INTERVIEW OF THE WEEK: John Alexander, managing director of the Baxi Partnership TrustBy Steven Vass
STRICTLY for business anoraks, here's a pub quiz question: Which Scottish private investment fund was created by an Act of Parliament? The answer, you probably didn't know, is the Baxi Partnership Trust, which lends its name to a Westminster statute from 2000.
As managing director John Alexander explains, this is not the only unusual thing about the Dunfermline-based organisation, which has a total of £20 million at its disposal. It is also the only fund in the UK, or indeed possibly anywhere, that invests only in employee-owned organisations.
Having been in the market since 2002, it currently invests in seven such companies, including Loch Fyne Oysters, Aberdeen paper equipment maker Woolard & Henry and Preston-based insulation specialist Home Insulation Services. Things have ticked along slowly but steadily over the years, producing annual surpluses in the order of £500,000, but now things are about to change.
With the aid of some outside venture capital, some new-fangled investment models and a new consultancy arm, Baxi is close to transforming itself into a potentially much more prominent player in Scottish business. At a moment when there has never been more cynicism about excessive profit and short-termism, the move looks particularly well timed.
"These are companies that tend to have good governance, good corporate social responsibility, longer stability of employment and good training and development," says Alexander. "We have made a transition from the days where we only did one or two deals every year. Now we will be working with 20 to 30 companies at various stages of development."
Baxi has its roots in the Baxi Heating Company, a Lancashire company that dates back to Victorian times and is a household name for boiler systems just as Singer is to sewing machines or Shanks is to sinks. Its last scion, Philip Baxendale, decided to turn the company into an employee-owned organisation when he retired in 1983 rather than sell the business and pocket the proceeds. This served the company well until it overstretched itself in the late 1990s and had to sell everything off.
This left Baxendale with a lump sum of £20m from his remaining stake, which wasn't enough to get back into boilers, so instead he set up a trust to help create companies in Baxi's image. As there had never been anything like it before, this required an Act of Parliament. He enlisted as managing director David Erdal, former boss of Fife-based papermaker Tullis Russell, which had moved into employee ownership itself. Hence the trust started up in St Andrews rather than England, and later shifted to Dunfermline after Erdal switched to a non-executive role in 2004 and was replaced by Glaswegian accountant Alexander.
Baxi built up its portfolio with a series of deals that amounted to a total of about £12m. In the early days it took 50% equity stakes in companies, but decided this was too controlling, not to mention risky, and switched to purely lending money to become like a sort of specialist bank.
So it might have continued had two of Baxi's investments not gone belly-up. Learning IT, a Glasgow-based computer training company, and Windowmaker, a joinery company in Gloucester, went bust in 2007 and 2008 respectively, losing the trust in excess of £3m.
"It was not a problem that we lost because we knew these were high-risk businesses. It was the way we lost," says Alexander. "We decided to re-evaluate because we didn't think the employees had fully bought into the concept. If you look at Learning IT, it was a great business with really positive people, but as the market changed because bigger competitors were undercutting it, the employees weren't up for change. They grasped the situation not like owners but like employees that were being done in."
The test model became an Aberdeen-based oil services start-up called G3, which consisted of a group of former Halliburton engineers who wanted an employee ownership structure to remove the risk of being taken over. This time Baxi did much more thorough work with the employees before and after the deal to ensure that they were more onboard than they had been at Learning IT or Windowmaker, and it became the basis for a new investment strategy.
First off, Baxi became more flexible with its investments. Previously it only dealt with companies who were prepared to follow the exact structure of the Baxi Heating Company, which had 50% of shares held in trust and 50% held directly by employees. Now it would help with any structure of employee ownership and offer consultancy services along the lines of what it had done at G3, even for companies that didn't need to borrow money. This consultancy-only offering will see two English companies switch to employee ownership in July, for instance.
Baxi also decided to turn itself more into a business by lending far less and seeking a quick exit rather than tying up its money permanently. "The ideal would be to do 10 deals a year, all of them with someone else's cash," says Alexander.
To do this - and it includes pulling out of the current seven-strong portfolio - Baxi has been pushing to persuade venture capital groups (VCs) and banks that employee ownership is not a soft business option by pointing out that its 3.5% annual return is towards the top end of private-equity investments.
This saw him persuade Royal Bank of Scotland to take Home Insulation Services (HIS) off the trust's hands, but the deal unwound in the midst of the banking crisis. While Baxi is still looking for a longer-term investor for that company, it is coping with the current tight banking market by getting outgoing owners of businesses to become the main lender for other deals. This is the main driver behind another deal, this time with an East Kilbride company, which will also complete in July.
"Vendors are usually comfortable with lending to their old company because they know the business, they understand the management team and they are getting a return on their loan," he says.
Among VCs, Alexander has been trying to sell the idea that they partner with Baxi to set up a joint investment fund. VCs have traditionally stayed away from employee-owned businesses because there is no obvious exit, but Alexander has come with a model that guarantees the sale to the employees at the end of the period at a price that will keep the VCs happy. Combined with his investment return arguments, this has proved appealing, with one unnamed VC proposing to raise £15m on the markets for such a fund in this financial year. Alexander says: "They think it's possible simply because the theme of going out there and doing something different is attractive right now."
He concedes that not having Baxi onboard for the long-term will mean that some investments will not survive, but he thinks it will be worth it if the trust can spread the gospel of employee ownership more widely. "It's a move from elephants looking after one or two calves to hundreds of baby turtles on the beach," he says.
With that sun-kissed prospect in mind, employee ownership's time might just have arrived.
