The Inflexion journey

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Audio Transcript

Tim Smallbone

Hello and welcome to Inflexion Point, the podcast that explores those crucial moments in a company's journey that changed the trajectory of success. Through conversations with founders and entrepreneurs, we'll explore what those moments look like and how to recognise and harness them. For the first episode in this new series, we're going to start close to home with our own story, that of Inflexion, and how two colleagues in a borrowed office, sharing one computer grew the firm over 24 years to be the powerhouse it is today, with £8 billion of assets under management and over 100 businesses backed.

John Hartz

The industry had a sort of arrogance around capital and people sat in ivory towers and expected people to come and kowtow to them and we thought entrepreneurs would be at the centre of things. They were the people creating the opportunities and the jobs and the interesting businesses.

Simon Turner

We began to become a top performing fund that big investors could deploy as their partner.

Tim Smallbone

I'm Tim Smallbone. I've been a partner at Inflexion for 20 years. I was there almost at the start with our founders, John Hartz and Simon Turner, and I've been lucky enough to witness a great number of those moments that are part of our success story. And I'm delighted to be joined by John and Simon. Welcome to you both.

John Hartz

Thank you.

Tim Smallbone

Before we start, a quick word about where we're recording. We're on site at the Roundhouse in Camden, North London, where they are opening their fantastic brand new creative centre called Roundhouse Works. There's a large music studio, workshop spaces, a podcast studio, and the new Inflexion Workspace, an affordable environment for creative entrepreneurs and freelancers. And according to our fabulous host here today, it is the largest creative space for young people in Europe. The Inflexion Foundation's been supporting the Roundhouse for many years, and this new centre will double the number of young people that the Roundhouse can support to 15,000, allowing them to advance their careers in media and the performing arts. Now, did you imagine you'd be supporting projects like this 24 years ago when you began?

Simon Turner

Two and half decades, Tim. I can't believe it's been so long. I mean, it's come a long way and I think we were ambitious back in the beginning, but I'm not... I'm not sure we ever envisaged the sort of scale of what it's become today.

Tim Smallbone

How did you meet?

John Hartz

We both were sort of at a point in our careers previously where we thought we could do it better than the bosses. That was certainly my view, arrogantly at 31.

Simon Turner

Which hasn't changed much.

John Hartz

And then we both applied for a new job and the very clever American bloke who ran it interviewed both of us and said, actually, I'll have both. And I was a bit reluctant, but actually it turned out rather well, didn't it?

Simon Turner

We met at Claridge’s for breakfast 25 years ago. John was the first person I'd ever met who had bircher muesli for breakfast, being a good Scandinavian gentleman. So very instructive, even from those early days about him.

Tim Smallbone

So what were your first thoughts? Were you trying to just create, just to create your own tiny little thing? I mean, what did you imagine you were ever doing at the start?

Simon Turner

I think we were sort of initially ducking and diving a bit, but we thought that there was an opportunity at the same level. It was sort of ill-articulated, I think, in those early months. But I think we did think we were quite good at what we did and there was an opportunity to put capital together with entrepreneurs in ways that the industry wasn't necessarily doing really well. Now, we had neither capital nor a great stock of entrepreneurs to work with, so we were definitely sort of ducking and diving. But I think through that process, a bit of a plan began to then form about what was going on in our industry more generally and where that might go to. But that was really your start.

John Hartz

I think it was centring on the entrepreneur. That was the most important thing because the industry had a sort of arrogance around capital. Capital was relatively short supply in those days and people sat in ivory towers and expected people to come and kowtow to them. We sort of looked at it rather differently because as entrepreneurs as well, we thought entrepreneurs would be at the centre of things and they were the people creating the opportunities and the jobs and the interesting businesses. So we kind of put them at the centre really at the start.

Simon Turner

Yeah, I mean, the private equity industry is, I mean, has many excellent attributes and generally quite bad press, but it's not unreceptive to complacency, perhaps even a bit of arrogance. And so to approach that solution sort of in a different way culturally, I think was quite interesting and having had that formative experience of not having any of the attributes that a normal private equity firm would have and literally having to live on your wits and no right to win anything, no right to exist, you know, teaches you a great deal of humility and you have to sort of work that bit harder to create those formative bonds with the people that you want to help you on that journey, the companies you're backing, the capital providers, the lenders, the management teams, the chairs that you work with. So I think that experience was actually a really central part of the cultural journey that we’ve been on over 24 years.

Tim Smallbone

That humble beginning was the grounding of it.

Simon Turner

I think so, yeah.

