TWO’S COMPANY: PAUL SMITH AND RICHARD KILNER OF SHS GROUP
Paul Smith, the founder of SHS Integrated Services, welcomed Chairman Richard Kilner to the company in September 2012 when BGF invested £5.4m in the South Wales-based industrial scaffolding group.
I’m extremely proud of what SHS has achieved to date. SHS principally work in the utility sectors with technically demanding scaffolding structures for clients in the petrochemical, oil and power generation sectors. It offers a multi-disciplined service in a highly regulated sector and we deliver it with a quality of client service that well exceeds the industry norm. We can count a number of blue chip companies in our client base including Dow Corning, MURCO, ALSTOM, Laing O’Rourke, Balfour Beatty, Shaws and Interserve to name but a few. We have grown at around 40–50% over the past few years and we currently employ around 180 people from six sites across the UK. Achieving such growth in a competitive sector cannot be underestimated; it really is a challenging environment for a small private company given the competition that we face from the large national companies.
After leaving school, I went to work on a building site with my father and, strange but true, it was there that I developed a passion for scaffolding. I went on to gain valuable experience with a number of large national scaffolding companies but gradually realised that these companies couldn’t offer me the progression that I ultimately wanted. So 15 years ago, I started SHS.
It’s not all glory owning your own company – there are ups and downs, and blood, sweat and tears. It’s important to stay agile – each year brings different opportunities and you need to ensure that as a businesses you are responsive enough to capitalise on them.
One of the challenges in the construction sector is to find the right kind of work to achieve organic growth. Price is all-important but we want customers to appreciate what we do to make the job a success. Quality and safety are key, and an intrinsic part of the service that we offer. You need to fill the order books with profitable work, while also recognising that the largest framework maintenance agreements, which can help you do that, may only go out to tender every two or three years.
One of the important turning points for SHS was securing a major power station contract in West Wales, Europe’s largest new build Power Station at the time. This was a significant contract win for SHS as it demonstrated our ability to successfully deliver on a prestigious project but more importantly gave us the opportunity to expand our service offering to include insulation services.
Growth brought with it constraints on working capital. Typical debtor days in this sector vary from 60–90 days and with payroll burdens in excess of £1m a month (at its highest), the business was faced with certain challenges that it had not encountered before.
We talked to several organisations about financing, but BGF impressed us most. We felt their overall offer (outside of the initial cash injection) would best suit the management team in achieving its business plan whilst providing a strategic voice on the Board. It has also been very helpful to have their presence on the Board; contributing the right blend of experience and talent to a business is another challenge that rapid growth brings with it.
BGF made the introduction to Richard Kilner, who is now our non-executive chairman. His background in industry and finance, international experience, and a history of working with other Welsh companies was impressive, but we only appointed him after we’d interviewed him. He was focused and intelligent – we felt that he brought additional and complimentary skills to our own team.
Just turning up to the board meetings isn’t enough and certainly it wouldn’t enable an incoming chairman to form a thorough view of the company. An active committed chairman contributes something altogether different.
I certainly see Richard’s value as an asset to SHS. It is hugely useful when he can make connections outside of the business, for instance, getting us in on contract discussions. As an example, Richard chairs an NHS Trust. This is exactly the sort of organisation that we want to be talking to.
It also helps that Richard is so direct. He’s an important presence on our board because he will ask the straight questions that need to be answered. Sometimes you need someone there who can stand back from the operational issues that we face as a business each day, in order to provide perspective.
To be a successful business, you need to bring together a group of good people who are all trying to achieve the same thing. It is something that I have grown to appreciate during my career. Bringing in Gavin Payne as finance director and Roger Wint as commercial director (both joined SHS in 2011) has made a real impact, and now Richard is on board too.
In the long term, we would like to increase our framework agreements and secure future work in the power and construction sectors. We have significantly invested in the recruitment and training of individuals to support this. We recently acquired Dixon Pentland Limited boosting our capability in the critical services sector and are also looking to make further acquisitions.
Together, we can see SHS’ potential. We’re turning over about £18m a year currently, and we would like to get that to £30m within two years. But the key is that we remain a profitable business. We know we have the capability and team of professional people to offer the industry the highest standard of safety, quality and commitment.
