On the face of it, Star Capital Partners (Star) – led by chief executive officer Tony Mallin – has little reason for ceasing to raise closed-ended funds. After all, since the firm was launched in 1999, the two vehicles of this type that it has raised – the first totalling £580 million (€709 million; $963 million) and the second £800 million – have delivered an internal rate of return (in cash realised and asset valuations on a gross basis over 14 years) of approximately 73 percent.
But Mallin hints that, in spite of this, dealings with limited partners have sometimes been difficult. He relates that the £800 million fund, which closed in 2006, could have taken £1.5 billion. “But I didn’t want to take money I couldn’t invest,” reflects Mallin, seated in Star’s new headquarters in Piccadilly, the famous London thoroughfare (to where the firm recently moved from nearby Cavendish Square).
“That was a good time to raise funds but not a good time to invest them,” he continues. In fact, it was such a poor investment climate that – some four years later – only a small amount of capital had been put to work. At that point, Mallin “saw better value” and the bulk of the fund was deployed. The return figure quoted in the first paragraph suggests that Mallin knew exactly what he was doing – but he concedes that investors grew frustrated at having committed fees with few deals to show for the money.
GETTING OUT OF BEDS
There is at least one other reason why Mallin is uncomfortable with the closed-ended option. “With some businesses you want to own them forever but, with a fund, you have to sell,” he says. As an example he points to Alloheim, a German operator of care homes that Star sold to Carlyle Group in August last year.
Star had originally backed two “very good managers” who successfully built the business up to 6,000 beds over a period of six years. But the trend which made it a compelling deal in the first place – the billions of euros that need to be spent on care for an ageing population – is set to continue well into the future. “It’s a low-risk growth business that ideally you would want to hang onto for the next 10 years – but with a fund, you have to cash in,” Mallin points out.
Unsurprisingly perhaps, in light of the above comments, Mallin is toying with the idea of permanent capital through a listed vehicle – citing UK-listed engineering firm Melrose Industries (with its “buy, improve, sell” mantra) as a possible model for Star to follow. However, he notes the “very public disclosure” demanded of listed funds and insists that all options remain open.
Indeed, another avenue Mallin is exploring is proceeding on a more informal, opportunistic basis. This would involve “using some of our own capital from the last 15 years to do a few deals, bringing in friends and co-investors on a deal-by-deal basis”. He insists this would give him “more flexibility” than a fund. He comes across as something of an entrepreneur and risk taker, to whom this kind of freedom is important.
He also appears to be a bit of a dab hand at investing outside the restraints of a fund. For example, he was a founding investor in Benugo, the UK restaurant and café chain, when it had only one location in London’s Clerkenwell Road. When the business was sold to catering firm BaxterStorey in 2008, it was delivering turnover of around £25 million and had 20 outlets across the capital (in 2013, Benugo’s turnover had accelerated to £56.5 million).
ON THE RISE
Whatever model of investment Mallin chooses going forward, nothing is likely to faze him as much as having to put his life savings on the line when raising Star’s debut fund back in 1999.
Prior to that, Mallin had enjoyed a meteoric career rise. He joined London merchant bank Hambros to work in its leasing and structured finance business in 1977, soon after leaving school. When his boss left three months later, Mallin picked up his file and “made some deals happen”.
So successfully did he do this that in 1981 – at the tender age of 26 – he was being packed off to Australia to launch a structured finance subsidiary. “That was like a holiday,” he recalls. “I worked hard but I went to work on a ferry looking at the Opera House and Harbour Bridge and it was all a bit surreal after living in Highbury [north London].”
On his return to London, and still in his 20s, Mallin was made “one of the youngest-ever directors who wasn’t a [Hambros] family member”. He took up the reins of a “relatively small” leasing operation in London which “over the following 10 years became one of the biggest structured finance businesses” in the capital. He then became a vice chairman on the PLC board and “was responsible for most of the risk assets on the balance sheet”.
But Mallin’s upward ascent was halted by forces out of his control, when French bank Société Générale acquired Hambros in 1998. Following the takeover, Mallin’s business was split up and allocated to various SocGen divisions. After assisting with the integration process for nine months, Mallin departed – to face what he describes as “a critical point in my career”.
He had offers from investment banks, he says. What he doesn’t say – but is surely true – is that these offers were highly lucrative. It’s fair to conclude then that his decision to try and set up his own business was a brave one. However, having helped to establish Hambros European Ventures (now Duke Street Capital), he could point to past success at launching a start-up.
‘SLOW ON THE UPTAKE’
Given his past experience, a venture capital or private equity fund might have been the obvious choice, but Mallin was setting his sights on something else. “I saw a niche before the likes of Macquarie in real assets, but I was a bit slower on the uptake and perhaps more careful,” he says, smiling.
He concedes that asset-based businesses were viewed as “very unfashionable” at the time. “Private equity was about cash flow businesses, and capital-intensive businesses were shunned as a waste of equity,” he recalls. Not only was he defying conventional wisdom, he was also living off his savings. For an unemployed period of 18 months to two years, he travelled widely, spending time with “successful investors” such as Ian Cumming and Joseph Steinberg of US holding company Leucadia National.
“I wanted to understand why they were successful,” says Mallin. “All the people I spoke to had started with asset-based investments where there was not much downside but significant upside. I was trying to work out what the common denominators were amongst successful investors.”
