PRIVATE EQUITY IN THE UK THE FIRST 25 YEARS
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Contacts
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Private equity in the UK – the first 25 yearsEditor Anthony HiltonGroup Editorial Director Claire ManuelManaging Editor Samantha GuerriniEditorial Assistant Lauren Rose-SmithSub-editor Nick Gordon
Group Art Director David CooperDesigner Zac CaseyDesign Consultant Stephen Carpenter – iUVO DesignProduction Director Tim Richards
Group Sales Director Andrew HowardSales Manager Jim SturrockSales Executives David Friel, Laurie Pilate
Client Relations Director Natalie Spencer
Publishing Director Philip HoultDeputy Chief Executive Hugh RobinsonPublisher and Chief Executive Alan Spence
Published by Newsdesk Communications Ltd5th Floor, 130 City Road, London, EC1V 2NW, UKTel: +44 (0) 20-7650 1600 Fax: +44 (0) 20-7650 1609www.newsdeskmedia.com
Newsdesk Communications Ltd publishes a wide range of business andcustomer publications. For further information please contact NatalieSpencer, Client Relations Director, or Alan Spence, Chief Executive.Newsdesk Communications Ltd is a Newsdesk Media Group company.
On behalf of the BVCA – The British Private Equity and Venture Capital Association, 3 Clements Inn, London, WC2A 2AZ, UKTel: +44 (0) 20-7025 2950www.bvca.co.uk
Cover Image: GettyRepro: ITM Publishing ServicesPrinted by Buxton PressISBN: 1-905435-67-3
© 2008. The entire contents of this publication are protected by copyright. All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted in any form or by any means: electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. The views and opinions expressed by independent authors and contributors in this publication are provided in the writers’ personal capacities and are their soleresponsibility. Their publication does not imply that they represent the views or opinions of the British Private Equity and Venture Capital Association or NewsdeskCommunications Ltd and must neither be regarded as constituting advice on any matter whatsoever, nor be interpreted as such.The reproduction of advertisements in this publication does not in any way imply endorsement by the British Private Equity and Venture Capital Association orNewsdesk Communications Ltd of products or services referred to therein.
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Forewords
9 25 years of the BVCAWol Kolade, past Chairman of the BVCA
14 A changing dynamicAnthony Hilton, Financial Editor, London Evening Standard
Key issues
16 The political challengeMartin Arnold
21 Private equity performanceJoanne Hart
28 The battle for hearts and mindsAnthony Hilton
32 Transforming the UK economyJoanne Hart
39 The rise of institutional investment in private equityAndrew Lebus
44 Individual investorsAndrew Cave
50 The funding treadmill Joanne Hart
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The roots of the industry
54 The early daysSir Ronald Cohen
60 25 years of the BVCA and the private equity industrySir David Cooksey
64 The role of 3iBaroness Sarah Hogg
68 Enterprising spiritAnne Glover, OBE
Private equity in the UK – the first 25 years
Impressions of the industry – the
impact of private equity
72 A view from outside the industryRichard Lambert, CBIDirector-General
74 The view from the NAPFDavid Paterson, NAPF Head of Corporate Governance
77 A question of imagePaul Myners
80 Private equity and economic performanceSir David Walker
83 Private equity in EuropeJavier Echarri, EVCASecretary General
87 The view from the USTimothy Spangler, Kaye Scholer LLP
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How private equity works in practice
91 Developments and challenges in buy-outsDr Robert Easton
97 Developments and challenges in venture capitalJo Taylor
100 Delivering transformational changeAndrew Cornelius
104 The experience of multiple ownersSarah Butler and Philip Hoult
108 Creating value through acquisitionsHelen Dunne
111 Turning point – turnaroundsNeil Rose
114 The road to success – venture capitalAndrew Cave
117 Developing business potential – development capitalDerek Bedlow
The future
120 Looking ahead to the next 25 yearsSimon Walker
25 years of the BVCA
The private equity industry is key to Britain’s continued economiccompetitiveness, says Wol Kolade, past Chairman of the BVCA
This year, the BVCA – the British PrivateEquity and Venture Capital Association – cele-brates its 25th anniversary. The organisation,like the industry it represents, has changedimmeasurably over the past quarter of a cen-tury, as the sector has grown into one of thebiggest success stories in the British economy.
Today, Britain is the private equity centre ofEurope, and our industry is the secondlargest worldwide, after the US. In those 25years we have gone from being little morethan a cottage industry into part of the main-stream economy.
When people think of private equity theyoften associate it with buy-outs of big house-hold names: AA, Boots, Debenhams. But ofcourse the reality is that we are a much broad-er church than that. Private equity and ven-ture capital are behind the medical diagnosticservices we use in hospitals, the chips in ourmobile phones, the manufactured compo-nents of our cars, the bioethanol fuels thatmay run them in the future, as well as the lat-est research into clean technologies that aretrying to find solutions to some of the envi-ronmental challenges we face.
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Private equity directly and indirectly benefitsmillions of workers and their families. Overthe last 25 years it has been the returns thatthe best-performing parts of the industryhave generated, often far in excess of thoseof the stock market, that have been the mainreason for its growth. The reason the industryexists at all is because that is the way manyinvestors, including public and private pen-sion funds, want to invest their money. Noneof them is forced to invest in private equity –they choose to.
Britain benefits from the industry in otherways, too. For the financial year 2006/7, it isestimated that private equity-backed compa-nies generated total sales of £310 billion,exports of £60 billion and contributed nearly£35 billion in taxes. That’s enough tax to payfor all the nurses and police officers in the UK.During the same period, financial and profes-sional services firms generated an estimated£5.4 billion in revenue through the provisionof services to the private equity community.
So, as a driver of the UK economy and ofBritain’s competitiveness, private equity has acompelling story to tell.
Today, Britain isthe private equity
centre of Europe,and our industry is thesecond largest worldwide, after the US
The founding of the BVCA in 1983, at the very beginning of our industry’s astonish-ing period of growth, seemed a bit optimisticat the time. But it has paid off.
The BVCA currently has more than 200 fullmembers, who represent the vast majority ofprivate equity and venture capital firms oper-ating in the UK, and a further 200-plus asso-ciate member firms, including lawyers,accountants and other professional advisersto the industry.
We have come a long way in 25 years. Fromhumble beginnings when we had just 34 fullmembers and no associate membership tospeak of, we have increased total member-ship twelve-fold. Total investment by mem-ber firms began at just £190 million, and hasgrown to over 100 times that, and total fundsraised have increased by a multiple of 50since 1983.
Some of the pieces in this book addressthose early days. With its roots very much inventure capital, its founders tell tales of theBVCA being set up when no-one, includingthe financial institutions such as banks andinvestment funds, really knew what venturecapital was, and didn’t know much about early stage businesses or buy-outs.Recognising they had much to learn fromeach other, the joint benefits of educatinginvestors, and the need for a lobbying organ-isation, the BVCA was born.
Despite having recently evolved into theBritish Private Equity and Venture CapitalAssociation, better to reflect the full spectrumof organisations we now represent, eventoday the BVCA remains close to its venture
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capital roots. Of the 1,300 UK companies thatreceived private equity investment in 2006/7,more than three quarters received less than£2 million, proving that despite the headlines,the industry today is not mainly about multi-billion pound buy-outs.
Growing businesses by adding value is at theheart of what all the BVCA’s member firms do.It is what unites the smallest venture firm andthe largest buy-out house. Supporting start-ups and university spin-outs with early stagefunding remains a critical part of our industry,and something that the UK economy as awhole continues to benefit from. Stories suchas the one told in this book of CambridgeSilicon Radio (p.114), show the role of ven-ture capital in taking a brilliant idea or inven-tion, turning it into a university spin-out, and inthis case into a world-leading company.
In the mid-market we take growing business-es and help propel them forward. At thisstage in a company’s life we can add criticalvalue through strategic advice, as well as thefunds to invest in growth. More recentlythere has been a trend for multiple privateequity owners to be part of the story of build-ing and growing companies like Gala Coral,Tragus and Center Parcs (p.104).
At the big end we take mature businesses andre-focus and re-energise them. In some cases itis about an unloved division of a larger compa-ny, or turning businesses around, shaking upmanagement and cutting out waste. Beingbrave enough to take tough decisions to buildon strength rather than prop up failure. Thecase studies on transformational change andturnarounds in the later sections demonstrateexactly what I am talking about (p.100 and 111).
Growing businessesby adding value is atthe heart of what all
the BVCA’s member firmsdo. It is what unites thesmallest venture firm and the largest buy-out house
Foreword
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This book is acelebration of howfar the industry has
come, how much it hasachieved and its aspirationsfor the future
The BVCA celebrates its 25th anniversary ina very different political, economic andmedia environment from that in which itbegan life. The changing landscape over theintervening years, including the fall of theThatcher government, the recession of theearly 1990s, the domination of the internet,the dotcom bubble, the rise of New Labour,the development of mega funds, globalisa-tion, the emerging economies of China andIndia and the credit crunch, have all helpedshape the UK private equity story in a varietyof ways.
It is also the case that as we have grown as anindustry, so the size of our deals hasincreased, and so the numbers of thoseaware of private equity, and affected by it,have expanded greatly. People’s expectationsof us today are different and we are having tochange our own attitudes to transparencyand communication.
