RBDC Team Spins Out, Aims at Middle-Market –

In the world of private equity, to lose one executive may be regarded as a misfortune; to lose five looks like carelessness. That paraphrase of Wilde is unlikely to raise many smiles at Royal Bank Development Capital (RBDC), which in late July suffered the departure of a substantial portion of its Scottish investment team. The defectors were director Steven Scott and associate directors Torquil Macnaughton and David Calder from RBDC’s Glasgow office, together with Edinburgh assistant directors Rod Begbie and Mark Philips.

Although the defectors’ contracts precluded them from commenting at press time, sources familiar with the matter confirmed the ex-RBDC executives have plans to launch an independent U.K. middle-market fund with a target of GBP100 million ($160 million) or more. Moreover, sources said the upstart group already has lined up some institutional commitments. Sources have cited Bank of Scotland, Norwich Union and Standard Life Assurance Co., as well as the executives’ former employer, Royal Bank of Scotland as possible backers of the new venture.

Execs May Spur No-Confidence Vote

Should Royal Bank of Scotland back the effort, it will undermine RBDC’s attempts to downplay the significance of the team’s departure. Paul Whitney of Parallel Ventures, which recently signed a co-investment agreement with RBDC, also tried to minimize the impact of the defection. Whitney described the loss of the five directors as, “disappointing, but not the end of the world from Parallel’s point of view. [RBDC Managing Director] Joe McGrane has more experience than all of them put together.”

Whitney added that RBDC currently is ahead of schedule on the GBP40 million per year deployment target set by Parallel.

However, a number of prominent industry observers, who declined to be named, stressed the importance of the role the executives played at RBDC.

“Make no mistake, this is a serious blood-letting,” said one observer. “These are the guys who have been driving performance at RBDC for some considerable time.”

Steven Scott worked with RBDC since its inception, while McNaughton and Begbie each notched up four years, with Philips and Calder weighing in at three and two years respectively.

Nor were market participants slow to suggest possible reasons for the mass defection.

Several sources speculated that a remuneration structure that provided, as one source put it, “too much to the chiefs and not enough to the braves.” Were this the case, it would mirror the private equity structures at several banks and other large institutions that have been slow to devise remuneration structures that reflect market rates for private equity professionals.

One individual closely connected to the team, however, denied that remuneration was the primary reason for the team’s departure, saying instead that fundamental strategic disagreements between the “gang of five” and RBDC’s senior management have prompted the executives to strike out on their own.

The same source said that the planned fund would focus closely but not exclusively on a number of key sectors, targeting transactions in the GBP10 million to GBP75 million range. The source further predicted the team, once contractually free, soon will be in a position to hold a first close on the vehicle.