From the Gurkhas to the City but now David Hitchcock has his sights on creating world class precision engineering firms in the UK
Ebbw Vale-born City heavyweight David Hitchcock is raising £40m to help UK precision engineer firms move into the expansion fast lane
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After Cambridge, where he was awarded a boxing blue, he joined the army, via Sandhurst, and embarked on a military career that saw him becoming captain in the Brigade of Gurkhas and serving in Northern Ireland with the Royal Regiment of Wales, before moving into the Square Mile, firstly in equity sales with Goldman Sachs, and then as managing director of JP Morgan.
But it is the manufacturing sector that now has his main focus, or to be more precise, precision engineering.
And his interests operate on two related fronts.
The married father of four sons is an investor in and executive chairman of Cardiff-based and acquisitive Cyrus-RW Group, which has its headquarters and factory right in the heart of Cardiff Central Enterprise Zone, which is not targeting manufacturing but financial and professional services.
But innovative finance is not far away as Mr Hitchcock is also executive chairman of Cyrus Investment Management, set up with the sole purpose of acquiring precision-engineering firms in some of the most deprived areas of the UK, and especially Wales.
But unlike the private equity model of thinking of an investment exit from day one the fund’s aim is clear; to support acquired firms to grow with a focus on providing working capital, whether for investment in new plant or machinery, recruitment or moves into new markets.
He seemed genuinely excited and enthused – like a small child on Christmas Eve – during the tour of the shop floor of Cyrus-RW, where he proudly shows and explains a range of high-tech equipment and products for clients that include Tata – during which the mutual respect between him and the workforce is plain.
The fund, which successfully raised £5m in a pilot, and which has combined fundraising efforts in funds 2 and 3 with the aim of securing £40m by the end of next April, has HMRC and regulatory approval for investors to invest via the Enterprise Investment Scheme (EIS) which gives UK taxpayers who do a 30% tax break.
But this is the polar opposition of some EIS schemes, which have in some people’s eyes blurred the lines between tax avoidance and evasion, but a fund that is being used to invest in real manufacturing firms and not some fanciful film project.
As a result it will provide an in-the-round upside for the Treasury in increased personal and business-related tax receipts.
First deal in Wales
The fund, via the pilot, has just completed its first deal in Wales with the acquisition of Port Talbot-based high-tech security door manufacturer Rhino Doors, for which the fund has ambitious expansion plans for a company which Mr Hitchcock believes clearly demonstrates that Wales, despite seeing a decline over the last 40 years, has manufacturing “in its DNA.”
But why spend time and energy on Cyrus-RW and the separate investment fund when he could walk into any top executive role with his investment track record in the City?
Mr Hitchcock said: “I am doing what I am doing because I want to do good. I had a bit of an epiphany a few years ago and I want to leave a legacy.
“Half of what we are trying to do is to create an excellence organisation that provides really first-class and sustainable jobs.
“But this is not some bleeding-heart nonsense as we are commercial, but we think you can have a holy alliance where everyone does well, with jobs going into areas that really need them, like Wales and the north of England.
“And they are not going to be what I call muck jobs. We want to spend time and money training them to make them world-class people and we can.
“We can be a world-class precision engineering company [Cyrus-RW Group] with a world-class fund supporting the wider sector.
“And it is very important that we are precision engineers and not production and that we can afford to train apprentices really well.”
Cyrus-RW is one of the UK’s leading precision engineering companies of its size. It employs around 250, with a turnover of around £15m, but has a 47% gross margin. Other directors include founder Ian Watkins.
And it had made a number of acquisitions, including Cardiff and Briton Ferry-based engineering firm Taylors & Sons after it went through in 2008 – but following a lengthy legal battle last year it was shown this was a result of an administration error at Companies House which wrongly classified it as being insolvent, which resulted in a credit squeeze and subsequent demise.
In terms of Cyrus Investment Management, which has an office in St James’ Square in London, Mr Hitchcock said there is a huge market to go after.
On the lookout for acquisitions
The company has identified 1,500, in many cases family-owned and run precision-engineering firms, which could be acquisition targets.
Mr Hitchcock said; “The companies we are looking to build and buy, although they are not big, are all pretty world class. The fact they are still going means they must have been doing something right, and that is the opportunity.”
“In my life most people have tried to oversell to me, but it is so usual to be in an environment [precision engineering] where people profoundly undersell themselves and it is actually a real pleasure to come in and finance them properly and build them up.