Throughout this period of change the BVCAhas been at the vanguard of helping theindustry to adapt to its new responsibilities.We led the way by setting up the WalkerReview into Transparency and Disclosure inearly 2007. In our 25th year we are continu-ing to help establish best practice in this areaand will ensure the fair implementation of SirDavid Walker’s guidelines through the set-ting up of the Guidelines Monitoring Group,under its first Chairman, Sir Mike Rake.
As the economic environment becomestougher, the BVCA will do all it can to protectthe competitive advantage Britain currentlyenjoys in relation to other leading financialcentres of the world. If the UK is to retain itscompetitive edge, as a place for private equi-ty houses to base themselves, the tax andregulatory environment they operate withinneeds to be a stable and predictable one.
This book is a celebration of how far theindustry has come, how much it has achievedand its aspirations for the future. It seeks tocapture the effect of the changing economicand political landscape of the last 25 years onthe industry, as well as provide a snapshot ofthe industry today. We have asked industryprofessionals, commentators and key stake-holders from the wider business communityto impart their perspective on the industryand the challenges it has faced. I would like toextend my warm thanks to all those who havetaken the time to contribute to the book.
The book has a second aim, too – to showwhat the industry does and how it does it. Itis important to understand one central factabout private equity: private equity is aboutmaking businesses better. The stories hereare of real businesses that employ thousandsof people and the way private equity workswith those businesses. That to me is wherethe real history, the real story, of this industryand the role it plays in the UK economy lies –and that is what we should be celebrating.
A changing dynamic
Foreword
The skills of the private equity industry are unique and deserve wider appreciation, says Anthony Hilton
Diversity can be a strength, but it can alsobe a challenge.
For the private equity industry, the difficultyis that the various techniques it employs andthe differences in approach between housesare not properly understood by the public.
In spite of the serious efforts made by theBVCA and several of the leading firms to helppeople understand the industry, there is still alack of appreciation generally of the range ofskills and talents that are assembled underthe generic ‘private equity’ label.
One of the purposes of this publication,which celebrates the 25 years since thefounding of the BVCA, is to show how com-panies in the UK and beyond have benefitedfrom the expertise and know-how of privateequity practitioners. The book looks back atthe industry’s roots, with contributions frompioneers such as Apax Partners’ Sir RonaldCohen and Sir David Cooksey of AdventVenture Partners, and analyses the key issuesgoing forward. It draws together the views oforganisations such as the CBI and the NAPF,as well as the opinions of leading businessfigures, including Paul Myners and Sir DavidWalker. Finally, a series of articles containingin-depth case studies reveals how the indus-try really works in practice, whether it is pro-viding development capital, pursuing a buy-and-build strategy, turning around distressedcompanies or planning a large buy-out.
A further challenge for private equity is poli-tics. For much of the early years – when thefocus was on start-ups, on development capital
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and on small buy-outs – the industry operatedaway from the public gaze. There was no dis-cernible sign of political interest, other than ageneral enthusiasm among all parties that capi-tal should be made available wherever possiblefor the funding of new businesses.
The industry inevitably has its cycles, buteach has led to a higher peak. This was partic-ularly evident after the millennium, when itbecame possible for private equity houses toraise funds of unprecedented size, and there-after to become significant players in mergersand acquisitions.
Private equity firms had, of course, taken overmajor public companies in the past – mostfamously when Kohlberg Kravis Roberts tookover RJR Nabisco in the US, and in Britainwhen supermarket group Gateway and homeimprovements business Magnet were bothsubject in the 1980s to bids from rival houses.Interestingly, though these deals were highprofile and controversial at the time, they stillfailed to arouse the interest of politicians.
This time it is different: the significant increasein size and number of such bids, and the ten-dency to pursue well-known targets haschanged the dynamic. The public woke up tothe existence of private equity without know-ing what it was. Private equity had to come toterms with public and political scrutiny.
It can be argued, with the benefit of hindsight,that it was too slow to adapt. As a result, theindustry suffered from attacks born of politicalopportunism in some cases and elsewherefrom genuine, though misplaced, concerns.
The worst of the storm has passed becausethe industry, led by the BVCA, has moved tobecome more transparent and better under-stood. For other reasons, the politicians havealso moved on. However, there is a big differ-ence between a volcano that is dormant andone that is extinct, and it is only right that thisbook acknowledges the political dimension,and tries to put it in a global context.
The private equity industry is a vital spur toefficiency and growth, but it still needs itslicence to operate. Its activities need to beaccepted as legitimate and useful by the pub-lic if it is to avoid being taxed or regulated outof existence.
Another challenge for private equity is geog-raphy. The industry started in the US, tookroot in Britain and is now making rapidinroads in mainland Europe. There are vastopportunities there as businesses restructureto cope with competition from Asia, but inspite of this, it is to Asia that some housesalready look.
The pace of change in business is so rapid, thelife cycle of companies so much shorter thanin the past, even in Asia there are opportuni-ties. For many houses, that is where the futurelies. Perhaps they are right, perhaps not.
To an observer, it matters less than the factthat the industry continues to flourish. If pri-vate equity has a single core skill, it is the abil-ity to deliver transformational change. Therecan be no more necessary role in this mod-ern, globalised world.
If private equity has asingle core skill, it isthe ability to deliver
transformational change
The political challenge
Key issues
Private equity became a key issue in the 2007 Labour deputy leadershipelection. Now that the election fever has passed, what is the mainstreampolitical attitude to private equity and how is this changing over time? Martin Arnold, Private Equity Correspondent of the Financial Times, reports
Imagine the scene. British trade unionscheer and the London media howl in protest asthe newly elected Conservative Governmentfails to convince one of the last big privateequity houses left in the City to reconsidermoving its head office overseas.
As French President Nicolas Sarkozy wel-comes the latest buy-out fund to Paris, hehails the success of his policy to makeFrance’s capital a global financial centre withzero capital gains tax and low fiscal rates fornon-doms.
Property prices in London’s Mayfair plummetas swathes of office space and luxury homesare put up for sale. Thousands of jobs are lostas lawyers, accountants and banks cut theirUK private equity teams and switch to chicnew offices on Paris’s left bank.
Alright, now breathe. Don’t panic. This isunlikely to ever happen. Private equity’simportance to the City and ultimately theoverall British economy is surely too great forthe Government ever to change radically thetax and regulatory structure that has fosteredthe growth of the industry.
Nonetheless, relations between policymak-ers and private equity executives reachedtheir nadir in 2007. What started as a tradeunion-fuelled controversy over job cuts atprivate equity-owned companies, such as theAA motor services group and Igloo Birds Eye,the frozen foods group, snowballed into afull-blown political debate about tax, trans-parency and the overall economic contribu-tion of buy-out firms.
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The poster child for the unions’ campaignagainst private equity was Damon Buffini,Managing Partner of Permira. He played arole in both the £1.75 billion acquisition of theAA in 2004, when it joined a consortium withCVC Capital Partners, and the £1 billiontakeover of Igloo Birds Eye in 2006.
Some buy-out executives claim the initialunion campaign was triggered by an internalpower-struggle between the GMB union andthe AA staff, which led Paul Kenny, the UnionLeader, to make Permira and Buffini thescapegoats for his own difficulties.
Whatever the truth of this, the union cam-paign caught the public’s imagination.Interestingly, this was not just a British phe-nomenon.
Private equity was an issue in the Swedishgeneral election when one candidate pro-posed measures to curb its freedoms, butfailed to win. The industry came under evengreater attack in Germany.
The root cause in all these cases was thesame. It had less to do with private equity asa method of finance than with the actionstaken by private equity owners to return busi-nesses to profitability. Companies frequentlyfall into private equity hands because theyhave underperformed. Sorting them out canrequire taking tough decisions on plant clo-sures and job losses, which previous manage-ment shirked.
That said, in the British context, last year thebuy-out industry arguably did not help itself.Just as the public mood was turning against it,
Private equity’simportance to theCity and ultimately
the overall British economyis surely too great for theGovernment ever tochange radically the tax and regulatory structure
private equity firms embarked on some ofthe most daring buy-out bids ever seen inEurope, notably an £11.4 billion bid led byCVC for J Sainsbury, the supermarket.
CVC’s bid for J Sainsbury failed. But it wassoon followed by an £11 billion bidding warfor Alliance Boots, the pharmacy chain, withcompeting offers being made by KohlbergKravis Roberts and Terra Firma. With theacquisition of Boots, it seemed no house-hold-name company was beyond privateequity’s reach, however big it was.
Another crucial – and perhaps unlikely –ingredient arrived to take the controversy toa higher level. The Labour party’s contest tochoose a new leader and deputy after TonyBlair’s departure gave British trade unions,wielding their significant voice within theLabour party, the opportunity to press thebuy-out debate to the fore.
The Treasury Select Committee announced itwould hold an inquiry into private equity andthe Government put pressure on the BVCAto review transparency and disclosure. Thisled to the BVCA’s appointment of Sir DavidWalker, the City grandee and MorganStanley Adviser, to draw up a code of con-duct for big buy-out firms.
The intriguing thing, and one overlooked inthe UK at the time, was that a similar debatewas happening in, of all places, the US.Private equity is a vastly important and long-established player in the US economy, buteven in that country there was disquiet aboutthe essentially secret nature of much of theactivity. Again, the lack of transparency pro-vided fertile ground for public distrust andpolitical criticism.
