Thursday 27 October 2016

'No matter the challenge, our job is to go out there and find the opportunities'

Private equity funds drive today's business environment says John Dolan of Cardinal Capital. He spoke to Group Business Editor Dearbhail McDonald

Published 02/10/2016 | 02:30

John Dolan by Jon Berkeley
John Dolan by Jon Berkeley

There's a dire scene in the movie Pretty Woman where corporate raider Edward Lewis (played by Richard Gere) undergoes a miraculous conversion aided by prostitute Vivian Ward (played by Julia Roberts) where Lewis decides to save Morse Industries instead of tearing the company apart and selling it off for a profit.

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The asset stripper turned equity saviour sub plot is almost as mawkish and unrealistic as the main love story in the romcom.

It sees Gere's character Lewis, who tells Ward that his job is to "screw people for money", fulfil a childhood dream - in less than a week - of "building things" instead of tearing them down.

It was a happy-ever-after of a corporate kind, with new-found white knight Lewis completing the virtuous circle when he leaps from his white limousine and rescues Princess Vivian.

Hollywood has a lot to answer for.

However, Pretty Woman (the corporate part at least) gets - in its own schmaltzy way - to the heart of the debate over private equity.

Do private equity funds want to grow the companies they buy or are they in it for nothing more than a dastardly smash and grab?

Is private equity a force for public good or should we hold on to our businesses for dear life like Bull McCabe in The Field?

I decide not to share my Pretty Woman metaphor when I meet John Dolan, the soft-spoken managing director of private equity with Cardinal Capital Group, Ireland's leading alternative capital provider.

The group provides private equity capital, mezzanine finance and other alternative or shadow lending to a broad range of sectors in the Irish market, including the property sector.

Private equity funds, Dolan admits, are not universally loved or, he argues, well understood.

It's their investment in distressed Irish property assets that has garnished a particularly bad name for private equity funds in recent times.

This is not least because they have been trading - entirely lawfully - in Irish distressed assets, including domestic mortgages, on a de facto tax-free basis. The Government has moved to restrict Section 110 and has also spooked Ireland's investment and advisory community with threats to review other tax neutral structures used by private equity funds - including Ireland's newest fund vehicle, the Irish Collective Asset-management Vehicle (ICAV).

I meet Dolan to discuss the activities of Carlyle Cardinal Ireland, a 50:50 joint venture between Cardinal and the Carlyle Group, the US global asset manager.

The CCI fund, at just under €300m, is the largest private equity fund focussed on investments in Irish SME and mid-market companies, investing between €5m and €50m in each investee company, with co-investment available for what CCI describes as "larger tickets".

The "sector agnostic" fund comes with huge backing by the Irish Government, with some €125m in funding from the Irish Strategic Investment Fund (Isif).

It's an interesting time to meet Dolan, as the all-island fund, which has a 10-year life cycle, has now deployed about half of its funds.

The CCI has, in its first three years, invested in seven businesses, many of them household names such as chocolatier Lily O'Brien's, consumer payments company Payzone Ireland and Carroll's, the eponymous ham maker.

In recent months, the fund made its first steps across the border, investing in Learning Pool, the Derry e-learning solutions provider.

And just last June, it acquired AA Ireland, the motor and car insurance provider which recently announced its entry into the Irish life assurance market, for €156.6m

The case studies and the growth of the Irish companies the fund is investing in are, says Dolan, helping to overcome a cultural resistance amongst Irish businesses to private equity.

"I think the fear lies in understanding what private equity is and what type of private equity is available," says Dolan, who trained as an accountant with Deloitte after studying commerce at UCD.

"Our fund is set up with a growth mandate - so we take companies that are growing already and try and accelerate that growth plan, versus other private equity plans that have different ways and styles about getting that return.

"It's also a bit of an Irish The Field mindset of 'I'd like to own everything'."

The return CCI (an exclusively growth capital fund which does not back start-ups) expects from its investments is not for the faint hearted. The fund aims to double a business within five years, with high expectations and potential rewards for companies that agree to go on the private equity journey. Dolan says it is the job of the fund, as an investment partner, to bring established companies to the next level. And to ensure it does, a representative of both Cardinal and Carlyle automatically join the board of an investee company.

The fund also carries out extensive local market research and relationship-building with management teams and advisors to ensure its stars - their management team's goals and that of the company - align.

Competing with US and UK private equity companies, Dolan says it is CCI's 10-strong team's local knowledge and contact base that distinguishes it from potential rivals.

"We are the largest fund locally," says Dolan, who sits on several investee boards and spends his weekends fielding calls from his new entrepreneur colleagues (in between refereeing underage football games).