My background is in construction. I spent almost 20 years working in the industry, and then another 14 years working at 3i Group, the venture capital business, where I was a Partner in the Infrastructure and Growth Capital teams. So really, I’ve been around businesses such as SHS for most of my working life.
These days, I combine a number of different roles, including some consulting, and some work with the NHS. Now there is my Non-Executive Chairmanship with SHS. I first got to know many of the people at SHS whilst BGF was doing its due diligence work on the company before investing. They asked me to help with that process, possibly with a view to becoming a non-executive at the company. But when we got near to closing the deal and the suggestion was made that I might become Chairman of the business, I definitely felt the SHS guys were interviewing me, as much as I was evaluating them.
That is as it should be, because the relationship between chairman and chief executive depends to a large extent on chemistry: it is really important to spend time together, to find out whether you’re going to be able to make it work.
You also need complementary skill-sets. It would have been pointless for SHS to hire someone with huge expertise in the scaffolding sector, because the company already has that resource. I bring something different to the company; above all, my many years of working with businesses to give them the best chance of growing. There is a huge amount of process work involved in that, and this is an area where entrepreneurs are likely to lack experience. In the investment world, there is a saying, ‘You buy a business that is difficult to understand and build a business that is easy to sell’, and it is a good way to look at this. Companies need better structure and governance as they grow in size, so at SHS we’ve worked really hard on improving the quality of Board meetings and processes.
One way to achieve growth, of course, is through acquisitions and we’ve already done one deal since I arrived at SHS. I think my help was important because no-one at SHS had ever done an acquisition before, whereas I’ve spent a large part of my career working on deals of one kind or another.
In the end though, I don’t have a specific brief at the company. My role is to be here for Paul and his team when they need me. We don’t feel the need to have calls scheduled between us, for example, because either one of us just picks up the phone when we feel it’s necessary. Similarly, while the typical non-executive chairman would probably spend two-and-a-half days or so a month on this sort of role, I think it’s important to recognise that sometimes much more of my time will be required. I certainly spent more time than that at SHS during the acquisition process, for example.
The challenge now is to really grow the business aggressively, without losing what has made it special as a smaller company. For example, I’ve spent a lot of time talking with customers since becoming Chairman – I think that’s another important part of the job, and one thing they really like, is that every single project has a company director involved in it. Customers describe SHS as a very non-adversarial business, and the question is how you go about scaling that ethic.
I’m also keen to bring some of my experience from my work in the public sector, where I chair an NHS Trust. One of the things you notice in the public sector is a real focus on managing risk, and that’s something that is less common in the private sector, particularly among smaller companies. It’s definitely an issue I want to bring into the discussions we have at board level; this question of how you manage risk in a really strategic way.
Overall, my early impressions of Paul haven’t changed. It was immediately clear to me that he was a very “backable” Chief Executive. He has tremendous entrepreneurial drive and a real focus on customer service; and this is now a team approach. Paul has been wise to surround himself with really good people over the past couple of years, who are now adding tremendous value to the company. I really hope I can play my part too.
In fact, I feel fortunate that I arrived at SHS when I did, because Paul and his team had done a great job in what, looking back, was a really difficult market environment. The outlook for the next couple of years is certainly much more positive than the circumstances in which SHS had been working for the two years or so before BGF’s investment.
SHS extends breadth of industrial services with £2m acquisition
– Acquisition follows £5.4m investment of growth capital by BGF in September 2012 –
BGF portfolio company SHS Integrated Services, a specialist provider of high specification industrial scaffolding and associated services, has acquired Dixon Pentland Scaffolding Company Limited, a leading provider of scaffolding services to the energy and heavy industrial sectors. The opportunity was introduced to SHS by Grant Thornton Corporate Finance in Cardiff, who also advised on the transaction. The value of the transaction was approximately £2m.
The acquisition will provide Barry-based SHS with a national platform for expansion into a highly specialised and regulated market.
Based in Doncaster, Dixon Pentland specialises in work in the critical services sector, for example providing scaffolding services to the power line and transmission industry. The company’s specialist work for customers such as National Grid is complementary to SHS’s own activities on petrochemical and utilities sites.
With an annual turnover of £5m, key customers of Dixon Pentland include AMEC, Babcock and Balfour Beatty and the company employs 65 people.