These issues have cropped up for decades,however. Those who undertake the challengeof restructuring businesses inevitably comeunder fire – witness the attacks on the con-glomerates run by Slater Walker or HansonTrust in the 1970s and 1980s. The fact thatconcerns over the pain of restructuring beingfelt by employees while the gains went else-where existed then, shows that it is not pri-vate equity per se, but the pain of restructur-ing which arouses the interest of politicians.
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It is also the case that public concern can beshort-lived – it now seems the early summerof 2007 was the low point. While the publicimage of big buy-out firms may take carefulnurturing to recover, a combination of eventssince has served to deflect criticism awayfrom the industry.
Firstly, the credit squeeze started in July 2007,cutting off buy-out firms’ access to the abun-dant amounts of cheap debt that had allowedthem to mount their most ambitious bids inthe US and Europe. The financial turmoil hasshifted attention from the financial structuresof private equity, to the operational improve-ments it can deliver.
The industry also took a significant steptowards greater public understanding andaccountability when Sir David Walker pro-duced his guidelines on transparency and dis-closure, which will apply on a ‘comply orexplain’ basis to the biggest buy-out firms inthe UK. While the code has attracted criti-cism from trade unions and policymakers fornot going far enough, it should answer someof the attacks about lack of transparency asprivate equity firms start to publish moreinformation about themselves.
While private equity investments still onlyaccount for about 1.5 per cent of GDP in theUK, the industry has expanded at an aston-ishing rate. Like any rapidly growing industry,private equity needs to mature. Buy-outexecutives must become more visible,explaining their strategies to workers, suppli-ers, customers and the wider public via themedia. But these could be no more than thegrowing pains of an industry that has grownfaster than anyone could have forecast.
This is certainly the view of practitioners, noneof whom doubt the industry’s resilience. SirRonald Cohen, Founder of Apax Partners,forecasts it will double in size in five years andStephen Schwarzman, Chairman of theBlackstone Group, said at the CBI’s 2007 con-ference: “Private equity is here to stay.”
Not only would most politicians agree, butacross Europe they are also more inclinedthan they were to accept Schwarzman’s otherpoint – that it is also a force for good.
While private equityinvestments still only account for
about 1.5 per cent of GDPin the UK, the industry has expanded at anastonishing rate
Private equity performance
Joanne Hart asks where the returns come from – financial engineering,multiple enhancement or by improving the running of the business?
To many participants in the public mar-ket, the private equity industry has achievedsignificant returns purely and simply onleverage. Firms have bought cheap, solddear and multiplied the equity return on theirinvestments by gearing up the balancesheets. The process has been made eveneasier in recent years, thanks to the abun-dance of cheap money.
That, at least, is the perception from the out-side. Within the industry, however, opinionsare rather more varied. Some deny the finan-cial wizardry proposition almost completely.
“Financial engineering is well understoodand it is available to everyone in the market.If it was that simple, most private equity firmswould deliver similar returns. But in fact,returns vary enormously,” says PermiraPartner, Charles Sherwood.
Sherwood points to data1 which shows thatin the ten years to March 2007, Europeanbuy-out funds produced pooled averagereturns of 11 per cent, but delivered a medi-an average return of just 3 per cent. In otherwords, half the funds in the survey producedreturns of more than 3 per cent, but half pro-duced returns below 3 per cent. The upper
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quartile average return was 12 per cent overthe period. And even if the data is analysedon an annual basis, the difference betweenpooled average, median and upper quartilereturns is substantial.
“The average is basically meaningless. Whatactually characterises this industry is disper-sion around the average and the fact that themore successful firms consistently outperform.So delivering returns has to be a bit more dif-ficult. It has to depend on delivering someform of value-added that is not easily under-stood by everyone,” Sherwood suggests.
“Debt is important, but only in so far as itmagnifies value that is created by othermeans,” he adds.
Other general partners agree. Most acceptthat financial engineering plays a part, butthey stress that success cannot be achievedthrough gearing alone. Many participantsclaim too that different sectors of the marketrely on leverage to a greater or lesser extent.Mega funds, or those firms with funds ofmore than £5 billion, are often accused ofexcess reliance on leverage, but they them-selves believe they have talents the ‘smaller’firms do not possess. Firms with funds of less
“Financialengineering is wellunderstood and it
is available to everyone inthe market. If it was thatsimple, most private equityfirms would deliver similarreturns. But in fact, returns vary enormously”
than £1 billion, meanwhile, frequently sug-gest that they are the custodians of privateequity as it should be – they genuinely growbusinesses rather than using fancy financialtechniques to boost returns.
“For me, the highest quality investment gainis to do with the performance of the underly-ing business and that means selling more,making higher profits and generating morecash. If you run the business better, it growsand when you come to sell, it will command ahigher multiple, not because of the econom-ic cycle, but because it is a better business,”says Paul Marson-Smith, Managing Partnerof Gresham Private Equity.
Marson-Smith cites Penn Pharmaceuticals, aWelsh drugs manufacturer that Greshambought in 2000 for £12 million. At the time,the business, which owned the rights to theThalidomide drug, employed 120 people.Gresham split off the controversialThalidomide division, sold it to US giantCelgene and built up the remaining busi-ness, almost doubling the number of staff,boosting turnover five-fold, increasing prof-its ten-fold and generating a 12 times returnon investment.
Such stories are encouraging – and they maybecome a more common feature of the pri-vate equity landscape, particularly if condi-tions in the lending markets are as tough asthey have been in the recent past. For, if debtis less available, leverage will simply have toplay less of a role in the industry. Jon Moultonof Alchemy Partners believes this will hitlarge firms in particular.
“Big funds have made a lot of money out ofrising debt multiples. Looking forward, we aregoing to see an increase in due diligenceaccompanied by a reduction in prices, areduction in leverage and a reduction inreturns,” he says.
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Most partners, in firms large and small, are con-fident they will be able to withstand the chang-ing environment and adapt to the new era.Their confidence comes from a fundamentalbelief in private equity’s business model.
“Private equity exploits what McKinseycoined as ‘governance arbitrage’. What thatmeans is that successful firms pursue a differ-ent governance model, which creates a realcloseness between managers and owners,”says Sherwood.
Clearly, there is a difference between the waylisted companies and private equity-ownedcompanies are structured. In a listed compa-ny, the Board may own some shares and mayhave options over more, but the vast majorityof the equity is owned by a wide variety ofinstitutional shareholders, who meet thecompany once or twice a year.
In private equity-backed companies, the man-agement owns a substantial and significantpercentage of the equity and so do the gener-al partners. Not only that, but there are invari-ably one or two general partners sitting on theboard of the companies in which they haveinvested. This can create a genuine closeness,as well as an alignment of interests.
It should also mean that both managers andgeneral partners are keen to improve thecompanies with which they are involved.
Sherwood, meanwhile, points to Inmarsat,which Permira and Apax backed in 2003.
“When we invested in the business, therewere 86 different shareholders, each with adifferent agenda, including suppliers,investors and customers. There was virtuallyno alignment of interest between manage-ment and owners and there was a poor line ofcommand. We changed the managementstructure, the business was given a new leaseof life and by the time we floated it, it was abig success,” he says.
“Private equityexploits whatMcKinsey coined as
‘governance arbitrage’. What that means is thatsuccessful firms pursue a different governancemodel, which creates a real closeness betweenmanagers and owners”
Key issues
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“In the past, privateequity made returnsfrom a third leverage,
a third multiple arbitrage and a third from running the business better”
These turnaround stories cannot be achievedby leverage alone. But they do require adegree of expertise within the private equityfirms themselves.
“You need a broad skill set to interact withdifferent companies. There is no point havinga seat at the board if you don’t have the rightpeople to fill it,” says Sherwood.
Multiple arbitrage has played a part in privateequity’s success as well, but that has dimin-ished over time.
“In the past, private equity made returns froma third leverage, a third multiple arbitrageand a third from running the business better.Recently, the competitive landscape hasturned multiple enhancement into multiplecompression and firms have been forced todo more with their portfolio companies todeliver the returns,” says Jacques Callaghanof Hawkpoint.
Nigel McConnell of Cognetas points out that,at his mid-market firm, more than 60 per centof returns are generated by operationalimprovements in the underlying businesses,rather than any kind of financial engineering.“We never buy a business unless we think wecan improve underlying earnings,” he says.
This refrain is likely to become more pro-nounced across the industry. In the earlydays of private equity, leverage played anundeniably large role and in recent years,gearing moved to centre-stage again. Now,the debt multiples of 2005 and 2006 are sim-ply not on offer – so private equity firms willhave ample chance to prove they are not justfinancial wizards.
1 Source: European Private Equity and Venture Capital
Association
The battle for hearts and minds
Key issues
The private equity industry has made headway in terms of improving its public profile, says Anthony Hilton, but a number of challenges remain
It is one of the maxims of public relationsthat it is what people believe that matters, notwhat is true, because – for better or worse –it is beliefs that drive action.
The private equity industry has learned thislesson too, albeit it left it rather late. For muchof the period after 2000, when a combinationof favourable circumstances came togetherto usher in a period of phenomenal growth,the industry was too busy managing itsexpansion to focus much on what peopleoutside thought of it.
