April - PM: CARLTON PARTNERS A View From Berkeley - Syncap

Andrew Taee 

Group Chief Executive 

As winter turns to spring we feel it is timely to launch 

our view of the world from Berkeley Square. 

It has recently been quite dramatic – gale force 

winds threatened to uproot tall trees, then a blanket 

of snow appeared just when shrubs were beginning to 

blossom. Berkeley Square buzzes with people meeting 

and across our three Carlton Partner businesses it feels 

as though this is going to be an excellent year with some 

surprising events to unfold. 

“A View from Berkeley Square” has been launched by 

us to give you an insight into the workings of our fi rm and 

the specialist value-added services that we provide. We 

feature in these pages some examples of these values 

at work at Carlton. 

Carlton Capital Partners, Carlton’s asset management 

business, has enjoyed a successful year, outperforming 

Alice Bordini 

Partner 

A View From Berkeley Square 

Investment Perspectives for 2007 

One of the most common ways of starting a fi rst 

investment letter has always been “what a 

difference a year can make”. Well, in my view, 

2006 was not a life changing year. With a few exceptions, 

I would say it was a case of ‘more of the same’. 

On the economic front, the bears have been proven 

wrong. Growth continued unabated (despite a severe 

US housing downturn), no major market crashed, no 

major fi nancial accidents happened and there were 

no signifi cant corporate or fi nancial company defaults. 

As a pretty much constant feature in any year, we had 

Carlton Capital Partners 

April 2007 

its key benchmarks. Alice Bordini shares with us her current 

perspective for 2007 with her ideas on which alternative 

asset investment strategies are more likely to succeed 

in 2007. 

Carlton Corporate Finance has seen a succession of 

high profi le cross-border transactions working with 

Carlton’s international partner fi rms around the world; 

we highlight some of these. Also, Carlton’s new advisory 

board chairman, Sir Ralph Robins, shares his experience 

of the importance of corporate fi nance at Rolls-Royce. 

Carlton is in the process of putting a more formal private 

equity structure around our existing principal investment 

activities with the formation of Carlton Growth Capital. 

The team which we are putting together has extensive 

expertise in structuring and investing in companies 

in the smaller end of the mid-market. This is where we 

see opportunities to invest amounts of £2m to £12m in 

companies which have established businesses in growth 

sectors (larger transactions will be considered with our 

investment partners). I look forward to reporting on our 

progress this year as we convert investment opportunity 

ideas originated by Carlton’s network of people into a 

private equity investment portfolio. 

Carlton’s membership of the Clairfi eld Partnership 

provides us with the ability to service our clients’ needs 

on a global basis. We are expanding our reach into 

China and look forward to announcing these new 

arrangements shortly. 

a painful correction in May/June but it was already 

forgotten by the end of the summer. Amaranth, a 

$9bn hedge fund, collapsed in August and wiped 

out $6bn of investors’ money, or 65% of their assets. 

Markets barely blinked. When LTCM, a $4.5bn fund 

collapsed in (again) August 1998 the Fed was forced to 

pool the world’s major investment banks in a concerted 

effort to avert fi nancial crisis. True, markets were far less 

sophisticated than they are now and LTCM put at stake 

not only its investors’ money but the whole fi nancial 

system, hence the need for a rescue operation. In barely 

eight years, markets and their participants have grown 

and liquidity has increased dramatically. The market’s 

ability to absorb shocks is now far greater and makes 

the 90s look like the past generation. The next ten years 

are likely to witness another similar surge in innovation 

and development of the fi nancial systems. 

Most corporate balance sheets are very healthy: 

companies have used cash to reduce their leverage and 

fi nance acquisitions. On the other side, private equity 

transactions and MBOs have been largely fi nanced 

through debt, which has created additional leverage 

in the system. Credit spreads are still very low and, as 

soon as there is a change in the world’s risk appetite or 

economic conditions, they will widen considerably. The 

credit binge is not set to continue forever and at some 

point there may well be a re-rating of many fi nancial 

assets. 

www.carltonpartnersllp.com Tel: +44 207 355 2211 Fax: +44 207 495 8675

One controversial issue is volatility. Over the last few 

years it has, by and large, fallen in most asset classes. 