Founded in 1998 by Paul Smith, SHS erects and dismantles large scale, technically demanding scaffolding structures for clients in the petrochemical, oil and power generation sectors. It also provides complementary insulation services. SHS’s services are often required by site owners, operators and contractors for essential maintenance and refurbishment work of industrial plants. Offering the highest safety and operational standards, SHS has secured long term contracts with multinationals such as Dow Corning, Murco and Alstom.
SHS financed the acquisition following investment totalling £5.4 million made in September 2012 by BGF.
Dixon Pentland represents the first acquisition that SHS has made using BGF capital.
Finance director, Gavin Payne, who led the deal on behalf of SHS, commented:
“This is an important step for SHS. Dixon Pentland’s reputation and customer base is a great fit with SHS, opening up new markets and enabling us to provide an even more complete service to our customers. We shall be continuing to work with Grant Thornton and BGF to identify potential further acquisitions to complement and extend our offering in what is a highly-specialised market.”
Paul Oldham, BGF’s regional director for South Wales and the South West of England, commented:
“SHS was the first company in Wales that BGF has backed and our investment was made in order to strengthen the company’s core capabilities, develop a broader range of services and expand into new sectors and geographies. Dixon Pentland is a highly complementary acquisition given its reputation in the industry as a well-established, high quality operator and will add considerably to the range of services that SHS is able to offer its clients.”
Regional Director – South
Paul joined BGF in May 2011 and heads up our South West and South Wales region, covering the South West of England, Berkshire, Hampshire, Oxfordshire and South Wales from offices in Bristol and Reading. As well as working on new investment opportunities in the region, he currently sits on the board of four BGF investee companies and is a member of the BGF national Investment and Executive Committees.
Prior to BGF, Paul worked as a private equity investor for 16 years with 3i and LDC and also led Grant Thornton’s South West Corporate Finance advisory team as Partner for six years. He qualified as a Chartered Accountant with KPMG in Manchester and holds a First Class Degree in Economics and Accounting from The University of Sheffield.
“I joined BGF on the day we launched – the opportunity to create a new and unique investment business focused on helping SMEs to grow was both exciting and challenging. It is great to see that our supportive, long-term approach to funding and supporting ambitious management teams is in demand. We are achieving two of our key objectives – helping exciting private companies to grow, and increasing the size of the equity growth capital market in the UK. We will continue to invest in our regional team to enable us to work with many more ambitious companies.”
Alex joined BGF from KPMG Corporate Finance in February 2012 and is responsible for sourcing and executing investments throughout the South West and South Wales.
Since joining, he has been involved in over 10 completed investments and currently sits on the board of a number of these in support of their growth aspirations.
Alex graduated from the University of Warwick with a degree in Mathematics in 2004 and qualified as a Chartered Accountant with KPMG in 2007.
He now lives in Bristol, enjoys playing tennis, squash and golf and participating in at least one ski trip a year.
- BVG Group (Board Observer)
- Canburg (Board Observer)
- Magma Global
- Prezola (Board Director)
Ned works in BGF’s investment team in the South West and is responsible for finding and completing new investment opportunities as well as continuing to work with the boards of BGF’s investee companies.
Ned joined BGF in January 2012 from Maven Capital Partners (formerly Aberdeen Asset Management) having worked in their London office since 2007. He has completed more than 20 equity investments and has been involved with the boards of most of these companies. Earlier in his career Ned worked in corporate finance with BDO Stoy Hayward and previously qualified as a Chartered Accountant in 2001.
Ned graduated with a BSc in Oceanography with Mathematics from Southampton University. He lives in Bristol and is married with three young children. Ned is an improving golfer, a keen snowboarder and a declining footballer.
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CAPEX TO BUILD GROWTH
Aberdeen-based STATS Group and South Wales’s SHS Infrastructure Services (SHS) may be hundreds of miles apart but the two businesses have much in common. Both specialise in largescale project management and engineering services for demanding clients; both have exciting growth plans that are dependent on capital expenditure; and both have turned to Business Growth Fund for help.
