Investing locally: Sarah Brereton, Keyhaven, on finding the right sponsors in niche markets

With much of the world still in turmoil, and private markets having seen a significant slow down in deals in recent years, there are still cause for optimism. We spoke to Sarah Brereton, Partner, Keyhaven Capital Partners, about how Keyhaven positions themselves within niche markets, finding sponsors locally and where she thinks the biggest opportunities for growth will be found in the coming years.

What transaction types do you do and why did you choose to focus on these in your strategy?

At Keyhaven, we are looking for local businesses. They're often niche market leaders that are pan European or international in reach, or maybe they have the potential to grow into that profile over a hold. To maintain this pan European lens and find the best deals, we believe you need to be local in each country.

To be truly local and achieve that goal effectively and efficiently, we partner with best-in-class local sponsors. They're often independent sponsors all around Europe and we monitor the independent landscape as it continuously evolves, and new sponsors emerge over time.

Then we co-underwrite the deals together. We have a flexible mandate, so we can look at new deals together or we can invest follow on capital in their existing portfolio companies. This allows us to do both transaction types and to focus on supporting the business, its growth plans, and the sponsor through leveraging our pan European network and insights from other investments.

Within this strategy then, what would you say are the keys to success? How do you make sure you get the results that you're aiming for?

The biggest thing for us is alignment. In all these deals, no matter what the transaction type, whether it's a new deal that we're co-underwriting together or a continuation solution or vehicle, there'll always be significant rollover from management or commitment from our sponsor partner.

This is great because you’ve got skin in the game, you've got alignment, but you've also got good pricing, as we're all buyers together. No one's a seller. This aspect is very appealing to us. Therefore, we're buying well and coming in at a nice entry point. Apart from that, the key is having a similar partnership mindset: Everyone needs to want to work together.

We’re also looking for clear and immediately actionable plans set by the sponsor, that we will then work with them on. Trust is a key part of that process. So, if it’s the second deal we’ve done together, we can look at something that might have not worked out or we passed on, and as a result know each other well. Our biggest questions will always be: Is this sponsor the right partner for the business? How can we support the plan through our network and experience?

What do you think 2024 and looking into 2025 holds for your end of the market and the general market? And are there any challenges you can predict or any sort of potential? What are the possible outlooks you're looking ahead for?

Even though there is a lot of geopolitical conflicts, interest rate uncertainty, it also feels like there’s a lot of positives ahead. We've been focused a lot on exits with our partners and have managed to generate significant liquidity in 2023. This continues to be our focus for the next 12 to 18 months.

We are currently seeing signs of a rebound in the M&A market, particularly in our segment. In the lower mid-market, there's always good deals going around that aren’t intermediated and are under the radar of mainstream private equity. The cheques aren't as big, so the deals are easier to do.

Were also seeing groups doing more deals together than previously. Sponsors are putting their heads together to make up for capital shortfalls and create strong value creation plans. They are choosing to find partners that can add value in certain places. We think that there will be more deals to be done over the next 12-18 months. Our deal flow is strong, it’s just a matter of sourcing the Keyhaven deals that fit our criteria.

How do you select which ones fit those criteria?

We look for niche market leaders that are resilient and defensive to economic shocks. Within this, we focus on key sectors where we have significant experience.

We’re big on healthcare services, and a lot of these are pan European plays and buy and build situations, for example dental clinics, radiotherapy centres and B2B diagnostics firms, which all have strong use cases.

We also focus on business services, especially areas where there is a critical service or product being provided. Often there will be a regulatory or compliance-driven demand. E.g. Grounds maintenance, events infrastructure

We also like manufacturing businesses that are providing key components to companies. E.g. the automotive value chain and precision engineering.

We are not afraid of consumer, but we focus on specialist consumer. We like themes such as the humanisation of pets and have therefore made two investments in this space.

That sounds like a really wide scope of businesses in your portfolio. How important is that diversification?

Our strategy is purposefully flexible, as diversification is important to us on many levels. We can do two transaction types, co-underwriting transactions or continuation solutions, that also opens the funnel, and we have a lot to choose from. As the years go on and markets evolve, certain sectors become more interesting, and have the flexibility to target these. We don’t have set diversification targets or rules as we feel this is not optimal.

For example, we like Northern Italy, where there are some interesting founder-owned manufacturing businesses. Similarly, we have focused a lot on agribusiness in Spain, driven off our belief in the healthy living trend which has driven accelerated consumption of produce like berries and vegetables globally.

We think local specialised knowledge is important when investing in niches and regions. To find these companies, we partner with the local sponsors. These groups are high performing teams, sometimes established private equity funds, but often independent sponsors that have spun out of larger groups. There are a lot of creative and entrepreneurial people in our segment of the market – this is key for us and our conviction on deals. Our founders are entrepreneurs themselves and that spirit is a key differentiator of Keyhaven. It creates significant alignment between us, our sponsor partners and the management teams we work with.