I believe that volatility has structurally come down in 

the wake of more stable economic growth around the 

world, better company balance sheets, an increased 

sophistication of the world’s fi nancial systems, a better 

redistribution of risk (thanks to structured fi nance) and 

more transparent and predictable monetary policy. The 

world’s central banks have gradually become reactive 

and markets can now mostly anticipate what the next 

move will be. They have traded their pro-activeness 

for more stable interest rates and Forex markets, which 

have helped equity & credit markets and economic 

growth to stabilize. 

We cannot ignore the impact that hedge funds have 

had on volatility. Hedge fund activity has improved 

market effi ciency and reduced asset mispricing. This 

said, volatility price is in most markets undervalued and, 

although the timing for a volatility re-rating is very hard 

to predict, the downside is much lower than the upside. 

This applies more in markets whose economies could 

slow down more markedly in 2007 and could therefore 

make volatility surge. 

Equity markets are not cheap. In most cases they are fairly 

valued, but in a few they are outright expensive (e.g. 

India). If corporate earnings slow, markets would have 

to change their assumptions and some selling pressure 

would emerge. On the other side, should growth come 

in better than expected, infl ationary pressures are likely 

to grow stronger and central banks would be forced to 

raise rates, which would have a potentially even bigger 

negative impact on the market. 

Overall I expect market corrections during 2007, but see 

positive numbers by year end. Private equity activity, 

share buybacks and M&A are set to continue at a 

strong pace and drain funds, and hence liquidity, out 

of global markets. The emergence of a new investor 

base in developing countries has created additional 

demand for fi nancial assets, which will create further 

impetus to their prices. 

Liquidity remains high, despite the substantial reduction 

from the levels two years ago. Banks continue to 

Introduction 

Rank value 

$150,000 

$125,000 

$100,000 

$75,000 

$50,000 

$25,000 


M&A Buyside Financial Sponsor Activity (US$m) 

source: Thompson Financial 

M&A Buyside Financial Sponsor Activity (US$m) 

$0 

2000 2001 2002 2003 2004 2005 2006 

Rank value (US$m) # of deals 

800 

700 

600 

500 

400 

300 

200 

100 

0 

# of deals 

multiply it and feed it into the system. The fall in oil 

prices has also had a positive impact. Commodities 

have emerged from 20 years of bear markets and 

have benefi ted from increased demand, momentum 

investing and their consecration as an alternative asset 

class, followed by a surge in the amount of capital 

global investors allocated to them. 

The question now is: “Where do we go from here?“ 

We are asset allocators and the questions we ask 

ourselves are where to allocate capital, what might 

be the best vehicles to play our top down views and 

whether we can do so in a controlled risk framework. 

We invest most of our clients’ capital in alternative 

funds, mostly hedge funds, and are not benchmark 

driven. Investing in hedge funds means that we have 

access to a huge variety of investment opportunities 

across all instruments, asset classes and geographies. 

It means identifying a market’s potential (beta) as well 

as a unique way of playing that market (a portfolio 

manager’s skill and talent, the alpha). 

What do we like? 

Equity, in particular emerging markets. The story is just not 

comparable to anything else in the developed world. 

Let us just consider that in 1950 developed economies 

accounted for 60% of the world economy. Today they 

are about 50% and getting smaller every year. $3bn of 

new consumers and producers have been added to 

the global system. It is a new middle class that is fuelling 

the system and making the world less dependant on 

the US consumer. Emerging countries, and not only 

the so-called BRICs (Brazil, Russia, India and China), 

are set to overtake developed economies soon with 

clear implications in terms of demand for commodities 

(metals, precious and soft, and agricultural produce) 

and for developed market exports. 

