, which this year celebrated its 10th birthday, has just held a first and final close on its second fund. At €350 million, the vehicle is more than three times the size of its predecessor, raised two years ago, and is the firm’s first fully fledged 10-year closed-ended investment fund; the €110 million Fund I had just a two-year investment period.
Jackson – sometimes known as ‘Jackpot’ Jackson – may be yet to win the hearts of the public, but he and his firm are clearly winning over investors.
Jackson, who spent 20 years as an investment banker, first in the US and then in Europe, founded OpCapita in 2006 alongside John von Spreckelsen, famous for turning around the fortunes of supermarket chains Budgens and Somerfield, and operator David Hamid, who had spent 17 years at electronics retailer Dixons Group and had just finished turning around and listing car maintenance group Halfords.
“When we started the business I understood – not that it’s very complex – that in order to go into the sorts of businesses that we were going to invest in, we were going to need to have real operational expertise in-house,” Jackson says.
“They were two really ideal partners for me when I started the business.”
Joining the trio were Josh Spoerri, Chris McDermott and executive assistant Martine Pedro, all of whom are still at the firm. “That must be the great strength investors saw when we went out to raise this fund. They saw a team that has worked together successfully for a long period of time and been through a lot together and is still really enthusiastic about what we can do.”
Raising Fund II, Jackson says, was very different to raising the first fund back in 2014, when the firm’s track record was short and mixed: on the one hand, the spectacular two-year journey from administration to IPO for video games retailer GAME Digital, delivering a 5.9x return; on the other, the fallout from Comet.
“One of the experiences we had was being different isn’t always perceived as good,” Jackson says. “[Investors] didn’t really know which bucket to put us in. We tried to explain to people that we’re not a turnaround fund or a distressed investor; that we’re about operational improvement. And a lot of investors looked at us and said, ‘I don’t have a box for that.’ And fair enough, I think what we do is very differentiated.” OpCapita, says Jackson, falls between a turnaround firm and a sector-focused firm. “We’re not just sector guys who will buy anything in the consumer and retail sector, but we’re also not a turnaround firm.”
By ‘turnaround firm’, Jackson means firms made up predominantly of former insolvency practitioners who focus on process and cost reduction.
“Our strategy is very different from that in that we might buy a business like GAME out of insolvency, but insolvency’s not really where we add value. The value we bring is the operational change. So sure, we’ll cut costs, but cost-cutting is one time, you have to do it. It doesn’t save a business.”
One result of this focus on operations is that OpCapita tends to have longer hold periods than traditional turnaround firms because there’s a lot of work to be done. A recent example is French furniture retailer BUT, which OpCapita acquired in 2008 and this summer agreed to sell to buyout house Clayton Dubilier & Rice in a deal that is understood to have generated a return of around 3x.
“What [CD&R] saw was the opportunity to continue along the path of what we had developed for further higher margin decorative sales, online internet roll-out, continued roll-out of the small store format we had developed,” Jackson says.
“We put those pieces in place so that the next owner would have something that they could get excited about, and that, I think, is a big part of the strategy. It’s not just turnaround, if you will, it’s really operational improvement in a very different way.”

FOCUS ON OPERATIONS
‘Operational improvement’ has become something of a buzz phrase in the industry in recent years.
“A lot of people have wrapped themselves in the cloak of operations over the last five or 10 years,” Jackson says. “Investors are appropriately cynical about what GPs really do when they go into portfolio companies; everyone says they do operations, but what does that really mean?”
OpCapita combated this scepticism by going into “really extreme detail” on each of its portfolio companies and then threw itself open to intense reference-checking. “We opened up everybody that we’d ever worked with as a reference and said, ‘Call everybody you’d like.’”
Many investors were receptive to OpCapita’s message, but keen to see more. At the time of the fundraise GAME had just been listed, and the firm had just acquired German discount clothing retailer NKD and was acquiring Spanish frozen foods retailer La Sirena Alimentación Congelada. The latter were two of the three investments that ultimately made up the Fund I portfolio.
“I think people just wanted to see more and they wanted to watch us over a longer period of time. It’s perfectly reasonable if you’re going to make a multi-year commitment to someone; you want to know who you’re getting into bed with,” Jackson says.
“In Fund II we went to many of the people we’d met a few years earlier and they said, ‘Yes, you actually have continued doing that, that’s great, that does appeal to us, and we’ve had enough time to understand it and see what you really do.’”
What OpCapita really does is something Jackson has no trouble articulating. Every question put to him is answered eloquently with detailed examples from portfolio companies – moving furniture sourcing to Asia at BUT, adjusting pricing at NKD, adding senior commercial expertise to La Sirena, overhauling the management team at MFI.
OpCapita has three core questions it asks itself when assessing whether to invest in a business: does the business have a reason to exist strategically? Can the firm identify from the outside what the problem is? And does the firm have a solution to address that problem?
Throughout PEI’s conversation with Jackson he talks about OpCapita’s portfolio companies in the context of these three questions, particularly emphasising the firm’s belief that all of its investee companies – even those that didn’t survive – had a reason to exist.
The firm’s first investment was one of those: in 2006 it acquired the retail business of UK furniture chain MFI, which Jackson describes as “a very broken business”.
OpCapita – or Merchant Equity Partners as it was then – identified the biggest issue at the company – a logistical problem – and set about overhauling the business from top to bottom. It filled 10 of the company’s top 11 management positions, retaining just the sales director; it opened a new 700,000 square foot warehouse; it found new suppliers for the kitchen parts; it rethought the product offering, pricing and promotional strategy; and it implemented an SAP-based system to improve efficiency and integration.
And the turnaround worked; Jackson’s team took MFI from £30 million negative EBITDA to better than breaking even in around a year. Unfortunately, in the summer of 2007 the collapse of Northern Rock made a colossal impact on the UK housing market. “By early 2008 when everything was working flawlessly, we were already seeing real issues in the orders received, just because customers were very cautious, the housing market was down.”
OpCapita took the opportunity to sell the business to management backed by a financial investor, coming away with “a small gain”. The deal closed just two weeks after the collapse of Lehman Brothers, a storm which MFI ultimately couldn’t weather.
“It was certainly not the most satisfying outcome because we’d done a huge amount of work and we really felt like we were going to be able to get a lot more profit growth than we got,” Jackson says.