Without external investment to fund that expenditure, both companies would probably still be struggling to fulfil their potential. With the money, however, the two businesses are building reputations as leaders in their fields: STATS provides maintenance, repair and modification of oil and gas installations and pipelines, onshore and offshore, while SHS erects and dismantles large-scale scaffolding constructions on technically demanding projects. “When I arrived in 2011, SHS was operating with a significant overdraft and was having to turn down opportunities to bid for new work,” recalls Gavin Payne, the company’s finance director. “We did have a finance line with the bank that was facilitating some growth, but cash was massively constrained and we were never going to be able to move to the next level – we turned away £6m of business in the first two months I was here simply because we didn’t have the capital to commit.”
SHS’s difficulties started with the pressing need for capital spending, Payne explains, because the projects where the company specialises, working at refineries in the petrochemicals industry, require so much equipment.
“We needed to spend sizeable sums on the basics of our business – on tubing, boards and other scaffolding kit,” says Payne. “And we wanted to think longer-term – for example, we’d always bought wooden boards, even though steel boards last much longer, because our cash was so short we needed the cheapest option even when it turned out to be a false economy.”
Another issue was cashflow, adds Payne. “Payment terms in this sector are generally 60 or 120 days, which makes life very difficult for under-capitalised businesses.”
It is a story that Pete Duguid, the chief executive and founder of STATS Group, recognises very well. Duguid first launched STATS in 1998 and spent most of the next ten years battling with the company’s constrained finances. “I vividly remember my bank manager telling me I couldn’t build a business on enthusiasm alone and in truth, while there was always growth, we were constantly fighting working capital,” he says. “That was fine in 2007 when the banks were offering very easy access to credit but then the financial crisis came along and the oil market collapsed.”
In the years following the crisis, STATS faced a challenge simply to survive – not because of any flaw in its business model or products and services, but because it did not have the capital buffer needed to ride out a difficult trading period comfortably.
Fortunately, the business made it through, but Duguid realised he needed help to take STATS on to the next level. He could see clearly how the company could expand its range of products and services, and had plans for international expansion. But STATS still lacked the resources for the capital expenditure required to turn that vision into a reality.
“By the end of 2010 we’d stabilised but banking support had disappeared,” Duguid says. “I had to make a call – we knew we had to do something different and that’s when I began looking foroutside investment.”
The search ended in March 2012 when BGF invested £7.8m in STATS, in what was then only the fund’s fourth investment. Six months and 11 other investments later, BGF and SHS agreed a £5.4m injection of growth capital in the scaffolding business.
“What’s clear in both these cases is that the companies had no chance of any significant growth without taking on additional capital,” says Paul Oldham, a BGF regional director based in the Bristol office. “They could have opted to go for much slower growth, but they were ambitious, which is one of the things we look for in a company when we’re considering whether to invest.”
Oldham believes growth capital of this type – as opposed to debt – is ideal for companies with large capital expenditure requirements. You’re not going to be able to arrange debt for a period of longer than five years, which isn’t a great basis for long-term capital investment,” he argues. “Even as you’re investing, you’re already worrying about when you’ll have to roll over the borrowing.”
In contrast, Oldham says, with a slug of capital to fall back on, businesses can concentrate on worrying about growth rather than financing. “What our money has done in both these cases is take away the constraints from these companies and level the playing field with their larger competitors,” he argues. “That’s what BGF does – we invest in smaller companies whose skills are just as good, or better, as those of larger companies, and whose products and services are of equally high quality, or higher, so that they’re no longer at a disadvantage just because of their balance sheet.”
SHS’s Gavin Payne shares that analysis of the value of growth capital, but says he had particular reasons for choosing BGF.
“We spoke to a number of potential sources of funding, and while BGF’s terms were competitive, more important in the end was our impression that there was a greater willingness to work with us,” he says. “It didn’t feel like a traditional private equity involvement – they’ve only taken a minority stake and while we welcome their support and advice, it’s still us running the business.”
At STATS, Pete Duguid had similar anxieties. “My concerns were all about whether I was working for a new master and about how the decision making process would work,” he says. The fact the fund was happy with a minority stake in the company helped allay those fears. BGF also introduced Duguid to oil industry veteran Graeme Coutts, who subsequently became chairman of STATS and now plays a crucial role in helping the company realise its plans for international expansion.
In the end, says Paul Oldham, this is the type of edge that BGF needs to communicate to companies looking for investment.
“If all we were offering was money I think we would have done a lot fewer deals than we have done – our network of contacts is often an important part of businesses’ decision to go with us.”