Asia is a fertile ground for a number of hedge fund 

strategies because it is still ineffi ciently priced, especially 

compared to developed markets, and is in continuous 

change. Even with a correction factored in for the year 

I am very bullish. China is likely to have another positive 

year with most of the buying in the market being 

domestic. I also like Japan. It is trading at low historical 

valuations, with a P/E of 18x versus an average of 35x 

since 1988 and an EV/EBITDA of 7.7x versus 8.2x for the 

US, which signals its signifi cant de-leveraging in recent 

years (data for MSCI Indices). Sentiment is still negative 

but the country is slowly coming out of defl ation, which 

means that Japanese investors will have to make 

substantial changes to their asset allocation. Last year 

M&A activity also started in a convincing way with the 

fi rst ever domestic hostile bid and more cross-border 

deals. 

I like Latin America, especially Brazil. The increasing world 

demand for food and bio-energy will benefi t this country 

which has seen its interest rate come down in a straight 

line in 2006 from 18% to below 13%. With infl ation running 

at around 3%, the potential for further reduction is large. 

This is coupled with the modernisation of its economic 

and credit system, and with a developing middle class 

the potential for growth is there. 


Selected Eastern European markets, in particular the 

most peripheral ones, are set to benefi t hugely from 

their countries’ accession to the EU. Their equity markets 

are still underdeveloped and under-owned by foreign 

investors, which is exactly what we look for. 

Western Europe is benefi ting hugely from Eastern 

and Central European countries’ convergence. Two 

examples are the swollen order book of German 

construction companies and the booming fi nancial 

sector. Not all of this is in equity market prices yet. 

Activist strategies should continue to perform strongly. 

The world is unmistakably going towards fi nancial and 

economic effi ciency and anyone trying to resist it is 

bound to struggle. Emerging markets are also becoming 

an interesting ground for this strategy, especially in Brazil 

and Asia. 

Gideon Franklin 

Senior Advisor 


The M & A Markets 

The combination of cheap money and corporate 

confi dence, which lead to 2006 breaking records 

for M&A, has continued in 2007. Activity levels 

are still high, albeit that some of the most compelling 

deals have been undertaken and chief executives are 

maintaining a highly disciplined and strategic approach 

to M&A. The price expectations of some vendors are 

also inhibiting transactions. 

Financial sponsors seek ever larger investment 

opportunities, as demonstrated by the potential offers 

for Sainsbury’s and Boots and the offer for TXU in the 

USA. 

Sponsors are also continuing to compete strongly in the 

auction processes in which we have been involved. 

Recent transactions have seen fi nancial buyers winning 

the day with offers approaching 10x EBITDA. However, 

the re-rating of many corporates and their ability and 

willingness to debt fund deals is enabling them to 

compete, albeit by sharing the value of achievable 

synergies. 

Financials and real estate extended their lead in M&A in 

the so-called mid-market (under $500m value) last year, 

whilst industrials, materials and energy overtook tech 

Finally, I do not like credit spreads at these levels, and 

am concerned about the huge leverage that has been 

created in recent years by structured products. 

Conclusion 

Carlton Corporate Finance 

To conclude, I believe 2007 will be an eventful year, 

where a number of real and fi nancial assets are 

likely to converge towards their fair price. Important 

developments are likely to happen on the political, 

economic, social and fi nancial sides. Investing will be 

less easy than the past three years and differentiation 

will be a must. We are constantly on the look out for 

new trends and infl exion points, and smart and different 

ways of playing our views. �� 

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Mid-Market M&A by Target Industry Up to US$500m 

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and media. Deals in telecommunications �� 

once more 

rank at the bottom end of the group. 

Transactions 

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Carlton and Clairfi eld Partners advised on transactions 

approaching $1bn in value in 2006 and we continue to 

build on this into 2007. 

2006 transactions included advising: 

AXA Private Equity on the acquisition of Pfl eiderer Track 

Systems, a leading player in the rail track industry with 

seven plants in Germany, Hungary, Romania and Spain, 

for $180m. 

Rentokil Initial Plc on the acquisition of J.C. Ehrlich 

Co. Inc., a pest control service based in Reading, 

Pennsylvania, for $142m. 

McCormick & Company, Inc. on the acquisition 

of the assets of Epicurean International, a leading 

manufacturer of Asian food products under Thai Kitchen 

and Simply Asia brands, for $97m in cash. McCormick 

is a global leader in the manufacture, marketing and 

distribution of spices. 

