Pennine invests private capital in one acquisition at a time.

A generation of founders is retiring without successors, and the market for businesses with an enterprise value below about £3 million is served by business transfer agents and trade buyers rather than by institutional capital, which cannot deploy at that scale. Pennine's expectation is that a buyer who approaches those owners directly, before an agent is instructed, with finance arranged and a commitment to continuity, will be offered sound businesses at prices that reflect the limited alternatives available to the seller.

The return on equity is expected to come principally from repaying acquisition debt out of the existing cash flow of the business, so that the equity comes to own, free of acquisition debt, a business bought at a modest multiple. Growth, where it occurs, is additional and is not relied upon. The businesses are selected for their ability to service that debt: service and distribution trades in which customers buy under contract, under regulation or by routine, with ten or more years of trading, a manager responsible for day-to-day operations and a spread of customers. Hospitality, retail, construction contracting and businesses in financial distress are excluded, because earnings that follow the economic cycle or depend on the seller cannot prudently support acquisition debt.

• Before commitment: the accounts, the financial model, the due diligence reports and the terms of the senior facility and the vendor loan note, with the risks set out in writing in the same detail as the expected return.
• A shareholders' agreement setting out the dividend policy, information rights, the consents required for further acquisitions or borrowing, and the terms on which any shareholder may sell.
• Quarterly management accounts and a written report from the founder, and a seat on the board for commitments above a level set in the shareholders' agreement.
• No personal guarantee is sought from any co-investor.
• No salary is drawn by the founder from an acquired business until the deferred part of its price has been repaid.

Pennine's co-investors are expected to be individuals who have built or sold a business, family offices and private investors familiar with the North West and its trades. Terms are set out in a memorandum provided privately, after an initial conversation.

Pennine seeks a term loan secured on the business acquired, sized as a multiple of that business's earnings rather than of its price, from lenders accredited under the British Business Bank's Growth Guarantee Scheme and from specialist acquisition lenders. No structure is pursued in which the cash available for debt service falls below 1.2 times the amount due in any year of the plan. Deferred consideration owed to the vendor is subordinated to the senior facility and carries an initial interest-only period, so that the senior lender is repaid first and the business is not required to service two amortising loans in its first years under new ownership.

Before a lender is asked for a decision it receives three years of filed and management accounts reconciled to VAT returns, the financial model with its sensitivities, the financial and legal due diligence reports, the heads of terms and the proposed shareholders' agreement, a summary of the management remaining in place and their retention terms, and the founder's curriculum vitae. After completion the company reports as the facility agreement requires, and adverse developments are reported promptly and in full.