"That and the level of activity that we have done, that's our unique selling point. People are wary about investing, particularly where there is no local presence on the ground.

"Everyone relies on the local relationship, so we spend a lot of time not just meeting the management and companies, but also advisors to find out what's going on and who we should be talking to."

Dolan's conversion to private equity was completed after a lengthy career on the advisory side. After graduating from UCD, he trained as an accountant and advised on a series of major deals with Deloitte Corporate Finance and later with NCB.

He was the lead investor and director in a number of Ireland's fastest growing tech companies including AMCS, Helix Health, Fenergo (which secured $75m from Insight Venture Partners last year), and BriteBill (which last month was bought by Nasdaq-listed Amdocs for €80m).

At NCB (renamed Investec in 2013), he was a partner in Investec Ventures, its venture capital fund and was a key member of the team that sold 50pc of the Mater Private Hospital to UK private equity firm Capvest in a deal reported at the time to value the group at €350m.

Earlier this year, Carlyle Cardinal was one of several groups reportedly shortlisted to bid for the Mater Private - a feat which would have capped a remarkable cycle for Dolan.

Dolan has an uncanny knack of riding the waves of the economic cycles: during the crash years he was investing venture capital in start-ups.

"We still had the excitement of entrepreneurs coming in and pitching to you on a daily basis - it was pretty uplifting. You were reading about terrible things on the way into work, but then you were meeting entrepreneurs and the freshness of that kept you sane during that period."

Dolan is effusive in his praise for Ireland's entrepreneurs whom, he says, have an unrelenting dedication and focus.

"There is a trait across entrepreneurs, they're on it 24 hours a day. I always wonder about their family lives," says Dolan, who himself is out on the road for most of the week and is nonchalant about the intrusions into his personal life.

The sports fanatic and married father of three is also a big fan of Government agencies, such as the IDA and ISIF, which, he says, have maintained funding for Irish business through the worst phases of the economic cycle.

Bullish about Brexit, he says the decision by Britain to leave the European Union presents as many opportunities as it does challenges.

"Our job is to go and find opportunities, no matter what challenges come," he says, adding that investors are doing a lot more sensitivity analysis since the poll.

"If there weren't things like Brexit, everybody would be doing what we are doing and seeking other opportunities.

"Ultimately, we still have to come down with a view on that. That means we may not pursue just now or it may mean that now is a really good time to pursue - and we might acquire a UK business."

However, Ireland's new experiment with a minority-led Government is a matter of concern for international investors, according to Dolan.

Political stability was a given in Ireland, even during the bailout programme, but international investors are "keeping a pretty close eye on that at the moment", says the financier.

"I don't think it [the current Government] is a hard sell, but it has changed," he says somewhat diplomatically.

"This is the first Budget with a minority-led Government. We don't know how this is going to pan out - and I think people are watching that to see will they be able to carry it through and will they be able to make decisive-enough decisions."

One decision Dolan wants to see implemented is a reduction of Ireland's Capital Gains Tax to UK levels as part of the forthcoming budget.

The CGT rate on profits from asset sales was 20pc before the financial crisis: now it's 33pc compared to the UK's 18pc.

"On the advisory side, you do a transaction and move on to the next one," he explains.

"The most interesting part is investment and working with the management team to see how that plan evolves over time.

"The transaction is interesting in its own dynamic, but its much more interesting seeing how does that company grow after that?"

Dolan says Irish banks have also been hugely supportive of the CCI's growth agenda: all seven investments have been banked locally across all the main banks.

"We are giving the banks huge confidence," he says.

"If the business is cash generative and steady, the banks that are looking to deploy money to grow their own books again will be keen to deploy money in those circumstances.

"If you are at the other end of the spectrum and you are in turnaround mode, they're probably still scared.

"If a business just keeps taking on bank debt and doesn't take on any equity, then the bank are much higher up the risk chain. If something goes wrong with any of our businesses, we'll take the first hit. That's why we are looking for a higher return level than they are."

'I’m aged 40 and still expecting the call-up'

In my time off, you would generally find me...

“Somewhere with the family (three kids — one boy and two girls, aged eight, six and four). Part-time as their driver, part-time entertainment. Any spare time after that is sports time. Our house is sports-mad — rugby, football, GAA, golf, racing...”

The last book I read was...

“Dub Sub Confidential by John Leonard. It’s a behind-the-scenes look at the Dublin GAA football team.”

If I hadn’t gone into the world of finance I might possibly have been...

“A professional footballer. I’m still expecting the call-up... at 40.”

The last great meal I had was...

“At The Duck restaurant in Marlfield House down in Gorey, Co Wexford. I remember it well — it was the night before my brother’s wedding earlier this year.”

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