With growth journeys being rethought as the world emerges from lockdown, many companies will be considering new turns – or in fact entirely different paths. Carve-outs can transform orphaned assets into independent businesses of scale. But this requires care and experience to get right, from managing the people side to unpicking integrated IT systems, it’s a risky endeavour – but one which can lead to significant growth if done correctly.

As many companies grow into large organisations, some aspects may be overlooked or evolve into ‘non-core’ – particularly at times like these, when shocks can destabilise growth plans.

Here is where private equity firms can play a role: taking a once-loved but later non-core brand or business unit and carving it out of its parent, helping the vendor to deleverage and giving the carved-out unit the TLC it needs to shine again.

Inflexion has a long track record of supporting carve-outs, most recently with Rosemont Pharmaceuticals. The liquid pharmaceuticals business had 50 years’ experience and had grown to be the UK leader, but its listed parent company Perrigo was transforming to a more consumer-focused self-care company, thereby rendering Rosemont less core.

Rosemont management have confidence the Inflexion team will be a strong partner in the carve-out, given ample previous experience which management feel lends itself well to their plans of growing the product pipeline, licensing deals, M&A and geographic expansion. Take for example Kynetec, a specialist information and data provider to the agriculture and animal health markets which Inflexion carved out of its listed parent in 2016. Since then, management has been working closely with Inflexion on new product development, geographic expansion, new data delivery methods, and several acquisitions, most recently of Germany’s Kleffmann at the end of 2019.

It was a similar story at law firm Bedell Cristin, which contained a gem of an administrator, recognised by Inflexion because of its then-recent and very relevant success with Sanne Group, now publicly listed.

Inflexion worked to carve-out Ocorian, which has since gone on to complete six value-enhancing acquisitions, including the transformational add-on of Estera, completed in February 2020, to create a business with over 1,250 employees servicing over 8,000 clients globally.

The newly enlarged business just announced another acquisition in April, with the purchase of Luxembourg-based Allegro.

Such undertakings are complex at the best of times, and the story of British Engineering Services’ (BES) carve-out from Royal Sun Alliance (RSA) illustrates this.

The Manchester-based company is a provider of premium quality engineering testing, inspection and consultancy services whose customers benefit from state-of-the-art technology and online reporting systems. In late 2015, Inflexion worked with management to help carve it out from the Commercial Insurance division of RSA.

CEO Stewart Kay was introduced to a number of investors prior to choosing to work with Inflexion. “We met around seven or eight private equity firms who were all very interested in buying the business, but Inflexion came at it differently. While the others sent in a large number of people who mostly talked about themselves, Inflexion sent just two people who were clearly genuinely interested in our business. Prior to gaining exclusivity, they pulled together a sizeable pack talking about ambitions for the business and details for the carve-out, whereas others had a one or two-page plan.”

Ensuring success

Shortly after the carve-out of BES was agreed with Inflexion, Richard Houghton, former CFO of tech-enabled business processing specialist Xchanging, was appointed as Chairman, sourced from Inflexion’s network. “When I arrived, there was a legal agreement in place to carve the business out with a timescale of approximately six months to do the bulk of the work, including the transfer of staff and clients into the newco,” Richard explains. “We needed to start from scratch in areas such as finance, HR and supplementing the management team.”

Despite the challenges, the business ploughed ahead with strategic development and growth even as the carve-out was underway. Early on, Inflexion seconded a member of its staff to work with the BES team on evaluating an acquisition. Richard explains: “We didn’t have the bandwidth at such an early stage to focus on acquisitions, but having some Inflexion resource helped us to get it over the line.” Nortest was acquired shortly after the carve-out, allowing BES to thrive as an independent entity very early on. The experience and expertise gleaned from Inflexion on assessing such opportunities meant the management of BES were able to lead a second add-on acquisition themselves in-house.

“They have challenged us, but not put any additional pressure on the business,” Stewart says of the five-year partnership.

While still working closely together, the relationship is less intense now than it was at the beginning. Richard details: “Inflexion is now supporting us and guiding us with advice on an ongoing basis given their two board seats but there is less day-to-day involvement now we’re self-sufficient and so their input is more strategic than it was at the start.” Which may be how it should be, given the ‘big bang’ carveouts tend to entail at the outset. “Such a transaction is extremely onerous and there are risks involved,” cautions Richard, continuing, “so you need higher returns. But if you get it right, the rewards from a successful carve-out are very high.”

Such a transaction is extremely onerous and there are risks involved, so you need higher returns. But if you get it right, the rewards from a successful carve-out are very high.

Richard Houghton,

Chairman, British Engineering Services