It is no coincidence that mid-way through thedecade, in the three main areas of privateequity activity – the US, Britain and mainlandEurope – the strain began to show. Theindustry came under attack from both pressand politicians.
While the focus was slightly different fromcountry to country, the drivers underneathwere remarkably similar – people were learn-ing to adjust to a phenomenon that seemed tohave the power to change their lives, by takingover the places where they worked, wherethey shopped and where they spent theirleisure time. But they were not sure who thesemysterious buyers were, where they camefrom, where they got their money, nor whattheir intentions were. Hence their concern.
Most public relations professionals will tellyou there are times when their job is impossi-ble. There are occasions – though thankfullythey are rare – where the combination of asensationalist and superficial media, anopportunistic and headline-hungry bodypolitic and an electorate unwilling to engage
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with complex issues creates a perfect storm.
Something like this caught the private equityindustry and for a few turbulent weeks it suf-fered, but the storm has now passed. Thisdoes not mean that the need for public rela-tions has gone with it; but life should not begoverned by the storm. The industry can nowfocus on some longer-term communication,rather than fire-fighting.
The main challenge to the private equityindustry lies within its own ranks, becauseunder that one label lies a diversity of beliefand culture which makes it difficult to delivera common programme.
The venture capital industry, for example, hasalways invested in public relations and hasalways had a good public image. In the UK, 3ihad external and internal financial public rela-tions from the early 1970s – long before it everthought of becoming a listed company itself –and, generally speaking, it got a good press.
There are reasons for this. The public buy intothe idea of risk-taking and backing youngbusinesses and good ideas. They see how itcan benefit individuals and the wider econo-my. They also intuitively know how difficult itis, so tend not to begrudge the rewards.Interestingly, in a straw poll, most critics ofprivate equity did not associate venture capi-tal with the genre – or with their criticisms. For these reasons the public relations imper-ative for this part of the industry is quite dif-ferent from other parts. It needs to makesure that press and public understand howfragile the venture capital plant is, and how itneeds to be protected from toxic shocks –
The venture capitalindustry has alwaysinvested in public
relations and has alwayshad a good public image
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It remains a mistaketo convey theimpression of
effortless profit becausethat will always invite abacklash along the lines of “if it is that easy, thepractitioners do not deserve the rewards”
like sudden, unpredictable changes to thetax regime.
Buy-outs and the mid-market space have asimilar momentum behind them, but less ofit. Again, people intuitively understand thatthe owner of a business will be more commit-ted to its success than an employee, so theyunderstand how buy-outs work.
Where it gets difficult is when success seemsto come too easily – when a business is trans-formed within months of completion of abuy-out. This is because most people's expe-rience of business is that it is quite difficult toget right. Sceptics will wonder if it could nothave been improved under its old ownershipand whether the current owners manipulatedperformance downwards to get a betterprice. Or they will wonder at the durability ofan improvement that seems to have beenachieved so quickly.
Something the mid-market has going for it isthat most of the enhancement of the busi-nesses in this space comes from operationalimprovement. Getting positive coverage foroperational improvement and turnarounds isrelatively easy – the concept of restoringvalue through better management is an easyone to put across.
This is not the case with ‘financial engineer-ing’, where earnings improvement comesfrom heavy gearing or from a higher stockmarket rating when the business refloats.Both seem like sleight of hand – and thereforelikely to disappear as quickly as they arrived.
Making it appear too easy, and indeed talkingloudly about success while being veryuncommunicative about failures, is a wider
sin of the industry. Senior figures say it is aconsequence of the fact that private equity isalways conscious of the finite life of its funds,of the pressing need to invest existing fundswell because that governs their ability to raiseanother. The industry trumpets its successesbecause it plays well in the investing commu-nity and makes it easier to raise new moneyfor the next fund.
But, in focusing on its investors, it risks beingblind to wider sensitivities – those who thinkit has made too much profit, or not paidenough tax, or achieved its profits at toogreat a social cost. Balancing these con-stituencies is and will remain one of theindustry's major challenges.
There will always be politicians willing toexploit any perceived unfairness. The objec-tive for the industry is to instil in the publicmind that it is a force for good, so that whenthere is apparent unfairness it will be seen asa part of the whole and balanced against theadvantages. When this reaction becomes thenorm, the politicians and press will look else-where for their targets.
The irony in all this is that private equity isanything but an easy way to make money.
On the one hand, traditional long-only investorshave been berated for years because of theirrefusal to engage with the companies in whichthey invest and to come down hard on under-performing management. Private equitysolves this problem. It takes over underper-forming companies and aligns the shareholderand management interest to the greatest pos-sible degree. It makes capitalism work the wayit is meant to work.
On the other hand, it remains a mistake toconvey the impression of effortless profitbecause that will always invite a backlashalong the lines of “if it is that easy, the practi-tioners do not deserve the rewards”.
These issues will get bigger not smaller in thecoming decade because globalisation willincrease the pressure on companies andhighlight competitive weaknesses far morerapidly than before. Most businessmen todaysay they have never known a period wherepricing pressure is so intense, where compe-tition is so fierce and where the penalties forfalling behind are so severe.
The companies that survive will be those thatare adept at change. Inevitably, many will notbe. It is then most likely that private equitywill come on the scene to make the transfor-mational change that a public company boardmay have failed to deliver. Private equitycould be thought of as doing capitalism’s nec-essary, rather than dirty work – restructuringand reviving businesses, and taking the deci-sions others shrink from.
But it may never be universally liked – in thesame way that people shoot the messengerwhen they do not like the message. Societyhas to get used to rapid change, but it is ask-ing too much for those adversely affected byit in the short term to relish the experience orthank those who have delivered it. To someextent, private equity will always be seen asprofiting from someone else’s discomfort.
Just because it is difficult does not mean thatthe effort should not be made. Private equityneeds to be understood and treated withrespect, for it has a vital role to play.
Transforming the UK economy
Key issues
Private equity-backed businesses are reckoned to be among themost efficient in the UK. How do they stack up in terms of jobcreation, export growth and investment? Joanne Hart reports
In 1992, the Queen memorably referredto the year just gone as her annus horribilis.Only 15 years later, the private equity com-munity might have used the same phrase todescribe 2007. Not only did the industry suf-fer from increasingly tough markets and thevirtual disappearance of cheap credit, but itwas also lambasted by the media, the unionsand the general public.
Yet independent research indicates that thiscriticism is invariably unfair – private equityfirms are fundamentally beneficial for busi-ness. They boost efficiency, boost profitabili-ty, boost growth and boost employment –and they have been doing so for many years.The industry may have shot into the limelightin 2007, but it has been investing in UK com-panies and helping them to grow fordecades. Over the past five years, this sup-port has been particularly marked.
Between 2002 and 2007, for example, thenumber of people employed worldwide byUK private equity-backed companies rose by8 per cent annually on average. Over thesame period, the number of peopleemployed by FTSE 100 companies rose just 0.4 per cent per annum, while the figurefor the wider FTSE 250 index was 3 per centa year.1
In the UK alone, employee numbers haverisen by 4 per cent a year, compared to thenational average of 1 per cent annually.Private equity-backed companies currentlyemploy 1.1 million people, equivalent to 8 per cent of the private sector workforce.
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Historically, private equity companies havebeen responsible for the employment ofaround three million people or 21 per cent ofemployees working in the private sector.2
“Private equity delivers a substantial contribu-tion to stronger employment,” say consult-ants at AT Kearney.3
“A typical pattern that can be observed is anupturn in the first year after the buy-out andadditional growth at a less steep, but steady,rate over the following two to five years,”they add.
Across the UK, there are almost 450 privateequity, venture capital, funds of funds andsecondaries investment firms, which togetheremploy more than 9,300 people. As thesefirms use a range of financial, business andprofessional firms, nearly 15,400 profession-als are involved in private equity-related work.
Firms operate on a nationwide basis. Whilemany are concentrated in London, cities suchas Bristol, Birmingham, Edinburgh, Leeds andManchester also benefit from private equity.In fact, 60 per cent of legal, corporate financeand accounting firms operating in the indus-try and outside London consider private equi-ty to be a significant source of revenue.4
The sector generates considerable invest-ment, too. More than 1,250 businesses werebacked by private equity in 2006 and theirannual sales growth over the past five yearshas been around 8 per cent, compared to 6 per cent for the FTSE 100 and 5 per cent forthe FTSE 250. Annual sales revenue at portfo-
More than 1,250businesses werebacked by private
equity in 2006 and theirannual sales growth over the past five years has been around 8 per cent
lio companies increased from £28 million to£36 million on average over this period and,in more than 80 per cent of businesses,growth was organic rather than acquisition-led. Export growth has been robust, growingby 10 per cent per annum, compared to anational rate of 4 per cent.
Overall, in the financial year to April 2007,private equity-backed companies generatedaround £310 billion of sales revenue and £60 billion of export sales.
Investment has been substantial too, rising11 per cent annually since 2002, comparedto a national level of just 3 per cent. Spendingon research and development (R&D) hasbeen robust as well, rising 14 per cent overthe past five years.5
“Private equity-backed businesses have beenpretty successful. When you benchmarkthem against listed companies, they performwell on all measures, employment, enterprisevalue and profitability,” says Harry Nicholson,Private Equity Partner at Ernst & Young.
