19th January 2023
Chris Kay, Investment Director, recently spoke with Paul Francis-Grey, Editor at the Actum Group to discuss our approach to value creation for portfolio company Codestone.
The full interview can be read below:
London-based software and services private equity investor, FPE Capital, has placed M&A and an improved pricing policy at the heart of its value creation strategy for portfolio company, Codestone. The company is based in Dorset, south England and has been in business for over 25 years.
Codestone provides ERP implementation, support and hosting services to UK SMEs, focused on SAP’s middle market BusinessOne and BusinessByDesign products and is a Gold Standard Microsoft partner. Since acquiring Codestone in March 2021, two bolt-ons have been made. In May, it acquired SAP ERP, Analytics and CCH Tagetik EPM specialist Clarivos. Codestone expects the acquisition will generate £10m in incremental revenue and £2m in incremental adjusted EBITDA in the first 12 months.
Six months later, it added DSCallards which strengthens Codestone’s business intelligence, data analytics and data strategy solutions and services. This will bolster Codestone’s digital platform capabilities and strategic value-add around its core ERP, and EPM portfolio.
Codestone has a heritage in the applications market, particularly around finance and reporting systems. Together with Codestone’s management, FPE saw the opportunity to add analytics and business intelligence capabilities onto Codestone’s core business offering.
“One of the core focuses of our investment in the company, and the rationale for the founders to want to take institutional money, was to support them in a selective M&A strategy,” Chris Kay, Investment Director at FPE, said. “We shy away slightly from volume-driven buy and build plays. We want to think about strategic M&A, broadening out skill sets and product sets and creating bigger more robust but more interesting companies to our customers rather than scale for scale’s sake.”
Digestible M&A Strategy
Shawbrook Bank supported FPE via a debt financing package on their initial partnership with Codestone. This package includes an incremental facility that holds ringfenced capital to support Codestone’s growth plan.
FPE and Codestone earmarked three areas to strengthen via acquisition. These include enterprise resource planning solutions (ERP), Business Intelligence and Analytics, and end-to-end Cloud IT solutions. The first two of these have been addressed as a result of acquiring Clarivos and DSCallards, Kay explained.
“We want to make acquisitions that move the dial, but are digestible,” Kay said. “While we do not have a set budget we typically spend on bolt-ons, we will provide as much capital as the company needs to continue its growth journey.”
Upon its investment in Codestone, FPE communicated to the market that it was in the hunt for acquisitions and has been managing the identification and outreach of targets alongside management. It has supplemented this approach by retaining the services of M&A boutique, Quercus, to build an acquisition pipeline. FPE has worked with Quercus on previous deals, Kay said.
Integrating Clarivos into Codestone was largely undertaken during the summer using internal integration teams, and the DSCallards’ integration follows suit leveraging best practices and lessons learned from the Clarivos integration programme.
Codestone has 700+ customers across several product lines. Adding Clarivos and DSCallards to Codestone will further grow the company with Kay citing 1,000 customers as a realistic target. Codestone has already doubled in profitability since FPE’s investment, while Clarivos and DSCallards were growing by 75% and 40% respectively before being acquired. They will provide upsell and cross sell opportunities to further boost the now enlarged company’s revenue.
Staff numbers have grown to 230 from 120, with Clarivos adding 70 staff to Codestone’s workforce, and DSCallards 11. Investment is being heavily concentrated on operational opportunities and adding more senior leaders in the company. This is all being done against a backdrop of growing the business 20% per year, Kay said.
Soon after acquiring Codestone in early 2021, FPE set about bringing in a new Chairman, Don Grantham, who bought with him a wealth of experience and expertise in the field having previously been President of Central and Eastern Europe for Microsoft.
FPE has an internal talent capability that manages an extensive network or access to a network of senior people with sector expertise that stretch across Chairs and CFOs. FPE additionally recruited Sam Bursey as CFO of the Codestone Group from its network. Bursey has ample M&A integration experience having previously worked at serial acquisitor, Capita, Kay said.
FPE’s internal talent network has helped Codestone identify the appropriate recruitment agencies to help fill new senior, non-C level, staff roles that specialise in the software services sector and are regionally close to the company. FPE also works closely with a human capital and organisational expert Steve Wycherley at Continuum who works with its companies in a management due diligence capacity to help identify the dynamics of an individual that would fit in the working culture and bring the necessary skillsets to that business.
FPE’s niche field of investing in software and software services SMEs allows it to better recognise the strengths of a business in this sector.
Kay said. “We knew of Codestone for a long time prior to investing. We think through our key go-to-market strategies in clusters and the ERP implementation world in which Codestone sits is a key cluster for us. We were previously invested in a company called The NAV People, which is a pure Microsoft Dynamics implementations support house. That allowed us to get up to speed with what the value creation levers in a company like this are, even before we sat down the team.”
Third party benefits
FPE often uses Intechnica for technical due diligence ahead of its investments and retains them throughout its journey with a business. FPE sees the benefit of using such consultants throughout the lifespan of an investment to assess our progress and ensure recommendations made at the beginning are being carried through successfully. They will also suggest further proposals given its familiarity with the business already, Kay explained.
In addition to its two core value creation objectives of pricing and M&A, FPE has also supported Codestone's investment to drive forward its marketing with the launch of a new website. ESG is another area it has been active in. Codestone has become a net zero company since FPE’s investment. It appointed The CarbonNeutral Co. to help with this exercise.
Code of conduct
Given FPE’s specialisation in software and services businesses, it is keen to cross-pollinate some of the methodologies and projects applied in other portfolio companies it runs. One such example is that of helping gauge and address Codestone employee sentiment through a ‘Pulse Survey’, which it took from FPE portfolio company, 60 Decibels.
Kay said, “Many of these companies are going through similar stages of growth and addressing the cultural element of this is a very important facet of companies that are scaling up. Having run a similar pulse survey after Clarivos was integrating with Codestone we found very positive results,” Kay said.
“FPE works as a first institutional investor in many of the companies it backs. We help businesses professionalise in terms of people, processes, systems and strategy. We have found there is a very rich stream of capital that sits directly above us in the mid-market,”.
Of the five companies it sold last year, one went to a strategic buyer; two were secondary sales to private equity houses; the other two were sold to PE-backed trade companies.
"We have found PE-backed trade is the best of both. They are experienced, M&A ready, M&A hungry and on that strategic trajectory. They also allow management teams to participate in that equity rollover and continue to grow their business within that larger platform.”