Andrew Wolfson,

Managing director,

Pembroke VCT

Andrew Wolfson

Pembroke VCT likes to fund businesses that are above the level where friends and family could provide the funding, but below the de-risked level: the space that the local bank used to fill with small business loans. We like to invest in strong brands with strong management teams.

Our investment model varies according to what the company needs, but generally we invest with straight equity at the post-revenue, pre-profit stage. We want the founders to be left with enough equity so they continue to be entrepreneurs, not employees – we want to help them grow.

Appealing investments are those concepts that are already familiar to the consumer, which we can then build into big business. We invested in UK boutique studio operator BOOM Cycle in 2013, after seeing how popular the cycling studio model was in the US. We were impressed by the young, passionate, entrepreneurial management and spent time with them fine-tuning the brand, which is all about entertainment on a bike.

We believe that there’s still plenty of growth in this sector, particularly with integrated wellness concepts, as well as health and fitness businesses filling former retail space on secondary high streets. We’re always on the lookout for interesting concepts in this sector and are currently looking at some pay-as-you go opportunities.

Additionally, we’ll be keeping an eye on the wider health and fitness industry – anything that helps to contribute to a healthy lifestyle, such as food and drink offerings that are low in sugar.

We’ve already invested in cold-pressed juice company Plenish. Like BOOM Cycle, this company had a young, active, female entrepreneur at the helm, with a passion for what she was doing and the vision to grow and diversify the brand.

“There’s still plenty of growth in this sector, with integrated wellness concepts and fitness businesses filling former retail space” – Andrew Wolfson

BOOM Cycle has seen huge success in the UK market

Gonçalo Mendes,

Partner,

Oxy Capital Mezzanine Fund

Gonçalo Mendes

We’ve invested twice in Fitness Hut in Portugal – a total of €12m, or 18 per cent of our fund. This operation is a good fit for our fund: we saw a lot of growth potential, both in terms of Fitness Hut’s expansion plans and the growth potential of the Portuguese fitness market, which currently has low penetration rates.

When we invested, Fitness Hut had seven clubs and was aiming for 45. Offering a premium low-cost model, its strategy is to provide a quality product at an attractive price, and it’s the clear market leader in Portugal. Prior to our investment, Fitness Hut had employed capital well and achieved good returns, so we believed that would continue to be the case going forward.

We have a very flexible investment model and try to customise our investment to whatever the situation requires, so we can provide equity, take control, be minority investors or provide debt. This was a debt investment because that’s what Fitness Hut wanted, although we took the right to buy a percentage of the company.

Fitness Hut management was very confident in the growth prospects and the shareholder value that would arise from that growth. Most importantly, the management team owns a significant share of the business – 50 per cent – which we like, because then they still act like owners.

We like the fitness sector because we see it as a sector that will grow, driven by people receiving more information about what’s good for them. In general, when looking for investment opportunities, we seek growth potential, return on capital, high quality management teams and a transaction structure that shows that insiders really believe in the business.

Fitness Hut in Portugal is a premium low-cost model

Richard Taylor ,

Investor,

Business Growth Fund (BGF)

Richard Taylor

BGF has two investments in the health and fitness industry, at opposite ends of the spectrum, and both are going very well.

We invested in Xercise4Less in August 2013, because the budget space was very exciting at this time. This disruptive model was demonstrating it could take market share from the mid-market and also increase penetration by enticing more people to join a health club.

Xercise4Less offered a differentiated model, with the lowest membership price (£9.99 a month) and the largest sites, which meant there were no queues for machines. Because it has a membership contract, unlike other budget operators, it was also doing well with retention and attrition rates.

There were also good opportunities for the company to grow, with landlords offering attractive rents in former retail sites. Finally, it had a strong management team who had all spent their careers in the sector and had accumulated a vast amount of knowledge.

Gymbox was a similar story, but at the opposite end of the market. Premium, differentiated, focused around London, quirky and high-end, the financial dynamics were attractive. Again, we were backing someone who had spent many years in the sector and we knew that the quality of the management was very high.

Our model is to take a minority equity stake in the business, backing the management while providing them with the funding to grow. As investors, we’re always looking for other opportunities and differentiated models appeal to us. The boutique market looks interesting – we don’t have any investment in this space at the moment.

“We’re always looking for other opportunities and differentiated models appeal to us. The boutique market looks interesting” – Richard Taylor

Xercise4Less has been able to take market share from the mid-market

IN OTHER NEWS...

Octopus and Barrecore, UK
Octopus Investments invested an undisclosed amount in UK-based boutique fitness concept Barrecore last December, to allow the company to expand throughout the UK and Europe. The company had previously invested in Gymbox and has a track record of supporting sustained growth.

Barrecore currently has nine studios in the UK, offering high-intensity classes that incorporate body weight exercises and a ballet barre. To drive the European expansion, Peter Woods was appointed as Barrecore’s new CEO. He has previous experience of scaling fast-growing businesses in the European health and leisure industry, at David Lloyd Leisure, Aspria, Holmes Place and Sk:n Clinics.

See HCM March 17, p66, for an interview with Peter Woods.

Quadrant and Fitness & Lifestyle Group, Australia
In September 2016, the Health & Fitness Lifestyle Group – created by Quadrant Private Equity as an umbrella company for its various fitness acquisitions – became Australia’s biggest fitness group, in terms of membership, after securing Fitness First from Oaktree Capital Management. This deal followed Quadrant purchasing Goodlife Health Clubs from Ardent Leisure, as well as low-cost operator Jetts Fitness.

At the time of completing the deals, the combined portfolio included 224 gyms and 188 franchises – a strong national footprint of budget and full-service clubs. The group now has 650,000 members with annual revenues in excess of AU$400m.

Quadrant executive chair Chris Hadley says there’s a great deal of growth to come in the Australian fitness sector: “The gym market in Australia is valued at about AU$2bn and gym membership levels are still below some global benchmarks. The market is expected to grow by between 5 and 6 per cent over the next five years, driven by both population growth and rising awareness of health and fitness benefits.

“Sixty per cent of the population is overweight. Part of the government’s agenda is to get people fit and keep them healthy. There’s a conversation to be had with the government about how the fitness and gym industry plays a part in that.”

See HCM March 17, p32, for an interview with Greg Oliver, CEO of the Fitness & Lifestyle Group.

NorthEdge and Total Fitness, UK
In April 2015, NorthEdge Capital – a private equity firm focused on investing in companies in the north of England – backed the management buyout of Total Fitness. The membership base had grown by 14 per cent since January 2013, taking the group back into profit; the MBO released new investment for the next phase of growth.

NorthEdge is what partner Ray Stenton calls a “generalist investor” whose model involves bringing broader business expertise to back management teams in delivering their plans. It focuses exclusively on northern-based businesses in the UK and invested a reported £11.5m in Total Fitness.

See HCM Aug 15, p30, for an interview with the team behind the turnaround of the Total Fitness brand.

Barrecore has nine UK studios and is now geared up for expansion

Quadrant recently acquired Fitness First Australia