THE ANNUAL REVIEW 2010 - PEI Media

private equity annual review 2010 pa g e 103
JUNE
What a stable UK government means for
private equity
“With a certain level of clarity over the future
– and £6 billion public spending cuts due this
year – opportunity now knocks for private
equity firms. Firstly, the need to find efficiencies
across the public sector opens the
door for any portfolio companies that offer
products and services that can help with this
task. Secondly – and more pertinently – is the buying opportunity.
As part of a Herculean revenue raising exercise it faces, many
expect the government to size up some of its trading entities and
ask which can realistically be sold off. Assets such as the Tote, a
sports gambling group currently owned by the government, and
Northern Rock, the banking group which was nationalised in 2007,
would certainly be on the block.”
JULY/AUGUST
Solvency II and Basel III threaten the industry
“The draft Solvency II Directive – scheduled to be introduced in
2012 – would create a more stringent capital adequacy regime for
insurers and reinsurers, with the goal of preventing these institutions
from taking on overly “risky” investments. The directive calls
for higher capital adequacy requirements, leading to higher capital
charges against unlisted assets. Criticisms at this stage centre on
the fact that all unlisted holdings are treated as being equally risky,
when in fact risk profiles vary between asset classes (hedge vs.
private equity) and strategies (buyout vs. venture capital). At the
same time the Basel Committee on Banking Supervision is due to
vote later this year on new capital adequacy proposals – dubbed
“Basel III” – which would enforce similarly stringent capital adequacy
requirements on the banking sector. Any noise around the effects
of these two regimes has been drowned out by the rumbling juggernaut
that is the AIFM directive.”
SEPTEMBER
Team up with a French sovereign wealth fund
“The raison d’être of the FSI is clear: sovereign ownership of strategic
assets, keeping French business French. As covered in this
magazine previously, GPs on the ground in France consider the
FSI to be an aggressive competitor in chasing deals. Last year it
invested €800 million in 21 businesses of various sizes. The pairing
with Apollo is, therefore, a curious one. Apollo also has very clear
goals, but they all relate in some way to generating a return for
investors, not protecting French industry. While the two entities
are currently aligned in their aim to own Alcan, this situation could
conceivably change. What if Alcan had to be restructured and jobs
needed to be shed? What if it made fiduciary sense to locate certain
business divisions outside France? It is doubtful that such measures
would sit well with both sides of the partnership.”
“The clock is ticking
on funds’ investment
periods, and money
needs to get into
the ground”
OCTOBER
On remunerating the ailing Candover
team
“Some LPs – and many public shareholders
of Candover Investments – will be left with
a sour taste in their mouths. If this is the
team that got the funds into a hole, why
should they be retained at all? Why should
they be enriched, when investors’ capital has
been eroded? Surely the assets could – and
should – be transferred to a new manager with a more motivated
and resourced team? But as one, more sanguine, Candover LP put
it to PEI, any actions taken were designed to protect the interests of
investors. To extract the value of what is left of LPs’ investments, the
team needs to be both retained and motivated. These are the people,
after all, who know the portfolio best.”
NOVEMBER
On a possible rise in the number of take-privates
“The public markets have remained a marginal hunting ground for
private equity firms. But will a new set of circumstances change all
this? With funds ticking towards the end of their investment periods
after what has been a relatively barren two years, private equity
capital is more willing (let’s not say desperate) than ever to find
opportunities. In secondary buyout deals, these willing buyers are
finding equally willing sellers, but only the highest quality assets are
finding their way onto the block and are often the subject of fiercely
competitive – and hence expensive – auctions. Meanwhile, public
stock markets have rebounded. With share prices looking less “bargain
basement”, institutions may well be happier to entertain offers.
If the same institutions fear a ‘double-dip’ recession threatens the
share price in the short term, they may be even happier to cash out.”
DECEMBER/JANUARY
On 5 November: Guy Fawkes night
“It was not Guy Fawkes but another Guy, Terra Firma’s founder,
chief investment officer and figurehead Guy Hands, who occupied
the headlines on 5 November this year. After just four hours
of deliberation, a jury ruled that Citi investment banker David
Wormsley had not tricked his long-time business associate and
sometime friend Guy Hands into overpaying for music group EMI.
At stake was a maximum payout of £1.5 billion (€1.7 billion; $2.4
billion) in damages and considerable reputational risk. A win for
Hands might have set an interesting precedent for other bankers
to be sued where LBOs had gone awry. The ultimate verdict was
unsurprising. Jurors were being asked by Terra Firma’s attorney to
award against Citi purely on the basis of Hands’ testimony: nothing
was offered in the way of documentary evidence. It always seemed
like a long-shot at best or – at worst – a hopeless case for Terra
Firma; a tactic to gain some bargaining leverage in debt renegotiations
that went too far.” n