John Hartz

And I think just working with entrepreneurs from that side of the table was a key thing. And I think, we start with our first couple of deals, it was that they got us as being different from other people. And actually, I think now, you know, 24 years later, we still have that. I mean, I like to think it's true that people want to work with Inflexion rather than they can fund our deal or whatever.

Simon Turner

But John's had more than one good idea over 25 years, just for the record. But one of the things I would credit him with in those early years, particularly having come from a big buyout house, Apax, you know, one of the great brands of the industry, was that he had been exposed to what was happening at the upper end of the industry and how that side of private equity was beginning to industrialise. You know, these big powerhouses were emerging. Some of them are household names today, even the broader sort of community. But I think John had a sense of that was happening in the upper end and there was an opportunity to maybe begin to replicate some of those attributes but tailored for the mid-market.

Tim Smallbone

So you had a humble beginning, you had ideas. You also had, you've just been referring to that framework of where the private equity industry was at that time, so you could see where your own niche was developing. You referred there to culture. You grounded a culture right at the beginning, this sort of humble culture.

Simon Turner

I mean, we weren't lacking in self-confidence and you have to, I think, have a bit of chutzpah to do these things, you know, off the bat with sort of no other sort of attributes, I suppose. But I think that culture of being respectful, doing what you say you're going to do, turning up on time for meetings, trying to avoid some of the sort of common courtesy pitfalls that I think business generally neglects, private equity perhaps particularly neglects, I think is a, you know, is a useful part of the culture. It's by no means the whole part. You know, we're also hard charging and flinty and I look at the organisation today, I mean, it's an incredibly powerful machine full of very clever, but actually extremely nice people. And I think that combination is really attractive and sort of highly effective. It's certainly the environment that I like working in.

John Hartz

From the very beginning, you know, I'd worked at other private equity firms and it had been a male-dominated environment. And to be honest, I didn't like it. And so when we started, we absolutely wanted to have females in a diverse environment, not just because it's a nicer work environment, you just get different viewpoints on people, different takes of management, different risk profiles, and just get everyone around the table and make sort of proper decisions.

Simon Turner

We weren't assembling a group of people who had sort of vanilla, upwards only, you know, the right university, the right MBA, the right sort of series of brand names on the CV. We were assembling people, for whatever reason and partly because they were available, but also because they brought a bit of grit and a bit of perspective, and they valued what we had and what we were putting together, perhaps a bit more highly than those who felt it was just their right.

John Hartz

Yeah, I mean, to put it in your perspective, it was we were looking for Man City rather than Man United players in those days.

Tim Smallbone

Yeah, that's a context I can understand.

John Hartz

Yeah, exactly, because City was, you know, the fighters, weren't they? And they were not doing so well, whereas, Man U, you walked on water. And so we wanted to have other people, wanted the City players. I'm obviously turned around now, but.

Tim Smallbone

I don't flatter myself, my availability was my key attribute to getting a job. You called it Inflexion, implying a moment of change. How would you interpret that in terms of our journey? What would you point to as those inflection moments beyond the foundation moment?

Simon Turner

But there were definitely some moments where I think we perhaps began to be noticed, we managed to prove things out, the Ster Century.

John Hartz

Yeah, the first deal. This was a business no one else wanted to buy. It was a cinema chain in the UK, this is a long time ago when people used to go to the cinemas and didn't listen to podcasts and watch things on their phones, you know. It's just a great opportunity, a lot of money being spent by someone and we were buying it for less than net asset value and it was going well. Had a fantastic management team who we sort of really gelled with and we sold it within a year for 3.2 times the money.

Simon Turner

And then we were able to follow that up with a bit more success. The investment strategy had really begun to take shape and we've had this rather distinctive investment strategy throughout the sort of two and half decades we've been doing this – you know, high growth, high margin businesses, backing great entrepreneurs and so on – but I think it was in those formative deals that strategy that became the sort of spine of the business really, really came together. But you need those moments because they project you to the next level. And that just deepens your relationships with funders, with advisors, in our case with investors, which was, of course, always part of the battle, sort of, raising sufficiently sized funds and finding investors who, really wanted to get behind what we were doing. It remains a journey today, but it's a little easier and you've got long relationships, but back then you had to persuade them to take a view.

John Hartz

So, Tim, you don't think that the first inflection point was when Tim joined us?

Tim Smallbone

That was what I was hoping you were going to say.

John Hartz

Yeah, you know, started the Manchester office and, you know, just took off from there.

Tim Smallbone

I'm glad you mentioned Ster Century because I mean, it's a tiny deal in the context of what Inflexion does today, but in the context of Inflexion at that moment, it was the moment of credibility for the organisation.

John Hartz

Yeah, it definitely was.

