Hotbed warms the hearts of its smaller investors

Gary Robins' democratic firm is thriving, writes Simon Evans. And then there's the pole-dancing

For the average punter, a snatched 10 minutes watching Dragons' Den on the box is about as close as they'll ever get to the world of private equity and venture capital. Traditionally the preserve of the rich, the famous and the well-connected, Joe Public has been forced to watch private equity's spoils pile up from the sidelines.

But Gary Robins, chief executive of Hotbed, is doing his level best to spread the word much further than the swanky bars of Mayfair and the City. After packing in his well-paid job at the private equity firm 3i, Robins created Hotbed, a private-equity firm that supplies direct private-equity investments to a network of more than 800 members. Each member can invest a minimum of £25,000 into, among other things, gym companies, wind farms and cosmetics makers. They get their money back when the firms are sold or floated.

"I left 3i at the end of 1999 after 15 years of making them a lot of money," says Robins. "Smaller companies were 3i's bread and butter – they did hundreds of deals a year in that space. But I could see that 3i wanted to get out of venture and instead had aspirations to become one of the typical big-end buyout houses, so I quit. I had no interest in big private equity – it's just plain old financial engineering to me."

Robins, who first trained as a psychologist before entering the City, had to do plenty of his own engineering when creating Hotbed.

"When I was trying to develop the Hotbed idea I was asked by a colleague to help raise some finance for a football channel, which was looking to get £2m in start-up funds," says Robins. "The traditional venture routes were largely closed to such a small raising so the MD at the company asked me whether I would present to his mates at the golf club to try and raise the cash. They were not these business angel types .... But they were interested and we raised the cash, although the company didn't need it in the end."

Although such marketing probably broke every rule in the FSA's book, as Robins cedes, he decided to plough on and develop the idea further.

"We thought," Robins says, "what if we had a subscriber model, where we were marketing ideas to members who would pay to be part of a network? People outside the finance world would be able to buy their way into private-equity investments and participate in the returns. But we underestimated the early challenges."

Getting 50 members to sign up proved horribly difficult, with the absence of any kind of track record putting would-be investors off. "It took us three months to raise £350,000 in growth capital for the first deal," says Robins.

As with most business ventures the spur to Hotbed's growth came through a stroke of luck, when Robins, watching Chelsea play at the Bridge, happened to fall into conversation with Simon Cooke, then head of property assets at the giant German investment bank Deutsche. "He worked alongside Nicola Horlick at Deutsche and had decided he wanted out of the big bank for a new challenge," says Robins. "We persuaded him to join us for a fraction of the salary he was on at Deutsche. He certainly put us on the map."

Although Cooke has now gone, Hotbed recently hired Julius Gottlieb, the former finance director at Morley Fund Management, and latterly chief finance officer at Olympics developer, Lend Lease, as property chief.

While big-name hires have helped Hotbed establish credibility in the notoriously conservative investment world, the biggest contributor to success has come from the firm's membership. Word of mouth has been Hotbed's biggest friend.

"Around half of all the investment ideas are generated by members," says Robins. "We are actually hiring one of our members as a consultant at the moment because his ideas are that good."

Ideas that have come from the membership have included Hotbed's stake in Gymbox, an alternative to the traditional gym concept offering such delights as pole-dancing classes, chav fighting and boob aerobics – all in the name of fitness, of course.

"Gymbox was brought to us by Mike Balfour, the founder of Fitness First, who is a member," says Robins. "He brought it to us off market and would have chaired it for us save for a conflict of interest. Patrick Henchoz, of Esporta fame, is now chair. Another example of the membership at work. Most deals seem to throw up someone from the sector, they will suggest talking to someone else, who quite often isn't an existing member."

Sinclair Beecham, a founder of the Pret A Manger food chain, is also a member of Hotbed, as are famed fund manager Nicola Horlick, Bob Morton, the veteran City investor, and one of the founders of Admiral insurance. "Sinclair invited us to invest in his development of the Hoxton Hotel on the outskirts of the City, which has proved to be a very attractive asset," says Robins. "We've now sold our stake back to the founders, making three and a half times on our investment."

Robins remains bullish that the venture capital world has turned the corner. "To me things now have the same feeling as 1991 and 1992," he says. "I don't think things are anywhere near as bad as then. On the back of the period groups such as 3i invested heavily and returned some fantastic numbers on their investments in the following three years or so. The returns from the '91 vintage were staggering."

Hotbed claims to have generated an average rate of return across all their investments of nearly 25 per cent. Of course, members don't invest in each and every investment meaning bigger profits for some and losses for others.

"It's not all about capital growth because we think it's important to structure an income component into our deals," says Robins. "Our latest property deal is a good example where exposure to a loan note yields investors 7 per cent, which is very good in this environment. We also structure an equity option into the deals, which is clearly our big incentive to make sure we manage the investment as best as we possibly can for our members."

At £25,000 a pop Hotbed is hardly investing for the masses. However, it has brought the world of private equity a little bit closer.

"The power of syndication and aggregation is immense," says Robins. "Hotbed has opened doors in the investment world traditionally closed to the private investor. Investing shouldn't just be about passive fund management – it's a lot more than that."