Ernst & Young compiled a survey of exits inEurope and the US, which revealed that EBIT-DA (earnings before interest, taxes, deprecia-tion, and amortisation) at private equity-backed companies rose by an average of 15 per cent in 2006. Two thirds of this growthwas derived from fundamental businessexpansion, including investment and newproduct launches. The profitability of thesebusinesses means that in the UK alone, theycontributed £35 billion in taxes. Over the pastfive years, sales revenues from private equity-backed companies amounted to £1,331 billionand tax contributions totalled £140 billion.
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“Private equity businesses do well becausethere are some very clever people in theindustry and because they give managementteams the chance to own their own business-es. This is particularly effective if change isnecessary,” says Nicholson.
“Ultimately, private equity brings a sharperfocus to business and makes sure that thingsreally happen and happen quickly,” he adds.
A World Economic Forum report published in2008 bears this out.6 It found that when a com-pany goes private, a fundamental shift in boardcomposition takes place. “The board size andthe presence of outside directors are drasticallyreduced,” the report says, adding that privateequity board members are most active in com-plex and challenging transactions.
Portfolio companies agree with the analysisthat private equity ownership brings a sharp-er focus.7
More than 90 per cent of those surveyed forthe IE Consulting report in 2007 admit thatthey would not have existed at all – or grownmore slowly – without private equity backing.This backing does not just come in the form ofcapital. Nearly every private equity-ownedbusiness maintains that their investors haveprovided advice on strategy and financingand introduced them to useful contacts.
Almost 40 per cent of management buy-outcompanies also said private equity firms hadhelped them become more efficient, while 32per cent of businesses said private equity back-ing had boosted their R&D expenditure. A sim-ilar percentage said they had spent more on IT,thanks to support from private equity investors.
More than 90 percent of thosesurveyed for the IE
Consulting report in 2007admit that they would not have existed at all – or grown more slowly – without private equity backing
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Overall, the evidencesuggests that privateequity has played
and continues to play an important role in the UK economy
Portfolio companies that were not the subjectof management buy-outs were even morepositive about the impact of private equitybacking on investment activity. Around 57per cent said investments had been boostedby private equity support, while 54 per centsaid R&D expenditure was higher than itwould have been and 41 per cent said theyhad spent more on IT than they would other-wise have done.
Almost 60 per cent of businesses havereceived more than one round of investmentand most companies believe this is the singlemost effective contribution that private equi-ty has made.
Investment and efficiency helped companiesto become more innovative. Last year, 65 percent of businesses said they had introducednew products and services over the past twoyears, an increase of 10 per cent from 2006.
The World Economic Forum report alsobacks the role private equity firms play inboosting R&D and innovation. “Firms thatundergo a buy-out pursue more economical-ly important innovations, as measured bypatent citations, in the years after privateequity investment,” it says. The report addsthat private equity-backed firms bring agreater focus to patent portfolios and con-centrate more on a company’s core technolo-gies, but they maintain comparable levels ofcutting-edge research.
Overall, the evidence suggests that privateequity has played and continues to play animportant role in the UK economy. Investeecompanies tend to grow at a faster rate thanother UK businesses in terms of sales, profitsand employment. Most of this growth isorganically-driven and is acknowledged bythe portfolio companies themselves.
Private equity firms have long maintained thatthey add most value to investee companies byproviding support on many levels, not justfinancial – and managements seem to agree.Firms also maintain that they are encouraged tocreate strong, vital businesses because theseare most attractive to potential purchasers:independent data backs up this thesis.
Even though private equity has been underthe spotlight, therefore, accused of failing tonurture businesses, on-the-ground researchtells another story. The industry contributessubstantially to the UK economy and hasbecome an integral part of it.
1 Data from IE Consulting 2007 Report: The economic impact of private equity and venturecapital in the UK
2 Data from IE Consulting 2007 Report3 Private Equity Creates Employment & Value,
AT Kearney 20064 Data from Arbor Square Associates 2007
Report: The impact of private equity as a UKfinancial service
5 Data from IE Consulting 2007 Report6 The Global Economic Impact of Private Equity
Report 2008, published by the WorldEconomic Forum
7 Data from IE Consulting 2007 Report
The rise of institutional investment in private equity
Pension funds in the US initially led the way when it came to investing in private equity, but those based in the UK are now increasing their allocations. Andrew Lebus, Managing Partner of Pantheon Ventures, looks at howinstitutional investment in the industry has evolved over the last 25 years
The American Research and DevelopmentCorporation is often credited as being thefirst professional private equity investor,having been formed in 1946 to commer-cialise new technologies developed duringWorld War II.
In the ensuing years, wealthy families such asthe Rockefellers continued to make privateequity investments, but it was not until theestablishment of the Employee RetirementIncome Security Act (ERISA) in 1974, asadjusted in 1978, that pension funds firstbecame involved. The ‘prudent man’ rulewithin the ERISA allowed pension funds toinvest in private equity funds, provided thatthese investments did not endanger theentire portfolio. This, coupled with the stellarreturns achieved by some early private equi-ty funds, ensured that the seeds were sownfor pension funds to become at first cautious,but increasingly enthusiastic, converts to pri-vate equity.
Pioneering public organisations in the US, suchas CalPERS, were the first to participate and
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were instrumental in paving the way for futurepension funds to invest in private equity.
While pension funds and local authoritieshave invested in private equity since the mid-1980s, it was not until the beginning of thisdecade that the asset class hit the agenda ofalmost every pension board trustee. In theUK, the Myners Report, published in 2001,was responsible for focusing pension fundson the benefits of private equity.
Further factors that influenced the growth ofprivate equity participation relate to secularchanges in asset allocation among pensionfunds, following the closure of defined bene-fit funds to new members. These changes ledto a reduction in equity allocations and, conse-quently, to greater demand for fixed-incomeinvestments and alternative assets, includingprivate equity. Today, private equity is proba-bly considered by most pension funds. The2007-2008 Russell Survey of AlternativeInvestments shows 57 per cent of US pensionfunds and 54 per cent of European pensionfunds currently invest in private equity.
While pension fundsand local authoritieshave invested in
private equity since themid-1980s, it was not until the beginning of thisdecade that the asset class hit the agenda ofalmost every pension board trustee
The extraordinary long-term success of thelisted private equity market notwithstanding,there remains an inherent tension betweenthe benefits of having a permanent pool ofcapital and the burden of managing a pub-licly-listed vehicle in a market that, for itseffectiveness and by definition, depends inpart on keeping certain information private.
Development of the European secondary market The explosive growth of private equityinvestment in the 1980s attracted a broadconstituency of new investors. Some of thesegroups subsequently found the fixed life of atraditional limited partnership fund was notsufficiently flexible to meet their strategic orliquidity requirements.
In consequence, a market for secondarysales of private equity funds soon developed,beginning in the US with the formation of theVenture Capital Fund of America.
GT Investment Company (now PantheonVentures) completed one of the first Europeanpurchases of a secondary interest in 1986.This was followed in 1987 by the formation ofthe first European private equity secondaryfund of funds, GT Venture InvestmentCompany plc, a quoted vehicle now known asPantheon International Participations plc.However, it was not until the 1990s that theEuropean secondary market really began totake off, with the creation of a number of ded-icated secondary funds, including those ofColler Capital, HarbourVest, Landmark,Pantheon and Paul Capital.
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As the secondary market has matured, adiversity of transaction types and vendors hasdeveloped. Initially, the majority of secondarytransactions consisted of either an interest in asingle fund or a portfolio of fund interests. Toparcel fund interests with other assets, such asdirect company interests, was a natural pro-gression, and deals of this type became moreprevalent from the mid-1990s onwards.
More recent evolution has resulted in earlysecondaries, secondary directs, spin-outs andbuy-ins, and stapled secondaries. Theprocess of innovation in the secondary mar-ket continues, giving rise to more complicat-ed structures such as transfers of economicinterest and new mechanisms that enablevendors to retain a stake in the upside of theassets being transferred.
Institutional investors are becoming morecomfortable with the concept of the transferof private equity assets – any stigma that mayonce have attached to a secondary sale haslong since evaporated. Secondary divest-ment is now acknowledged as a proactivetool for portfolio management rather than asthe last resort of a troubled institution or areflection of a fundamental flaw in the qualityof the assets being divested.
In many cases, private equity can providecompanies with a better form of ownershipthan public equity, yet the asset class stillaccounts for a relatively small proportion ofglobal enterprise value. Despite the ups anddowns of private equity cycles, there remainsplenty of room for growth.
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It was not until the1990s that theEuropean secondary
market really began to take off, with the creation of a number of dedicatedsecondary funds
Development of funds of funds In the early years, it was more common thatprivate equity advisers would operate segre-gated accounts as gatekeepers on a largelynon-discretionary basis. As relationshipsbetween advisers and clients developed andas track records were established, the needfor discretionary management services grew.Funds of funds, which enabled client inter-ests to be pooled with proper alignment ofinterests, were a natural progression.