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Philips Electronics N.V., Europe’s largest electronics 

company, on the disposal of Anteryon International B.V. 

to the Cosyma investment group. Anteryon develops, 

manufactures and markets a range of optical 

technology products. 

Transactions in 2007 to date include advising: 

Spectris Plc on the disposal of Spectrum Inspection 

Systems, manufacturer of contaminant detection 

equipment for the food, pharmaceutical and textile 

industries, to Illinois Tools Works Inc. 

McInerney Homes Plc, the leading Irish housebuilder, on 

the acquisition of Lancing Homes, based in the North of 

England. 

Coveright and its private equity shareholders on the 

disposal of the furniture division to Spanish Group 

Pozorica SC. 

GB Group, the largest manufacturer of spare parts for 

the agricultural and heavy machine industries, on the 

acquisition of Tractiv Group from Close Brothers Private 

Equity. 

Morel Nettoyage, the French cleaning services 

company, on its sale to ISS. 

Japack, a distributor of food processing and packaging 

machinery, on the sale of the company to OFI Private 

Equity and the management. 

Welcome to Sir Ralph Robins 

Sir Ralph Robins has recently joined Carlton as 

Chairman of the Advisory Board. His CV is remarkably 

simple – just one company, Rolls-Royce, for the last 50 

years as Managing Director, Chief Executive and then 

Chairman. “I planned to leave after two years, but kept 

on being promoted. Perhaps the most remarkable thing 

looking back is how Rolls-Royce came to dominate the 

large aero engine market with GE. Twenty years ago it 

powered just fi ve aircraft; now every commercial aircraft 

in the world except the 737 is powered by Rolls-Royce”. 

He was also a director of several other international 

companies. His achievements and experiences during 

this period will be invaluable for us at Carlton and our 

clients. 

M&A played an important role in the development of 

Rolls-Royce including establishing a presence in marine 

with Vickers and a large US presence with Allison from 

the private equity fi rm Clayton. “Rolls-Royce bought 

Allison after three attempts to prise it out of GM. A surprise 

success of that acquisition turned out to be engines for 

the Brazilian short haul aircraft manufacturer Embraer”. 

Carlton Corporate Finance Ltd 

Jane Hughes - Managing Director 

Simon Murphy - Managing Director 

Mark Harrison - Managing Director 

Albert Ganyushin - Managing Director 

Scott Young - Managing Director 

Carlton Capital Partners LLP 

Sir Ralph Robins at the Carlton Reception 

People sometimes wonder if Carlton is connected 

with other companies bearing the same name. The 

Rolls-Royce name is familiar through cars as well as 

aerospace. Although the car business was sold in 

1973, “it never mattered people confusing the two 

companies providing the quality of the car remained 

high” he said. 

Sir Ralph is also Chairman of The Alter Technology 

Group, a company which acquires, tests and supplies 

components for the space and defence industry. “You 

can have a $100m product which depends on a $5 

piece of silicon to function reliably.” 

Carlton Corporate Finance Activities 

Carlton Corporate Finance provides strategic fi nancial 

advice, identifi cation of potential buyers and sellers, 

valuation and the management of transactions 

including private and public acquisitions and disposals, 

Rule 3 Advisory, capital raising and restructuring. 

Our extensive network at senior level in corporations 

and fi nancial institutions allows us to originate, negotiate 

and complete transactions in a discreet, effective and 

highly disciplined manner on behalf of our clients. 

The Clairfi eld Partnership provides our clients with access 

into key global markets. It also means that we maintain 

strong local knowledge of the regulatory, fi nancial and 

market issues that often makes the difference in closing 

a complex transaction. 

Eric Schots - Founding Partner 

Alice Bordini - Partner 

Nick Jones - Head of Sales 

Ariane Payen - Executive Director 

Carlton Growth Capital LLP 

Kevin McCollum - Partner 

Stephen Willis - Partner 

Alan Wheatley - Partner

April - PM: CARLTON PARTNERS A View From Berkeley - Syncap

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