Interview: Duncan Penny
Duncan is a Senior Founding Advisor at n Industries. Duncan was CEO at XP Power, a FTSE250 company, from 2003 to 2020. During his time there, he grew the business from less than $30mn in revenues to over $300mn, while significantly enhancing the profitability of the business.
He also completed on multiple successful acquisitions. His record of growing EPS at a compound rate of ~20% during his tenure is one of the best track records of British business leaders of publicly listed companies over this period.
Duncan brings significant value to our operating companies by helping to advise on strategy and growth.
Why the interest in the opportunity at n Industries? And how involved are you?
I have found it really rewarding getting involved with smaller owner managed businesses. They are often very enthusiastic, receptive to input and are so agile. As an advisor you can make a meaningful impact very quickly. Working at n Industries gives me the opportunity to do this – you really feel you can make a difference.
Since joining the Team, Jon, Paul and myself have started to engage with numerous prospective acquisitions through speaking with them directly as well as receiving Information Memoranda from brokers representing small niche industrial businesses.
It’s pleasing to see how many quality small businesses we have operating in the UK. I am currently spending a week or so a month on this discovery activity and am looking forward to spending more time advising the companies we acquire, once we start building the portfolio.
I have found it really rewarding getting involved with smaller owner managed businesses… you can make a meaningful impact very quickly. n Industries gives me the opportunity to do this – you really feel you can make a difference.
At XP Power you were one of the best performing listed businesses in the UK given you generated a compound annual growth rate for earnings per share of 20% and grew the business to over $300mn in revenues. What key strategies enabled you to deliver such an impressive rate of growth?
I believe the main factor was that our strategy was very clear, and we were disciplined in executing against it. It’s true that the strategy was refined and changed as the business developed, but we were always very clear regarding what was a good customer for us, the type of problems we could solve for those customers and therefore the value we brought to those customers. From that point it was straightforward to decide what type of products we needed to develop and the capabilities in terms of people, processes, and systems we needed to build to win against our competition.
Can you explain a little about the journey XP Power made during your time as CEO? My understanding is that you continually transitioned the business into higher value areas – the business grew gross margins from 33.5% to 47% and operating profit margins from 4% to ~20% during your time as CEO.
We initially started as specialist distributor of power conversion products, serving the fragmented industrial markets which included medical and defence. We gained a lot of knowledge regarding the market and what was required because we had so much customer interface. We found that many of the products offered by our principals were not suitable for our chosen customers, so we started to develop our own products. This started from private labelling products we could source in Asia and developed into specifying products for others to build for us and then to acquiring our own design capabilities through acquisition.
As we started to attract bigger, more interesting customers, we saw the benefit of having our own manufacturing so we could demonstrate complete control of the supply chain and manufacturing processes which was important in a mission critical product and highly valued by our medical and blue-chip industrial customers. We did this at the same our traditional competitors were outsourcing their fixed cost manufacturing to Asia to reduce their fixed costs. It felt like we were swimming against the tide, but the strategy paid off in terms of market share and margin growth.
At the same time this was happening, we were expanding the product portfolio in terms of power level and voltage to move away from the low-cost Asian competition. It was this that enable us to expand our margins at the same time we were growing the top line.
The “Goldilocks” industrial business for me is where the product or service is mission critical in terms of cost and/or safety, the customer’s product life cycle is long and is a relatively low cost for the customer in relation to his system.
How does your experience at XP Power inform what makes a good industrial or B2B business? And how do you apply that to helping n Industries make the right acquisitions?
The “Goldilocks” industrial business for me is where the product or service is designed in and not easily replaced, has a high cost of failure for the customer so is mission critical in terms of cost and/or safety, the customer’s product life cycle is long and is a relatively low cost for the customer in relation to his system (so service and quality are more important than the price). This should present a situation where there is an ongoing revenue annuity and superior margins and comparatively low risk from a business and investment perspective. Our acquisition criteria at n Industries encompass these characteristics together with having strong management team in place or a capable second tier that can step up and grow the business.
What is front of mind for me when visiting prospective acquisition targets with Jon and Paul is what we could do to help enhance the business and move it to a new level of growth and profitability. I had not worked with Paul Simmons before n Industries but I have been very impressed with how he is able to quickly assess a business and make meaningful recommendations, particularly on the operational side. Between us I believe we bring considerable depth of experience to ensure we make the right acquisitions to produce a formidable portfolio of high performing niche industrial businesses.
Where businesses do have clear strategies, they often fail to take the next step to really define how they are going to win in the markets.
What value do you think your experience can add to both n Industries as a group and to the Managing Directors of its Operating Companies?
When I was a full time executive, I found bouncing ideas off or testing proposed decisions and actions on people who had ran businesses and trod that path before invaluable. They would either introduce a new perspective to the issue at hand which frequently ended in a better decision or often would just confirm my thinking allowing me to press ahead with a plan of action with much more confidence. I believe that both Paul and I can provide this type of mentorship to n Industries and the Managing Directors of its Operating Companies giving them access to resources that they would never have had before. You’re a very clear thinker on business strategy – how do you help management teams improve their thinking about strategy?
What has struck me about many of the smaller businesses I have been involved is how often they try and pursue too many opportunities and therefore don’t manage to fully benefit from any of them. Many don’t ask themselves if they really understand the basics of where they should be playing in terms of markets, customers, products, and sales channels.
Where businesses do have clear strategies, they often fail to take the next step to really define how they are going to win in the markets and customers they are pursuing and most importantly what capabilities they are going to need in the business to fully realise their strategy. I’ve often found asking simple questions around these areas can be of great help to management teams in developing and refining their strategy.