The early entrants are now among the largestglobal fund of funds managers in the worldtoday. As the universe of private equity fundsincreases, investors need to devote greaterresources to their programmes to conductappropriate due diligence and secure access.Furthermore, the typical minimum commit-ment level of $10 million for many individualfunds predicates a very substantial allocationif an investor is to achieve diversificationacross a number of funds, stages and regions.
The scope of work required to identify thebest funds globally, to manage these relation-ships and to enable critical investment judg-ment to be made, requires skilled resourcesnot usually available to any but the largest ofinstitutions. Funds of funds offer institutionsthe benefit of significant economies of scaleand are, therefore, here to stay.
Development of the listed privateequity market Listed private equity is one area whereEurope, and predominantly the UK, has leddevelopment. The first quoted private equityvehicles were established in the late 1970s
and 1980s as tax-efficient UK investmenttrusts; this marked the beginning of the listedmarket. At this time, capital for private equitywas quite scarce and these trusts representeda meaningful source of funding for an industryoperating at a relatively small scale. The firstcrop of private equity investment trusts includ-ed Pantheon, Candover, Graphite, Electra and HgCapital.
The growth of institutional allocations to privateequity, however, ensured that the limited part-nership became the dominant private equitystructure and it was not until more recentlythat general partners began to think seriouslyabout raising capital in public markets.
This development reflects the growingprominence of leading private equity fund-manager brands, which may have broadenedthe appeal of private equity to non-traditionalinvestors. It may also, in part, reflect acknowl-edgement of the expected decline of definedbenefit pension schemes as a source of capi-tal for the industry in the longer term, and thecommensurate growth of defined contribu-tion schemes. These cannot easily invest intraditional Limited Partner structures becausethere is no ability to mark such interests to market.
Recent years have also witnessed the listingof management companies such as Fortressand Blackstone. It seems likely that othermanagers will come to the market, but in allprobability this route will be suitable only forthe largest groups, with the most visiblebrands and which have also diversified theirrevenue streams.
Individual investors
Key issues
There are increasing opportunities for individual investors to get involved inprivate equity deals. Andrew Cave looks at Private Equity Investment Trusts andother specialist vehicles, such as Hotbed and Pi Capital, which make it possible
Venture capital comes in many shapesand sizes and a key development in recentyears has been the establishment of organi-sations and vehicles that allow individualinvestors to participate directly in some of thebest private equity opportunities.
Private Equity Investment Trusts (PEITs),which are traded on the London StockExchange, are a good example. Firstlaunched in the 1970s, PEITs enable individ-uals to invest, alongside institutions, in aportfolio of mainly unlisted companies select-ed by a single manager. Alternatively, theycan invest in a fund of funds PEIT, whichinvests in a portfolio of direct investmentfunds, or indeed a hybrid of the twoapproaches. You do not have to be wealthyeither – investors can get involved for as littleas the price of a share.
The market capitalisation of London-listedPEITs, which include investment companiesoperated by the likes of Dunedin Capital,Electra Private Equity, F&C, Graphite andHgCapital, is estimated to be about £10 bil-lion. Returns have been good too – evenexcluding 3i, the sector has enjoyed anincrease over ten years of 223 per cent inshare price total returns, compared to 82 percent for the FTSE All Share Index.
“Investors are attracted to PEITs becausetheir historical performance has been strong,because they give access to a large part ofthe economy that is otherwise closed to mostinvestors and because investments in PEITsare liquid and easy to administer,” saysWilliam Eccles, a Senior Partner at Graphite
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Capital, which manages Graphite EnterpriseTrust. “They are also seen as important toolsin portfolio diversification.”
Each of the 20 listed PEITs – like each privateequity firm – has its own investment strategy,which may be dictated by geography, sizeand type of investment and so on.
One notable deal involving a PEIT was the£17 million management buy-out of paperdiary company Letts in 2000, a time when thesector was deeply unfashionable. DunedinCapital provided the funding on that occasionand subsequently backed the acquisition ofFilofax. The combined firm, known as LettsFilofax, has since become the market leaderin branded diaries, supplying 40 per cent ofall such products sold in the UK and export-ing to more than 75 countries. The businesswas sold for £45 million in 2006.
The Electra Private Equity-led £98.3 millionbuy-out of safety equipment group CSG in1998 was similarly successful. With Electra’sbacking, CSG evolved from a company with aregional focus into an international businesswith two global brands. The investment trustwas also able to introduce CSG to another ofits portfolio companies, which used the com-pany’s electronic identification system in itsown products. In 2007, by which stage CSGhad become a world leader in height safetyequipment for industries such as oil and gasand construction, Electra Private Equity soldits shareholding for more than £280 million.Proceeds from the sale of assets are distrib-uted to the trusts for reinvestment, ratherthan to investors. For this reason, holding
First launched in the1970s, PEITs enableindividuals to invest,
alongside institutions, in aportfolio of mainly unlistedcompanies selected by a single manager
shares in PEITs is seen as a long-term invest-ment and less suited to frequent trading.
Despite the uncertain beginning to 2008,Eccles believes the sector will continue toperform well. “Most PEIT managers havebeen operating for the past 25 years and wehave learnt a great deal in all market condi-tions,” he says. “This experience shouldserve PEITs well for the next 25 years.”
Specialist investment vehicles such asHotbed and Pi Capital are also meeting anincreased demand from private investors foralternative investments, as they search forenhanced returns.
With the 2006 relaxation of pension rules,individual investors are now able to consideralternative assets as part of their pensionportfolio. Research by Hotbed suggests thatan increasing number of private client portfo-lios allocate about 20 per cent of their invest-ments to private equity.
Such clients are normally experiencedinvestors and may not wish to lock their cap-ital into pooled funds over which they haveno control. However, they also often do nothave the time to seek out direct investmentopportunities or to manage their invest-ments personally.
Hotbed, set up in 2002 by Chief ExecutiveGary Robins, a former Investment Director at3i, is the UK’s biggest private investor network.
Its 600 high net worth members, mostly intheir mid-50s with an average of £1 millioneach to invest, have invested £127 million in36 private equity and commercial propertydeals with a total value exceeding £500 mil-lion. It invests about £50 million a year. Thefirm offers access to individually-selecteddirect investments, usually in units of £25,000.
It set out from the start to differentiate itselffrom business angel networks by appealing towhat it identified as “passive” private investors,who have capital to invest, but neither the timenor inclination to become closely involved withthe operation of their investments.
Robins says Hotbed’s investment opportuni-ties originate through relationships its teamhas built up with other professionals through-out the UK and are mostly unavailable to pri-vate investors through other channels.
Members decide individually whether toinvest, on a case-by-case basis, and Hotbeddoes the rest of the work – agreeing a clearexit plan, structuring and executing thedeal, working with management to increaseshareholder or asset value, and regularlyreporting back to participating clients.
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“The average return is consistently higherthan on conventional assets and it’s a funinvestment,” says Robins. “I think it’s evenmore interesting for private investors wherethey are able to select their own specificcompanies and build their own portfolios,rather than have a fund manager do theinvesting for them. But it’s not for the fainthearted or for people who don’t know whatthey’re doing.”
As well as participating directly in transac-tions, Hotbed’s members can invest in threeHotbed funds, including Parallel PrivateEquity, which invests alongside 3i andBarclays Private Equity in European buy-outs.
Pi Capital, meanwhile, was set up in 1998, buttook its current form as a private investmentclub in 2002, when it was bought by ChiefExecutive David Giampaolo and otherinvestors. It has more than 300 high net worthmembers, said to include Marks & SpencerChief Executive Stuart Rose, WPP ChiefExecutive Sir Martin Sorrell, Lastminute.comCo-founder Brent Hoberman and AlchemyPartners Managing Partner Jon Moulton.
“We focus on growth equity opportunities,but we do not do seed capital,” saysGiampaolo. “We don’t raise money for com-panies. We invest in companies. We set upspecial investment vehicles to invest in com-panies and then invite our members to sub-scribe to take part on an opt-in basis. On aver-age, between 40-60 investors participate ineach deal we do.”
Giampaolo says there are important differ-ences between a private investment club likePi and a conventional venture capital or pri-vate equity fund.
While funds are protected by the portfolioapproach so that losses from some invest-ments are offset by gains on others, Pi’s mem-bers subscribe for investments on a case-by-case basis. If the company they invest in fails,they lose their entire capital.
Giampaolo says this happens in an average oftwo of every ten companies Pi invests in.However, it has a high success rate in invest-ments it makes alongside the likes of AlchemyPartners, Englefield Capital and BC Partners.Its best exit to date has been in biosciencesfirm Cozart, which produced a five-fold return,and Giampaolo says one investment in Pi’scurrent portfolio is very likely to surpass that.
On average, Pi takes a stake of between 25 and 40 per cent in direct investments andnominal levels in larger buy-outs in which it participates.
“It’s more interestingfor private investorswhere they are able
to select their own specificcompanies and build theirown portfolios, rather thanhave a fund manager do the investing for them”
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The success ofvehicles like Pi and Hotbed suggest
this form of investment, like PEITs, is set to be apermanent and growingpart of the private equity landscape
Giampaolo believes Pi can be more flexibleon time limits than some traditional fundsthat are tied into fund cycles. He says thereare some investments in its current portfolio,for example, that have made excellentprogress that could be realised now, but ithas decided to wait to exit because the busi-nesses are still growing rapidly.
