Private equity vultures circle the stragglers

John Grayken, a US private equity entrepreneur, is dubbed “the executioner from Texas” by the German press. In South Korea, his firm, Lone Star, is known as meoktwi — eat-and-run capital.

Lone Star is among the buyout giants now circling ailing British firms. Last month, it swooped on McCarthy & Stone, the retirement homes builder, in a £630m deal that one top shareholder branded “opportunistic”.

Other listed companies have become prey in recent months, including outsourcer G4S, whose hostile bidder is backed by private equity firm BC Partners; the AA, approached by four private equity outfits before two of them teamed up; and Countrywide, the troubled estate agency group.

Lone Star and rival Apollo were also in the running for Asda before its American parent Walmart agreed to sell the supermarket chain to brothers Mohsin and Zuber Issa, backed by private equity money from TDR Capital.

With share prices dropping as the coronavirus resurges across Europe, Britain flirts with a no-deal Brexit and the Bank of England refuses to rule out negative interest rates, the City is braced for more takeovers.

The FTSE 250 index — seen as the benchmark for UK plc — has tumbled by 22% since February. Fund managers argue that UK stocks were already trading at a price/earnings discount to their peers overseas; that chasm has widened to about 40%.

Data firm Mergermarket said that while the value of takeover deals had fallen this year against 2019, private equity had been particularly active. Buyouts have topped $100bn (£77bn) in Europe for the fourth year running.

There are signs that the industry is preparing to exploit low share prices and cheap borrowing costs — armed with more than £2 trillion of equity capital.

David Cumming, Aviva’s head of UK equities, warned: “Given the mismatch between long-term value and current share prices, particularly for companies affected by current economic uncertainties, more bids are likely. Shareholders will have to make sure that incumbent management are not incentivised to sell out to private equity companies on the cheap.”

American firm Apollo may have missed out recently, but industry sources suspect it will return for more. Advent International, which took Cobham, the defence engineer, private in January, is also on the hunt: James Brocklebank, managing partner, said there were “a bunch of deals coming”.

Brocklebank argued that activity would be driven by the huge sums that private equity firms have stored up and by central bank efforts to prop up the economy during the pandemic, forcing down interest rates and sending investors hunting for returns.

Jon Moulton, the veteran venture capitalist, believes big private equity firms are increasingly targeting larger, more stable businesses, citing one reason in particular: fees.

He said: “The managers of these funds are making enormous amounts of money out of fees from managing the assets, so they have become asset gatherers first. They’re much less worried about getting performance fees. If you can get a few billion under management at 1% a year, it’s a pretty good life.”

In the past, the private equity model was often to buy a company, load it with debt, trim the fat and sell it on later for multiples of the value. Recent examples include Debenhams, which went into administration twice; the AA, which now needs a rescue; and Saga.

Yet there is a constructive side to private equity. Worldpay, the payments processor, was acquired from RBS by Bain Capital and Advent in 2010. The new owners invested for the long term in technology, floating it in 2015. Last year, Worldpay changed hands for £32bn — more than double its former parent’s market value today.

Private equity bosses argue that the model has changed. Brocklebank said: “Probably 15 years ago, the playbook was like, ‘OK, this thing is fat and sleepy and you can lever it and cut costs.’ Now it’s a lot more sophisticated. And people realise that what’s valuable is growth. The holy grail is revenue growth.”

Lionel Assant, head of European private equity at Blackstone, said the notion of private equity firms as “asset strippers and opportunistic short-term buyers” is fundamentally of the past.

Richard Buxton, fund manager at Jupiter, said not all private equity should be tarred with the asset-stripping brush: “The bizarre thing that has occurred over the last 15 years is that the willingness of private equity to take a long-term view has grown at precisely the same time as the willingness of institutional investors to take longer views has diminished.”

Britain’s largest satellite company, Inmarsat, was bought by a consortium of private equity firms led by Apax and Warburg Pincus last year for £2.5bn. Chief executive Rupert Pearce said: “Satellite infrastructure is a long-term game. I have to invest hundreds of millions into a new network which will arrive in three or four years. That’s an age for public capital markets to wait.”

However, Buxton said there were still certain private equity firms he did not trust when they floated companies given bad past experiences.

Car-maker Aston Martin is worth a fraction of its 2018 debut share price and has already needed bailing out. Wound-care giant Convatec floated in 2016, joined the FTSE 100, but was ejected a year later. Debt-laden AA and Saga have needed rescuing during the pandemic.

Ludovic Phalippou, professor of finance at Oxford Said Business School and author of the book Private Equity Laid Bare, said: “They will tell you they’re more operationally focused and so on, but it’s very hard to measure and assess.”

Liberal Democrat leader Sir Ed Davey warned: “With a difficult Brexit transition looming and the Covid crisis pummelling the economy, the last thing the UK needs is a wholesale sell-off of assets on the cheap to global private equity firms.”

Source: The Times