“The fund is essentially an expression of what we want to do and the vehicle to achieve that.
“What we want to do is build up world-class precision engineering companies in deprived parts of the UK, and especially in Wales. The fund is just a way I have chosen to exhibit that desire.”
Mr Hitchcock said the EIS-based structure provides an ideal vehicle, although he could have financed a fund quite easily through other routes with his connections and strong investment track record in the City.
He said: “We could have floated on Aim and everybody would have given us their war-chests. And yes, we could have gone to banks and a lot of wealthy family offices, as I know lots of people.
“But when I looked at the EIS structure what I thought was unusual was its rhythm seemed tailor-made for our business.
“The great thing with EIS is that you get three years and a day [investment period] and that enables the management to make proper strategic decisions.
“Policy guys like us as we are not some horrible tax break as there have been too many EIS schemes which have exhibited themselves in some high-profile film-investment deal failures.”
Under state aid rules the fund has, if acquiring firms although not applying when acquiring firms out of administration, to pay at least 50% of the vendors’ average turnover over the previous five years.
Deals have a ceiling of £5m.
While never a precise science, Mr Hitchcock could see the current funds – and future ones – creating a situation where Cyrus Investment Management could be in a position to execute up to eight £5m deals a year and in five years have 1,000 employees in its portfolio of companies.
But using the fund to acquire a firm is just one part of the equation, but also provides working capital, alongside centralised support and expertise, to aid growth.
Mr Hitchcock said: “It is about buying the best machines on the planet so top CNC [computer numerical control machines] and we never want to starve the business of cash.
“You’ll be amazed at how you can build things up if you do it the right way and you put time and effort into client relationships. If you over-deliver you get tremendous repeat business.”
Investors in the fund receive a return after three years and a day, but the likelihood is that many will choose to follow their money into future funds.
Mr Hitchcock said: “After three years and a day what happens is that we would get a third-party accountant in to value the business and then achieve that value via an exit.
“Preferably we would buy the assets ourselves and we would pay a fair price. But if it is a third-party purchaser you have to let it go as you owe a duty to your investors.”
However, he added: “I think employees and investors, like children, you should have for life.
“Yes, investors are focused on the internal rate of return and an exit, but this is not like the private-equity model of buying companies where you are already thinking about the exit.
“So I think the best thing to do is what we are doing, which is to say we are definitely going to offer you a fair price after three years and a day and then you can invest in the next fund.
“People who invested in the pilot had already invested into two previous EIS funds I did.
“So you get these loyal investors and the great thing is that nobody loses. Employees do very well and the investors do too, and get to build these world-class businesses.
“I feel we are really suited to this and feel like Billy Graham here, but I truly believe it is in our DNA.”
EIS is capped so that individuals can invest up to £1m per fund, providing they are UK taxpayers.
The fund is targeting not only strong deal flow in Wales, but potentially bringing investment in Wales.
Mr Hitchcock said: “I feel we are really suited to this and feel like Billy Graham here, but I truly believe it is in our DNA.”
He said the fund was the perfect vehicle to inject fresh impetus into firms in the sector that for one reason or another had stagnated.
He added: “An enormous percentage are owned by families, and in many cases the children don’t want to take them on and they just run out of energy.
“You have costs and if you want to grow you need a new factory and that really is hard work.”
But the fund has also acquired firms out of administration, for which it has executed two such deals.
Mr Hitchcock said: “When that 45-year-old worker is laid off and we come in and give him his job back that is really good.
“You have people crying and saying they are going to have a good Christmas now.
“That is really positive for morale and you get tremendous loyalty, but you have to know what you are doing, and we do.”
Last year, from the £5m pilot fund, it acquired out of administration hydraulic cylinder manufacturer Bradford Cylinders.
“Good for the soul”
Mr Hitchcock said: “It went under because it had a defined salary pension scheme, but we hired them all back [staff] the following week. The morale there is amazing.
“And if you go to Taylors at Briton Ferry on a wet Monday afternoon people want to be there, which is fantastic and good for the soul. So that gave me confidence that we can do these sort of deals.
“And they become our best sales force, and when we go to companies we want to buy they know we are not private-equity sharks.
“I say, don’t take my word for it, go and talk to boys at companies we have bought. But the bottomline is we would never buy something we cannot add value to.”