“But circumstances changed pretty markedly from the time when we bought the business to when we exited”.
Despite the ultimate demise of MFI, Jackson says the deal allowed OpCapita to “demonstrate this proof of concept” to investors.
“We [saw] we could take a very broken situation that nobody else would touch, make dramatic change – changing the management, the product spec, the supplier base, the infrastructure and distribution, the systems, the promotional strategy – and do all that in a very condensed time frame, and succeed. That gave us huge confidence that we could take those sorts of skills into other businesses that were underperforming and replicate that change programme.” Jackson’s view on the outcome of the MFI transaction gives an insight into his outlook: a relentless positivity and optimism that allows him to take on the challenges that others won’t. He brushes away any opportunity presented to call out media coverage as unfair or frustrating, instead delving deep into the companies themselves again and again to illustrate OpCapita’s hard graft and the reasons why ultimately it didn’t prevail.
Even when it comes to Comet, over which he was savaged by the mainstream press as a corporate raider, he remains unfazed, spending a good 20 minutes detailing how the firm came to acquire the business, the measures it implemented during the hold period to bring its £20 million negative EBITDA back up to positive, and what ultimately meant the business didn’t survive. (Three of the top five credit insurers underwriting the suppliers’ risk when shipping product to Comet withdrew their coverage and couldn’t be convinced to reinstate it, leaving the business without the financial capacity to build its inventory.)
“The press coverage was not really relevant,” he says. “What was relevant was the fact that 6,000 [people] lost their jobs in a business that we were the only hope of saving, and I think really had made an incredibly good effort at saving. We were unable to succeed.”
Although the OpCapita team is celebrating its 10th anniversary this year, Jackson says it feels “like we’ve only just gotten started”.
There is still plenty of room for OpCapita to grow. With such a labour-intensive approach to transforming its portfolio companies, the firm makes just one investment a year, if that; as the team grows there may be scope to increase that to one and a half or two deals per year, but, Jackson says, “I don’t think it becomes 10 investments per year in the foreseeable future – that’s not our business model.”

There’s also the option of broadening from pure retail into the larger consumer space.
But there are some things that Jackson is adamant won’t change: the average investment size, which is around €60 million-€70 million, is likely to remain.
“We’re in a nice place in the market where there isn’t a huge amount of competition. The investments we’re making are bigger than small turnaround firms in different European countries can typically invest in, and we have sufficient capital to make sure the companies we invest in are properly capitalised to get through difficult periods of trading, which always happen in businesses.” When it comes time for Jackson to take his place in the annals of private equity history, he hopes OpCapita’s efforts are looked on as “a social good”.
“That may be too much to ask given that not all our deals have worked the way we would have liked,” he admits, frankly.
“We’ve tried from the beginning to go into more difficult investments where others have not been willing to invest and to take on challenges that others wouldn’t take on. I hope people will say it’s a hard thing that we did. It doesn’t always work but overall we saved a lot of jobs, we saved a lot of businesses, and I think we created a lot of value for our investors.”
Over the last 10 years OpCapita has proven that it too has a reason to exist.
“It’s differentiated and I think it’s a value-add, not just for investors but for the companies we go into, so I hope people will, with the passage of time, be able to look at the record overall. But I’ll understand that always there will be deals that people will look at and say ‘well, that one didn’t work’. That’s true, but it certainly wasn’t for lack of trying.”

 

About OpCapita

Founded in 2006, OpCapita is a European private equity firm specialising in the retail, consumer and leisure industries. OpCapita actively invests in companies where there is an opportunity to deliver improvements in profitability and create long-term, sustainable value.

OpCapita’s team of in-house operating partners has decades of experience in consumer-facing businesses and a widespread network of contacts and specialists. The team adopts a hands-on approach to the companies in which it invests, drawing on exceptional management talent to deliver on its investments.

Over the past ten years, OpCapita has invested over €450 million in businesses in the UK, France, Germany and Spain. In August 2016, OpCapita announced the final closing of its second fund, OpCapita Consumer Opportunities Fund II LP, at the hard cap of €350 million. Fund II, which was significantly oversubscribed, received strong support from a diverse group of global investors, including pension funds, endowments, funds of funds, family offices and charitable foundations, predominantly from the US and Europe.