A year on from it's launch, Stephen Edwards and Walid Fakhry, co-managing partners at Soho Square Capital, reflect on the firm's key differentiators, deal and fund activity in the last year and look forward to what's to come.
Published article by Jennifer Forrest, RealDeals.
You have both known each other for a long time, can you talk us through your relationship and the decision to form Soho Square Capital in 2021?
Stephen Edwards: Walid and I co-founded Core Capital in 2004. At the firm, we were focused on equity investing in growth companies to drive returns. We raised institutional capital in 2011, and then again in 2015, and then worked for a period under the ESO Capital brand, which enabled us to invest their capital as well. From 2015 onwards, our investment strategy had evolved into a growth credit strategy; a flexible capital solution for highquality growing SMEs and equity investment with senior capital. This strategy is an evolution of the more successful investments we had in earlier Core funds. That was how we evolved into doing what we do now.
A Soho Square deal is one where there are very good growth prospects, with a strong and resilient business model and critically, there is a founder or management team who holds significant equity. Whilst they may partially de-risk at entry, they really believe in the upside of the plan.
Our structures leave more equity in their hands, leaving room for further management incentive and, if their plans are achieved, it gives them a much greater share of the upside created than under a more traditionally structured PE deal. As a result of being senior or preferred in the structure, we have a lower risk profile than mainstream PE. We minimise equity dilution and leave control in the hands of the founders or management. This ensures a greater alignment with management, so there’s a very good transition from owning and managing a business to professionalising and scaling up that will ultimately lead to a variety of exit options for both them and us. We are true partners for the entrepreneur on that journey.
Walid Fakhry: Our process has a big element of self-selection. For the better teams that see themselves as making wealth from growing their businesses, they self-select to us, as opposed to other PE options. They’re the ones who want to take as little dilution as possible. Our view is that this is their business, and so the more equity they keep, the more incentivised they are to succeed. We are there to provide capital, support them to develop their business and help in finding solutions to problems.
What sets Soho Square apart from other new firms that have launched in the last few years?
Fakhry: It’s a competitive market, and you have to trust the team you’re working with. In our last two or three deals, the teams have chosen to work with us because they felt comfortable, and because we have demonstrated a willingness and ability to help them address the issues that they have.
We are more of a partner and advisor to them, and we’ve noticed a real appreciation for that by business owners. As these businesses are growing so fast, they’ve probably skipped very quickly over putting in place the right management and structures the business needs to grow to the next level. Alongside our capital, they need our help to get this right and develop a broader vision on what else they can do better.
Edwards: For many of the businesses we target, it will be the first time they would have raised capital, so while there has to be a pricing conversation, there’s also a conversation about how your time together will be spent.
We can provide an alternative to the typical private equity structure. Many businesses will be looking for pure debt solutions and banking solutions, but those come with a number of restrictions that you need to operate within. That won’t be suitable for every growth business, hence the appeal of Soho Square’s approach.
Fakhry: We see ourselves as a stepping stone that gives businesses longer to create wealth with lower dilution. That’s a really elegant fit into this section of the market, that doesn’t necessarily have a lot of capital being provided to it.
Can you talk me through your investment strategy and thesis?
Edwards: We are typically investing £15m-£40m. We are much more situationally focused than sector focused and we’re interested in the quality and dynamics of the teams we’re backing. I think you do need some focus to build on the particular expertise of the team in certain sectors, so we have a strong TMT offering, with people within our team with telecoms experience, including Walid, who was an entrepreneur himself. He founded and sold one of the largest internet services in the Middle East.
We now have three funds: two of which we carried over from Core Capital, now renamed Soho Square I and Soho Square II, plus our recent fundraise, Soho Square III, which closed last year. We now have £350m AuM with nine portfolio companies.
Fakhry: We see ourselves as influencers, rather than determiners. We don’t tell management teams what to do, but we encourage them on what choices they should make and also lead them to make better decisions.
Edwards: Our usual route at exit still varies between a trade sale or secondary transaction to a larger fund. It’s rare that we’d do an IPO. We are even refinanced out if the growth has been strong, and they might raise new capital to continue in a similar structure with a larger alternative capital provider.
Fakhry: We don’t drive the exit of these businesses, because it’s the owners and the managers who control them. We never want to be in a position to force a sale on a team. The businesses we back are going to grow quickly, that’s why we backed them. And when the day comes when our structure or capital is no longer the right fit, we can take a step back, and let the business grow further.
Soho Square had four months of investing before the pandemic hit. How did that impact what you were doing, and any new investments you were seeking?
Fakhry: We never saw Covid as a barrier. At the time, we were fundraising for Soho Square III and we quickly had to adapt to the new remote way of working and ‘meeting’ with investors, so it definitely presented some challenges, but we worked through them and were pleased to close the fund last year.
Deal activity did slow down a lot, but certain companies were able to continue to trade well and we have made some really good new investments during the pandemic. We spend our time before the deal closes interacting with the founder or management team, getting to know them and using the diligence process to kick start the strategy for the investment period.
Both Steve and I have been through the 1994 recession, dot-com boom and bust, and the GFC of 2007/8. By the time you get to the next crisis, you know the world isn’t going to end. You assess what’s the lasting damage. I can remember us seeing the 2007/08 crash coming about a year in advance, so we completely halted our investing then. You get to a certain mode of understanding how the world looks when you come out the other side and jump on the opportunities when they present themselves.
What’s your approach to ESG, and how do you implement it within portfolio companies as a minority stakeholder?
Fakhry: My masters thesis was in sustainable development. Albeit that was in the late 80s, but everything we were writing about back then, the industry is finally waking up to now. In our position as minority stakeholders, we don’t typically drive a lot of the policies that the company has. However, as part of the selection process we complete pre-deal, we make sure ESG is an important element of the business. If you’re trying to sell a business today, and you do not have an ESG policy in the business itself, you will not be able to attract the best investors to take it on. Advisors are playing a big role in communicating that with founders and management teams.
What do the next five plus years look like for Soho Square?
What are the biggest challenges you’re looking to overcome, and targets you’ve set to achieve? Edwards: We’re at the fairly early stage in getting minority investing viewed as a mainstream consideration to providing structured solutions, but we’re certainly getting more traction than ever before.
Fakhry: We have a good niche, and a strong team. We’re trying to help the market understand our offering - and a large part of that is educating the advisors as to where we fit. We don’t compete head on with other PE players but we provide an interesting alternative solution to founders. We think this style of deal potentially enables better deals to happen in the future.
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About Soho Square Capital
Soho Square Capital is an investment firm focused on providing flexible capital solutions, typically in the form of senior or preferred capital with minority equity stakes, to established and growing UK and European SMEs. Headquartered in London, the firm is led by a highly experienced team that has been investing together for over 15 years, through many economic cycles and have the expertise and flexibility to invest up to £45 million in any given transaction, across the capital structure, from senior debt to equity. The team works closely with business owners and management teams to structure innovative, bespoke financing solutions and offer enhanced portfolio company support.