Pi has been averaging four deals a year, butrecently sold a 19.9 per cent stake in itself toBank of Scotland in a deal that involvesaccess to a significant number of the invest-ments made by the bank’s growth equity
and integrated financing operations. Pi isalso diversifying and recently secured itssecond property transaction. Membershipsare still being taken by referrals, butGiampaolo says the club will be limited to400-500 individuals.
Whether individual investors are motivatedby this feeling of being part of a ‘club’, thechance to build their own portfolio or simplythe returns on offer, the success of vehicleslike Pi and Hotbed suggest this form of invest-ment, like PEITs, is set to be a permanent andgrowing part of the private equity landscape.
The funding treadmill
Key issues
The structure of the private equity industry is in many ways dictated by the ten-year life of funds and the need to deliver performance to raise new capital. Is this a necessary discipline or a source ofinefficiency? Is permanent capital the answer? Joanne Hart reports
Private equity has been dominated by oneparticular style of funding for decades. It is rel-atively simple, relatively straightforward andrelatively successful. Firms approach investorsfor ten-year money and spend roughly fiveyears investing and five years divesting.
The model was conceived because theindustry felt it needed this amount of time tomake capital work effectively. But moneystarts running out after a few years, so mostfirms try and replenish their stocks everythree or four years.
General partners are constantly aware of howmuch money they have in the pot, how muchthey might need in the future and where theymight find that new capital. This means thereis a constant pressure to deliver the returnsthat make their firms look attractive and makelimited partners keen to invest in them.
But a number of general and limited partnersfeel the limited lifetime fund structure canlead to bad decision-making – if they are infundraising mode, for instance, they maymake exits unwisely.
This pressure has been particularly acuterecently. Limited partners have been lookingfor returns and this has encouraged privateequity firms to do deals. As a result, there is afeeling among some in the industry that cer-tain deals should not have been done andmay not have been done if the funding cyclewere different.
This is a view held by Jacques Callaghan ofHawkpoint. “[It is possible] more value couldbe created for investors if companies did not
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have to be sold at particular times during thefunding cycle to show potential investors thatreturns can be made,” he says.
Fundraising is also a lengthy and time-con-suming process. As the private equity markethas become more crowded and the searchfor returns has become more intense,investors have become more demanding –they are providing firms with ten-year moneyso they want to make sure that it is going tothe right home.
Permira, for example, held 500 meetings oversix months for its most recent fund, whichraised H11 billion and has 180 investors.“They all had access to our senior managersand to detailed information on every singlecompany we own,” says Chris Davison, thefirm’s Director of Communications. “It is aslightly protracted process, but it providestransparency and comfort for investors.”
Some firms argue that the funding cycleimposes a discipline on the private equityindustry that actively contributes to its suc-cess. “The ten-year model works for firmswith the track record to attract new money.Investors tend to invest in firms that deliver,so the whole process keeps you on your toesand helps ensure that the good firms prosperand the not so good ones struggle,” says onegeneral partner.
This seems logical and it encourages firms tofocus on effective and pro-active communica-tion with investors. “Our view of investor rela-tions is that it should be a continuous affair.You are fundraising the whole time, which
makes it far less transactional and far morelong-term,” says Paul Marson-Smith, ChiefExecutive of Gresham.
As the industry matures, however, otheroptions are appearing. Some firms have cho-sen to list and gain access to permanent capi-tal in that way.
American Capital, for example, has based itsentire model around a full listing. The NAS-DAQ-listed firm, a member of the S&P 500,has spawned an offshoot, European Capital,which operates using the same structure.Both businesses are regarded as successfuland American Capital, with $20 billion in cap-ital resources under management, is one ofthe largest providers of capital on the privateequity landscape.
Others have meanwhile used a listing to pro-vide an additional source of capital –Blackstone listed on the New York StockExchange in June 2007, raising $4.1 billion inthe process, while Kohlberg Kravis Roberts hasbeen preparing for an IPO since last summer.
While a listing is clearly an interesting option,it requires favourable market conditions andis principally open to large funds with suchestablished track records that investors willbe prepared to back them in this mode.
In a related development, meanwhile, theLondon Stock Exchange (LSE) seems tohave endorsed the idea of investment vehi-cles for professional asset managers, withthe creation in late 2007 of the SpecialistFund Market.
“Investors tend toinvest in firms thatdeliver, so the
whole process keeps you on your toes and helpsensure that the good firmsprosper and the not so good ones struggle”
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This is intended for highly specialised invest-ment entities that wish to target institutional,professional and highly knowledgeableinvestors only. The LSE hopes that it willappeal to a variety of different types ofinvestment managers, including those man-aging private equity funds seeking admissionto a public market in London.
Some firms, such as Alchemy, have opted tocreate an entirely new structure, offeringinvestors the chance to put £5 million ormore into a fund with a £400 million annualcapacity. Investments are made on an annualbasis and there is a 12-month notice periodfrom Alchemy or its limited partners.
“This is simple and easy to understand.Investors were after a fairer model and thisstructure offers fees that are lower than thetraditional funds, but without any of theirhurdles. You can get out any time you feellike it and the arrangement goes through to2047,” says Jon Moulton, Managing Partnerat Alchemy.
A couple of firms in the UK and the US havecopied the Alchemy model. Others haveopted for so-called evergreen funds, which,as their name suggests, do not have a limit-ed lifespan.
These vehicles work well, practitioners say,provided there is a functioning secondary
“It is particularly challenging for the last assetin a fund. You have to make sure it is acquiredin the first five years or you may pop upagainst the end of the fund. The key point isthat most firms could return more value mostof the time, if they were not under pressureto sell,” says one private equity adviser.
Although most industry participants believethe ten-year funding model will continue toplay a dominant role, there is a feeling never-theless that we are now entering a new era.While up to 90 per cent of investors are stillputting their money into private equity for tenyears, it can be very difficult to raise moneywithin this framework. Some firms may ulti-mately be forced to do things differently.
market. Six or seven years ago, if limited part-ners wanted to sell their exposure to a fund,they would have to accept a discount of 30 to40 per cent. Now the situation is more devel-oped. When conditions are stable, investorsin good quality funds can sell their holdingsquickly and at a premium.
Some private equity advisers believe the tra-ditional ten-year funding model will comeunder increasing pressure as the broader eco-nomic environment changes.
“The competitive landscape has created mul-tiple compression and that has forced firms tofocus on performance enhancement of theirportfolio companies. As that takes longer, theaverage holding period should get longer, sohaving the flexibility to circumvent fundrais-ing cycles would be helpful,” saysHawkpoint’s Callaghan.
The private equity industry tends to say thatportfolio companies are held for betweenthree and five years. In the past few years,however, holding periods have come down tobetween two and three years in many cases,as firms sought to take advantage of thebenign economic cycle. If firms now findthemselves obliged to hold onto their invest-ments for longer, to achieve the returnsdemanded by their limited partners, they maybegin to regard the ten-year funding model asa hindrance.
Some private equityadvisers believe the traditional
ten-year funding model will come under increasing pressure as the broader economicenvironment changes
The early days
The roots of the industry
The UK’s private equity industry may be thriving now, but 25 years ago it was a struggle to get investors interested inthe sector. Sir Ronald Cohen, Founder of Apax Partners,details the persistence of the country’s first venture capitalistsand the key role played by the early Chairmen of the BVCA
The first modern venture capitalist wasprobably General Georges Doriot, who was avisiting lecturer at Harvard Business Schoolwhen I was there. He had been responsiblefor an investment of US$70,000 to helplaunch DEC back in 1959. DEC floated in1968 at a valuation of US$125 million.Doriot’s firm, American Research andDevelopment, made an annualised return onits investment in excess of 100 per cent: itdoubled its money each year.
It was among innovative companies such asDEC that the US turned out to have crucialadvantages over Europe. One advantage wasin education, especially in the area of newtechnology. A second was in the businessculture, which admired success in business,welcomed innovation and encouraged com-petition and risk-taking. A third was in easyaccess to capital. Start-ups and early stagecompanies in the US were soon to find back-ers in the growing community of venturecapital investors, and among institutional aswell as individual investors in the shares trad-ed on the NASDAQ stock market, which wascreated in 1970.
My first move into this area was with a com-pany called MMG. It had its origins in aHarvard Business School project written in1970 by one of my partners, MauriceTchénio. Maurice was a brilliant student – topof the class, a Baker Scholar – who graduat-
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ed with high distinction. His paper was, ineffect, a draft business plan for MMG, thename of which he had coined. We launchedMMG to provide advisory services to entre-preneurial companies. One of my colleagueswas going to be based in his home town,Chicago, two were going back to Paris and Iwould be in London.
We tried to think out of the box. In the firstyear of our professional partnership, 1972,we considered what would have been one ofthe first private equity buy-outs in Europe, ofthe French crane manufacturer Potain. Forthe deal to make financial sense, the equityinvestment had to be leveraged with a signif-icant amount of debt (just as one mixes equi-ty and debt when one raises a mortgage tobuy a house).
But in those days it proved impossible to raisethe necessary debt for that kind of a transac-tion. We had the idea, but not the means. Wewere a decade too early. We made littleprogress and when, as a result, two of thefounding partners indicated that they wantedto drop out of MMG, and Maurice Tchéniotold me that he would prefer to operate moreindependently, I knew that in order to reversethe difficult turn of events I needed to find anew partner in New York. Whom did I knowin New York who could replace our departingpartner? Alan Patricof.