At the same time, Mallin was engaging in conversations with institutions he had developed relationships with about providing backing for a first fund. He says that AXA and Prudential were both interested, but RBS was the only one prepared to put up money in exchange for a hands-off role – thereby allowing the business to be genuinely independent.
In 1999, RBS (“before it was a very big institution”) committed £100 million on the condition that Mallin was able to raise a further £200 million. With no income – but with employees, lawyers and a fundraising process to pay for – Mallin went knocking on doors. Unfortunately, many of those doors remained shut. This was the height of the dotcom boom and anyone not talking the high-tech jargon of the day struggled to be understood.
Mallin recalls: “I started presentations and said ‘I can make you a return of 20 to 25 percent from real assets’, and someone would stop me after about five minutes and say ‘we make 25 percent a week here. What’s your internet strategy’?” Even for a character as apparently calm and unruffled as Mallin – who has the ability to fix you in a slightly unnerving stare before revealing a disarmingly warm smile – such experiences would have been testing.
He concedes it was the “low point” and that, while he firmly believed the dotcom bubble would burst eventually, he had no idea how long it would take. Luckily, he didn’t have to wait too long – the world caved in on internet-based companies in the summer of 2000 and people “started to wake up”. Suddenly, the momentum was with Mallin. Not only did he reach his £300 million minimum target, he almost doubled it – wrapping the fund up on £580 million. The fund ended up doing “extremely well” Mallin reflects.
THIS IS NOT RETAIL
So what’s the hallmark of a Star investment, and how has the firm delivered the level of return referred to in the opening paragraph? As a first step, Mallin looks for businesses whose offering – whether a product or service – is not just something customers like to have, it’s something strategic that they simply cannot do without. “So it’s unlike retail, where you hope the customer turns up tomorrow but you don’t know,” says Mallin.
He adds that Star also targets assets “where the downside is limited so your capital is protected, and there are levers you can pull to create an upside”. As an example, he cites Blohm + Voss, a marine industry business acquired from Germany’s ThyssenKrupp in January 2012.
The business was known for building super-yachts such as the Eclipse, the world’s second-largest luxury yacht, owned by billionaire Russian businessman and Chelsea football club owner Roman Abramovich. However, says Mallin, underneath this cherry on the cake which has been a graveyard area for investors were “three other businesses, one of which had all the hallmarks we look for and underpinned the entire value of the business”.
This hidden jewel was Blohm + Voss Industries (BVI), which makes seals used in ships’ propulsion systems. “There are only three businesses in the world that make these things,” Mallin points out. “So it had 30 percent of the world’s shipping as a customer. Ships need to be tested for seaworthiness every three or four years and, during that process, they have to have all their seals changed. So one-third of the world’s ships had to come back to BVI on a repeat basis. We had cash flows as far ahead as the eye could see.”
In January this year, Star sold BVI to Sweden’s SKF Group. It retained control of Blohm + Voss’s shipbuilding and repair businesses.
‘POLITICIANS LOVE IT’
One deal which is now front of mind for Mallin is ElecLink, a joint venture that Star established with Eurotunnel in May 2011 to develop a 1,000-megawatt (MW) electricity interconnector between the UK and France. The link, which will be 75 kilometres long and run through the Channel Tunnel, is intended to provide greater energy security, optimise energy production across Europe and counter supply volatility associated with renewable energy development.
“The politicians love what we’re doing,” Mallin says of ElecLink. “We’re reducing the need for additional generation in the UK and France. The link will cut carbon emissions and make it easier to reach emission targets.”
But while the politicians may like it, ElecLink – at least as a stellar investment proposition – may yet fall foul of the regulators. Star has applied to the relevant regulatory authorities – CRE in France and Ofgem in the UK – for the interconnector to be viewed as a merchant asset rather than a regulated asset “as it’s a private sector punt with hundreds of millions of euros at stake and we should be rewarded for that”. The potential return for a merchant asset would be significantly higher.
The application has progressed through the public consultation stage at which industry feedback is sought, and Star has been promised a response from the regulators by 18 March.
One further question that seems relevant right now is how does Mallin define the business he has created? Its high return figure and the complexity of target businesses means it does not sit obviously within the infrastructure universe. There again, the firm has invested in orthodox infrastructure companies such as Eversholt Rail, the UK rail rolling stock business which Star acquired together with 3i Infrastructure and Morgan Stanley Infrastructure Partners in December 2010.
In Mallin’s view, Star is a real assets investor and is also a kind of “pre-infrastructure” investor. He explains: “The core of what we do is real assets investing where you can lengthen the cash flows, broaden the business and de-risk it. When you do that, you transform it into something that looks like infrastructure. You take a real asset and you anaesthetise the risks that infrastructure investors don’t like.”
As an example, he references once more the interconnector. He relates what he describes as the “very difficult process” Star has undertaken: risking capital to create the connection; agreeing the grid connections on either side of the tunnel; linking into the national grids; and applying for a regulatory exemption. Infrastructure funds would not want to go through processes like that, he contends. But, at the end of it all – with the connection built and supply contracts agreed – Mallin envisages the creation of what effectively becomes a long duration, low risk utility that infrastructure investors would be entirely comfortable with.
Mallin himself is not one for the comfortable life. A boxing enthusiast (he sits on the board of the British Amateur Boxing Association) and accomplished rower, he appears to be always on the lookout for the next challenge. Having discovered the right type of businesses to invest in, he’s now looking for the right way to collect and invest the capital. The aim, above all, is to keep Star in the ascendant.