Tim Smallbone

Deals are obviously, it's our life trade, it's what we do. Any other sort of, any others that you would mention that were sort of transformational in terms of how we were perceived either by ourselves or by the investor community.

John Hartz

I think it's a sort of odd answer to this is that by not doing very much just around the start of the credit crunch. So in 2007, 2008, we did really nothing. And then in 09, we really stepped foot on the gas and did three amazing transactions, FDM, which was a star deal. And I think that finally got our funds into a fantastic position. Other people were really struggling because of how much money they put out in 2007 and highly leveraged transactions. And I think that was a real moment.

Tim Smallbone

But curiously, a period of time we had the courage not to invest was as impactful as the times when we were investing.

John Hartz

And it wasn't that strange. I think it's another inflection point, actually, Tim, when we started to think about sort of next steps and Simon wanted to split out our minority investing into a separate fund. And I sort of couldn't quite see the point. It was actually a brilliant step. A really, really fantastic sort of inflection point where we went from being specialists, you know, on buyouts, but also onto partnership capital investing with minorities and backing entrepreneurs in a specific fund in a minority position. I think that was a real turning point for the whole business.

Simon Turner

We began to become a really well-managed, super consistent, top-performing fund that big investors could deploy as their partner in the mid-market.

Tim Smallbone

The side of the business that's less public is the side of the business that faces the LPs, the investors. Was there a sort of key moment of signing up a, I don't know, a key sovereign wealth fund or a US endowment fund? Was there a sort of a key moment you thought, right, we've really cracked it here.

John Hartz

The sovereign wealth fund that came into the Buyout and Partnership Fund we raised in 2014. That I think got us on the map with others as well, because they talk.

Simon Turner

I agree. I think we've been collecting excellent and renowned investors throughout the whole life of some of those very early investors are actually powerful opinion formers.

Tim Smallbone

The UK is an island, but we now have crossed the channel, transformation moment, going overseas. How did that all come about?

Simon Turner

Ten years ago, we built relationships in India, China and Brazil, always exotic locations to help our portfolio grow and trade. So we've been working with, if you like, national champion businesses that are doing something interesting in the mid-market and helping them into international territories confidently for a long time. I mean, it goes right the way back, but we've been doing it more and more systematically as the time has passed and with ever more professional help. But our approach to investing outside the UK has always been cautious, I think because the private equity industry is somewhat littered with mixed experiences in that area, and partly because there was always just so much to do in the UK. But actually, as we've scaled, as we've developed expertise, as we develop ever deeper sector expertise, it just makes a tonne of sense to be operating on a slightly broader playing field, hence the Amsterdam experience.

John Hartz

Well, I mean, I'd put it down to people, you know, I mean, I think it was a combination of the sector specialists we got in, who are investing in sort of modern sectors, if you like, sort of healthcare and tech. And those are businesses where geographical borders are sort of irrelevant. They're solving problems that are, you know, sort of global in nature. So where the particular business is domiciled is irrelevant. So you're having sector specialists who could take us into opportunities in Munich or Amsterdam or, you know, Stockholm, it's kind of, they're talking the same language as the entrepreneurs, which is a global opportunity for those businesses. And then I think in terms of bricks and mortar experience, actually opening an office, which we did in Amsterdam a few years ago, that was centred around centring around the right people, and we found an excellent partner in Sander and he's built an excellent team there. And we're going to replicate that. And I think Having been very slow into Europe at some level, probably 18 years or something to open an office in continental Europe, I think that'll go much faster because it should do. I think we've now cracked it, but it will be centred around the right people. That's the critical ingredient.

Simon Turner

But at another level, I think we've actually been quite cautious and quite conservative, super protective of the quality of what we have, super protective of the culture, anxious not to sort of over-expand, to dilute those dynamics, to dilute the sort of purity of the investment approach and the value that we can bring to portfolio companies, not fall into the same pitfalls that other firms have done. And I think investors like us for that. I mean, they sort of know what they're getting. And there are plenty of examples, a few of them very good, a lot of them very mediocre or yet to be proven, or firms that have had some success and have, taken advantage of market growth to really scale. And it's a dangerous game. If you think about any business, the suddenly going from playing in the national market into multiple international markets, doubling again your workforce, changing the nature of what you do and the relationships you have with the people who help you with that process, that's an awful lot to handle, and it's a really hard thing to handle in a three-year period or five-year period, and I think we've therefore been sort of, I think, quite incrementalist and organic in what we've done, and I think that's also... kind of kept us a little bit away from some of the traditional dangers in the industry.

Tim Smallbone

Yes, I was going to ask you about pitfalls. I mean, if the three of us put our heads together, we could easily think of 24 private equity houses that over the course of the last 24 years, at some point or other, we've talked about that have troubled us.

