EquityFC Blog

PE out of the doldrums? | 29 September 2009

Finance execs looking for private equity-backed posts, take heart. There are lots of signs that the exits market is picking up. A decent bit of churn in PE portfolios open up options for fast-thinking FCs and FDs. So what are the portents that things have improved?

Well, I'll start with fantastic news from NVM Private Equity, which has just exited from medical diagnostics firm DxS for a record-breaking return of 13 times money (providing earn-outs all click, of course). Disclaimer: I do help NVM with writing tasks, but the numbers are impressive. And they show one thing very clearly: smaller and mid-market PE houses are fun to work with. DxS had its hiccups on the way - including a big change of strategy when the market it was targeting didn't play out. But NVM backed the business through thick and thin over eight years. They also tweaked the management team when the strategy demanded it - creating opportunities for new finance execs, of course...

But the exit joy is not confined to these shores. FT Alphaville reports that things are looking up in AsiaPac, with big IPOs and trade sales. As confidence creeps back into the markets - particularly important as the secondary buy-out market hasn't quite yet taken off - we can expect more of these deals. Just look (ahem...) at the New Look IPO, slated to value the PE-backed business at £1.7bn.

It's not all buoyant. Richard Fletcher in the Telegraph reports a doomish conversation with a PE GP, alleging that the party's over for the PE model. Well, he's wrong. Massive leverage and debt-enhanced equity multiples might well be a thing of the past - as Fletcher points out, public money investors will be wary of debt-laden companies like Jessop's coming onto the markets.

But PE is so much more than that – as hands-on, operationally driven firms like NVM make clear. Slaving away over the working capital and thrashing the cost base aren't any financial controller's idea of a good time. But spotting, evaluating and executing on market opportunities with a motivated operational colleagues and an interested, experienced and enthusiastic backer? That's more like it.

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Jon Moulton's shock resignation | 4 September 2009

A great scoop from Amy and the guys at private equity magazine Real Deals: they've got hold of Jon Moulton's resignation letter, and seemingly before big guns like the Telegraph. Moulton founded Alchemy Partners as a upper-mid-market turnaround shop in the late nineties, and since then he's carved out a name for himself as the nation's PE figurehead.

Perhaps most famous for the deal he didn't do - he was denied the chance to buy Rover, which went instead to a group who had no idea about turning it round but managed to pay themselves handsomely while it went bust again - Moulton was nevertheless a highly effective, straight-talking accountant of the old school. I interviewed him about six years ago and thought he was articulate, direct, fair and trustworthy - not bad for the PE industry!

That makes his departure all the more shocking - although the openness and directness of the resignation letter are not so surprising. He reveals that he's fallen out with fellow board members - whose own limited deal-doing record he exposes - over a shift in strategy from turnarounds to deals in the financial services sector.

Moulton is a loss to the industry. Although many a management team feared his no-nonsense approach (he told me that he fired around 60% of the FDs of portfolio companies they invested in!), the turnaround market is poorer for his departure. If I saw a chance to generate massive operational gains by rescuing a battered business, I know which backer I'd have wanted.

Happy retirement, Jon.

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The New Normal | 2 September 2009

Blogger Carried Interest has an excellent new post up discussing "the new normal" for the private equity industry. It's well worth a read. If you're joining a management team backed by PE or considering an MBO, it's vital that you have a keen sense of their priorities.

Carried Interest flags up these five new realities that he feels will define the industry for some time to come:

1. Fewer PE firms.
2. Tougher fund terms (which means lower fees and less generous carry terms for general partners).
3. Longer hold periods (although personally I think that's still a function of market buoyancy, not some newfound doctrine of sustainable ownership...).
4. Much less debt (CI reckons 50/50 debt/equity is a new norm; again, I'm not so sure GPs have fallen conclusively out of love with leverage - but gone are the days of fractional equity...).
5. Improving GP operating skills. This is actually tied pretty closely with the longer hold periods and lower debt, of course. But it's right that the quality in the industry - GPs who help management teams add operating value - should rise to the top and out-price (or out-risk) the financial engineers.

I think that all adds up to excellent news - if these are, indeed, new norms and not just a relatively short-term industry hair-shirt. It's particularly positive for finance execs. In most respects, the FD (and even the FC) role is becoming more outward-facing and, frankly, interesting. When financial engineering ruled the roost, I got the feeling some PE-backed finance execs felt a bit pressured to be number crunchers. These new realities should help them be more rounded again.

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Here comes the money | 1 September 2009

Private equity firms have been sitting on a tonne of cash for the past year - money raised in good times but struggling to find a home while debt finance has been scarce and vendors unwilling to sell. In June the "overhang" stood at $400bn globally. Wow.

Well, it's about to get bigger, at least in the US. According to data from The Deal, "in July and August, buyout shops rounded up $11.65 billion in new capital."(The site also has a good month-by-month summary of US PE activity.) There are three reasons things seem to be kicking off again.

First, debt is creeping back in. Banks might balk at offering recession-hit mid-tier businesses working capital loans. But they have to earn a buck somehow. Lending - albeit at more sensible multiples - to fund cashflow positive buy-outs is a good call.

Second, the market is picking up. There's been a total drought for exits, but with the markets ticking up and corporate strategy (as opposed to cost-cutting) back on the boardroom agenda, the market could get going again. The Deal also says the secondary buyout market is due for a comeback, too.

Third, the industry has recalibrated. I think a genuine sense of contrition has developed in the PE industry over the past year. Massively leveraged deals and wanton profiteering during the boom years has created fall-out (just look at Reader's Digest). Practitioners know they can and do create real value beyond financial engineering. That's why many of the new funds being raised are targeted at mid-market buy-outs - "investors showed a particular preference for middle market-focused shops," claims The Deal about this summer's fundraising - funding growing businesses that can generate true value in the right hands.

Hopefully that will be great news for the mid-market scene in the UK, too.That money has to be spent at some point - so polish up your business plan.

PS - Just a final word of caution. There is still a massive - £100bn-ish - mountain of debt in British business due to be renegotiated over the next 18 months. How that particular problem is handled (both by individual companies and the banking sector as a whole) is going to be a factor in any upturn for the mid-market PE industry.

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