Investment Strategy

Root Capital emphasis on Private Equity means that targets tend to fall into one of the following categories

small listed companies which have fallen beneath the radar of capital market institutions
non-core business units within larger groups
non-performing portfolio companies of private equity or corporate venturing funds

Historically, the private equity industry has made very high returns by gearing up businesses, and managing their cash flow generation more tightly. We believe that this approach on its own will generate much lower returns in the future, because there is more money chasing few targets and vendors will demand higher prices.

Our approach is very different. We focus on situations where there is potential, and a clear game-plan, for driving through major operational change to the underlying business that will significantly enhance its value over a three to five year timeframe. Typically, we like situations such as the following:

Turnarounds

Businesses with revenues of at least USD 5 million, and preferably over USD10 million, which are losing money, in financial distress and are perhaps under the control of their bankers or an administrator/receiver. Morale may be low, customers may be defecting, and a lack of focus and direction is likely to be hampering progress. We acquire the business and invest the capital and the expertise to enable it to turn the corner, restructure and gain a new lease of life.

Off-shore

Many support services businesses in the UK and Europe have a large number of employees executing routine administrative tasks. Our strategy would be to move these processes off-shore to low-cost countries such as India, thereby significantly increasing margins while maintaining, or even improving, service quality to customers. Root’s partners have prior experience of implementing a move to off-shore supply in a number of businesses.

Roll-ups

Fragmented sectors where there is a clear economic rationale to acquire and merge a series of subscale businesses. We will acquire one business, even a small one, to use as a platform to buy others and create a single business of critical mass. Provided economies of scale exist and can be achieved, then this type of deal can deliver high returns.

Climbing the value chain

Even businesses that offer low value added services and make unattractive margins could be of interest to Root, provided they have a large base of loyal customers. Our gameplan will be to implement the operational changes needed to sell higher value-added and higher margin services to the existing base of customers. This would create a step-change in value by not only boosting profits but also re-rating the company.

Carve-outs

Large corporations often have highly evolved internal functions providing services to the rest of the business. It can be possible to take such a function, spin it out into a separate newco, win third party business and create a whole new business and profit centre from scratch. Root will provide the capital and managerial talent to make it happen.

Acorns to oak trees

Early stage companies exist which may offer a great product or service, but perhaps to just one or two customers. If the average customer contract size runs to hundreds of thousands of pounds per annum, then these businesses can be transformed just by winning a relatively small number of new customers. Root’s game-plan would be to use our sales know-how, personal contacts and capital to make this happen.

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