Simon Turner

Should we do that just for fun?

Tim Smallbone

That no longer exist. Into what pitfall have they fallen? I mean, what have people done wrong that we've managed to avoid?

Simon Turner

You have some success doing one thing. And I think it's very easy to convince yourself that that's scalable, repeatable, that you've sort of cracked the secret code. And our industry is also one which is emerging, it's maturing, but it's not yet mature. And so there are sources of new capital out there that will sort of get behind the latest, hottest private equity house and empower them to take these very big steps. I mean, actually, the discipline, the ill-discipline lies partly with the managers, partly with the investors. And so there's been a tolerance of those kind of big, big steps. And you can overlay that, and we've seen this a lot in the last few years, overlay that with just investment fashion generally. The huge swing towards technology investing, software investing, and the amount of capital that's flown into that narrow vertical with an inevitable effect on valuations of businesses and size of the underlying firms and therefore the investing in the marginal deal and so on. I think those are real dangers, weirdly, dangers that are tolerated in our industry.

John Hartz

Private equity gets a lot of talent and so we'd like to think some of the best talent makes all the same mistakes.

Tim Smallbone

While I was walking from King's Cross I did some preparation by looking up the collective noun for peacocks. It's an ostentation and an ostentation of peacocks. So I was thinking all private equity houses are the sort of business that we shun and would never go anywhere near, which is dependent on a small number of strutting peacocks and yet you've managed to sort of herd them together over such a long time without anybody sort of upsetting everybody else.

Simon Turner

There's always been this nice characteristic of Inflexion where we've slightly resisted the sort of hero culture, heroine culture. I think success and failure are owned equally by the organisation. And if you hear today the teams talking about things that have gone well, everybody gets mentioned. And not just everyone on the transaction team, and those transaction teams are now quite large, you know, 5, 6, 7 people, but also people in other parts of the business who provided sort of material assistance. And I think those little details are really lovely.

Tim Smallbone

Successful private equity businesses are all about people. Getting the right people at the right moment, key to creating success.

Simon Turner

We do have some wonderful people in the organisation at all levels actually, and the quality of the people we're hiring today and who choose to build their careers with us are exceptional. I think we were very fortunate in Richard Swann, head of buyouts, previously chair of the investment committee; Florencia Kassai, who came to us from HG, who now heads the buyout business and several others. You can look at the sort of emerging group of partners as well for similar signs of talent. Some of those are generationally the best in the business. I mean, Richard is an exceptional private equity professional, exceptional businessman who just helped us mature enormously in terms of the quality of our decisions, leadership and so on. So no we, you know, those remarkable individuals have really helped the business take the next step. And now we look to people like Florencia, George Collier, some of these other people who are in instrumental roles in the partner group today to take on that mantle.

Tim Smallbone

It's a great privilege to be here recording this in the Roundhouse, which has received great support from the Inflexion Foundation. Another sort of moment along the way was the creation of the Foundation. How did that all come about?

John Hartz

This is a sort of idea I had, sort of, it was almost like one of those ones you had in the sort of shower, but it was based actually on Simon's trips to the North Pole. And he may not know this, but I mean, I saw him going to our suppliers, if you like, to get sponsorship for that and get some charitable donations for that, which he gave, I think, to the Prince's Trust. And I sort of thought about it. I thought, actually, I'm sure we can do something similar and really harness our whole organisation, every touch point. I think the most pleasing thing is how everyone in the organisation is really behind it and out there raising money for it. We've done, goodness knows, hundreds and hundreds of miles of walking for, you know, raising money for the Roundhouse, but also the triathlon stuff for the Impetus charity. I mean, it's been a fantastic success and I love the way everyone leans in.

Tim Smallbone

Well, it's been a fabulous journey and well done with the Foundation and the many years ahead. I think that's it for this episode, so my thanks to John and Simon for joining me. Remember to subscribe to Inflexion Point wherever you get your podcasts so you don't miss an episode. And be sure to visit the Inflexion website if you would like to learn more about how we back ambitious business owners and help them to accelerate sustainable growth. Thanks for listening.

About the episode

Inflexion Point turns the lens on Inflexion itself. Host Tim Smallbone sits down with founders John Hartz and Simon Turner to trace the firm's journey from two colleagues in a borrowed office, sharing a single computer, to one of Europe's leading mid-market private equity houses. They reflect on the moments that shaped it: the first deal that earned the firm its credibility, the discipline of holding back through the credit crunch before investing hard in 2009, the decision to build a dedicated partnership capital business, and the move into continental Europe. Along the way, they talk culture, people and the Inflexion Foundation, and why putting the entrepreneur at the centre has mattered from day one.