Stuart Paterson, a Partner at Scottish Equity Partners (SEP), shares his thoughts with Kreos on the current European growth-stage technology investment environment. Stuart is one of SEP’s founding Partners and has been responsible for a number of SEP’s most successful information technology investments including Bluetooth chip leader CSR plc, Gigle Networks, acquired by Broadcom, and Skyscanner, the world’s fastest-growing flight search business.   He has a particular interest in new investment opportunities in software, including internet services. Stuart was non-executive director of managed data centre provider ControlCircle until its acquisition by AIM-listed Alternative Networks, and currently sits on the board of Europe’s largest on-line multi-channel eyewear retailer Mister Spex.
SEP invests up to £20m in high growth technology companies across the UK and Europe. The team has a successful track record spanning 20 years investing in more than 150 innovative companies and realising over 110 investments.  The firm has significant funds under management, from an impressive blue chip investor base, and has recently broadened its range of funds with the closing of an infrastructure fund offering finance for small scale clean energy projects.
Kreos and SEP have had a long-standing relationship over many years. Investments we have worked on together recently include
¨ BioVex – Kreos provided €3m of growth financing. BioVex focused on the development of a cancer vaccine and was acquired for $1bn.
¨ Kiala –  Kreos provided €5m of growth financing to this Belgian based delivery and return parcel service. Kiala has now joined the UPS group.
¨ Mister Spex – Kreos provided €12m of growth and acquisition financing. Mister Spex is the leading online European optician and recently closed a $40m round led by Goldman Sachs.
You have successfully invested in a number of growth companies over the years: tell us a little bit of your current investment focus.
As one of the most established European growth capital investors we have invested in over 150 companies over the past 20 years. And accordingly we have had experience in most areas of technology, which is a main area of focus for us, as well as other growth investors.
Our core sectors include IT, Healthcare and Energy.  The key challenges are always the same: the pace of growth (it is a marathon not a sprint), scaling challenges and building great teams.  It is in these areas where an experienced investor can add value.
In the IT space we are big fans of the Consumer Internet sector due to its capital efficiency and scalability. We like to balance these consumer investments with investments in the Enterprise space which include SaaS software companies such as SSP, Intelligent Reach and SocialBro and tech-enabled services such as Control Circle which we recently very successfully exited, and the UK’s largest Private Data Centre business Pulsant.
 
Where do you see the most attractive growth opportunities in Europe at the moment?
I think different regions of Europe have their areas of expertise, though not all of them suit our investment focus.  We are very active in Scotland, the North of the UK and London, and in terms of European cities we like the B2C activity in Berlin and have a good network as a result of our Mister Spex investment: we see ourselves making more investments in Berlin.
SEP has been able to establish itself as a successful growth investor in Europe: what is the secret sauce that you have applied?
Through up-cycles and down-cycles, investing in private businesses is a long-term game. This needs patience and a supportive investor with experience who plays a proactive role in the growth of the business.  It is a journey which can take many years so the key is the trust and the relationship between management and the investor. Other factors to get right are the pace of growth, the development of the senior team as well as the financing and exit strategy Рwhich is where having an experienced and level-headed investor makes the difference if you are playing for a large outcome.
Kreos and SEP have worked together since 2002: how has your thinking around applying growth debt evolved over the years?
I think having growth debt in the tool bag is useful to improve the investor’s and management’s returns in the right situation.  Where capital is needed for profitable M&A, for working capital or to get to a key value-driving milestone, a pure equity structure may not be an efficient capital structure. Traditional lenders struggle with dynamic business plans and with companies’ lack of track record.  In addition tight lending covenants are not appropriate for many high-growth companies.  This is where Kreos can really help.  I have been impressed with Kreos’s ability to deliver and with its flexibility.  It is a relationship we really value.
Let’s look at a more recent joint deal like Mister Spex: what was the reason you decided to bring in debt into the financing structure and Kreos as a partner?
Mister Spex were looking to buy a profitable Swedish business with a limited trading track record and we needed to move quickly.  We had a strong equity base but a pure equity structure would not have been the most efficient structure for the acquisition.  Kreos was able to move quickly, and as  a major European growth debt provider they had the debt capacity we needed (up to €10-20m), and we valued the trust-based relationship that they would deliver on the deal, as well as be easy to deal with post-acquisition. We were right on all counts.
What are you looking for in a growth debt partner and how do you see the differences between working with banks and growth debt funds?
Traditional debt lenders and equity providers can end up being on the opposite side of the table, with traditional bank lenders becoming unpredictable if cash or EBITDA priorities change due to changes in the market, new growth opportunities or M&A.  I find with Kreos they are much more aligned with the investor and work as a team to get the right outcome for the company as well as for the debt and equity providers. They understand the dynamic environment of high-growth companies and this experience is critical.  The capital is more expensive than debt with tight covenants, but cheaper than equity and the flexibility debt funds provide is very helpful to the company and investors.