We tried to think out of the box. In the first year of our
professional partnership,1972, we considered what would have been one of the first privateequity buy-outs in Europe
I had met Alan a couple of years previouslyand we had got on extremely well. He wasone of the pioneers of American venturecapital. He had set out a few years beforeme, in 1969, when he raised a $2.5 millionfund from wealthy individuals in the US.Among his investors were two leading fig-ures in American business, Bob Sarnoff andEdgar Bronfman.
He had also set up a corporate finance advi-sory business to supplement the revenues ofhis venture fund. I telephoned Alan andmade him an offer. “Our Chicago-based part-ner is leaving. If you want to become ourpartner, we could help you in corporatefinance in the US and you could help us tobring venture capital to Europe.”
Alan is the most careful of people; he doesnot often make commitments on the phone.But on this occasion he immediately said yes.We soon agreed on a fee-sharing arrange-ment for the corporate finance business wewould do initially, and the deal was done.
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MMG continued as an advisory business,with a New York office for which Alan wasresponsible. Our London office was tobecome the British arm of the expanded pri-vate equity firm, Alan Patricof Associates,when we raised our first venture capital fundin 1981.
The French office, under Maurice Tchénio,likewise used the Alan Patricof name when itraised its first venture capital fund in 1983.The names MMG and Alan PatricofAssociates co-existed for some years, thenwe changed the name to MMG Patricof andfinally, in 1991, as the firm expanded geo-graphically and we felt the need to create aunified, international brand, the name inEurope was changed to Apax Partners.
With the benefit of Alan Patricof’s example inthe US, we set our sights on being venturecapital investors. But since there was no ven-ture capital industry in Europe, and sincenone of the financial institutions, whetherthey were investment funds, lending banks or
Since none of thefinancial institutionsreally knew
anything about early stagebusinesses or buy-outs, wefound that we had to getthe venture capital industrygoing ourselves
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We organisedmeetings where wecould pitch the case
for venture capital toprospective investors
investment banks, really knew anythingabout early stage businesses or buy-outs, wefound that we had to get the venture capitalindustry going ourselves.
In this respect we were no different frommany of the current generation of entrepre-neurs who start new firms in a new industry:you find that considerable effort is needed tobuild up the sector at the same time as youbuild up your firm. A lot of my energy wentinto making the case for venture capital.Some of my colleagues thought it was awaste of my time. But I did not think wecould be successful without this effort.
I was not the only one to realise it: some of ourcompetitors recognised the same necessity.Among those who were very active in thoseearly years were Michael Stoddart of Electra;Sir David Cooksey, Tony Lorenz, Colin Cliveand Lionel Anthony, who were Chairmen ofthe BVCA; Dick Onians, who was Chairman ofthe European Venture Capital Association;Roger Brooke of Candover; and NickFerguson of Schroder Ventures.
We organised meetings where we couldpitch the case for venture capital to prospec-tive investors. The first such meeting washeld in London, at the Grosvenor HouseHotel, in 1977. William Casey, the Head ofthe Securities and Exchange Commission,which regulates US stock exchanges, spoke.He had been invited by Alan Patricof, whowas also a speaker.
Leading financial institutions came, butnobody was really interested in investing insmall businesses. Private equity, venture cap-ital, small-company investments: these werenot on the agenda at that time.
We persisted nevertheless, and in the early1980s we organised annual forums in hotelconference halls at each of which about 30 entrepreneurs would stand up one afteranother to expound, in four minutes each, thevirtues of their businesses to potentialinvestors. We began to create a feeling thatperhaps there were worthwhile entrepre-neurs and ventures in Britain after all.
25 years of the BVCA and the private equity industry
The roots of the industry
Sir David Cooksey, Founder of Advent Venture Partners, looks back at the early days of the industry and analyses its evolution over the last 25 years
The early 1980s saw the birth of a trulyBritish venture capital industry. Until then,some UK-based funds invested almost exclu-sively in the US, typically Abingworth andThompson Clive, while 3i (in its former guiseof ICFC) mostly lent money in the UK to smallcompanies on a long-term basis, but usuallysecured against the companies’ assets.
Other firms, such as Electra and Charter-house, were well established, providingdevelopment capital to more mature compa-nies, but there was nothing in the UK or con-tinental Europe to match the equity financingfor emerging technology-based companiesthat the US venture capital industry providedat that time.
It was a golden age for venture capital, withthe developments in semi-conductors, rotat-ing magnetic memories and new softwareoperating systems enabling the advent ofmicro computers and so on. Meanwhile,developments in microbiology provided thedriving force behind new biotech companies.In every case, new entrants to the computing,telecoms and healthcare industries graspedthe opportunities to dramatically reduce costand improve functionality simultaneously.
Many established businesses struggled toembrace this rapid change and found thatthey could not compete. The result was theexplosive growth of many recently-formedcompanies, many of which migrated to theNASDAQ stock market for their furtherfunding requirements.
In the UK, several venture capital firms wereformed to invest locally and by the end of1981 there were about ten such firms inLondon. They were a mix of independents,such as Advent and Alan Patricof Associates(now Apax Partners), while Electra and ECIwere experimenting with early stage equityinvestment, and there were captives, such asCiticorp Venture Capital (later spun off asCVC). Abingworth and Thompson Clivestarted to invest in Europe as well.
We all had much to learn from each otherand the general partners of these firms metabout six times a year for lunch, as theVenture Capital Lunch Club. Electra alwaysprovided the best hospitality and we wouldmeet there as often as we could.
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All of this took place against a rapidly evolv-ing economic backdrop, with MargaretThatcher’s rise to power and the free marketpolitics that she promoted making the UK amuch more competitive place to do busi-ness. Venture capital was perceived to be aflag carrier for this new culture and manyleading investment institutions decided toback the fledgling venture capital firms.Even the Bank of England helped the indus-try promote its cause because it saw theindustry filling a void in the financing ofdynamic small firms.
The culture was further stimulated by theLondon Stock Exchange’s introduction ofthe Unlisted Securities Market (USM), astock market expressly designed to cater forsmaller companies undergoing rapidgrowth. The intention was to emulate NASDAQ in the US, but the growth rates ofthe companies never compared to the USmodel. The USM later failed in the recessionof the early 1990s, due to a lack of liquidity.
Nevertheless, the leading participants feltthat their activities were having a substantialimpact on the financing framework for smallfirms and that their Venture Capital LunchClub should be reformulated as the BritishVenture Capital Association. The purposewas to provide a representative body to bringtogether the entire industry and to act as alobby organisation when appropriate. Ibecame the first Chairman and the first coun-cil members included Sir Ronald Cohen ofApax Partners, Tony Lorenz of ECI and ColinClive of Thompson Clive.
Most of the venture capitalists set out tofinance businesses using the US model,which involved the exploitation of innovativetechnologies. They would seek to identify thesources of those technologies either alreadybeing exploited by a company or, more likely,residing at a university laboratory. In the lattercase it would be necessary to form a compa-ny in which to spin out the technology.
British universities obtained the vast bulk oftheir funding from the Government, and mostuniversity professors at that time believed thatinvolvement with business somehowdemeaned the standing of their research. Butothers – seeing some of the extraordinary
In the UK, severalventure capital firms were formed
to invest locally and by the end of 1981 there were about ten such firms in London
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London has developed as a European capital
of private equity and therole of the BVCA has grown with the growth in the industry
developments around Harvard, MIT andStanford universities in the US – decided thatthe time had come to be much more open toinvolvement with business. This trend was fur-ther stimulated when the Government termi-nated the automatic ownership by the NationalResearch & Development Corporation of intel-lectual property emerging from Government-financed research at the universities in 1985.
Over the past 20 years a series of measureshas followed to encourage collaborationbetween universities and business. Manyuniversities have developed competent tech-nology transfer organisations and much morespin-out activity has followed. Many success-ful companies have been formed, particularlyin the information technology, telecommuni-cations, media and life sciences industries.As a result, Britain has managed to hold itsown in the knowledge-based industries,whereas it had been failing badly 25 yearsago. Even the professors, who 25 years agowere often disparaging about the quality ofBritish management, now gladly participatein this process.
This is a high-risk process and there is fiercecompetition around the world in the high-techindustries. British venture capitalists havefound it difficult to identify and grow success-ful technology-based businesses, often
because our home market is too unreceptiveor simply too small for the companies to suc-ceed. There have been outstanding success-es, but there have been too few of them andthe industry has failed to consistently producethe high rates of return expected of it.
This caused many of those who started aspure venture capitalists to turn their atten-tion to more mature companies. The resultwas venture capital broadening to privateequity, with much buy-out activity startingin the mid-1980s. Since then, buy-out activ-ity has burgeoned, embracing every part ofthe economy with very beneficial effect interms of improving the performance ofunderperforming companies and the muchmore efficient use of capital to finance them.As buy-outs have grown and grown, privateequity has moved from being an alternativeasset to being a mainstream asset class. Andit has attracted much more media and unionattention, too.
London has developed as a European capitalof private equity and the role of the BVCAhas grown with the growth in the industry.The BVCA’s standing and influence is a trib-ute both to those who had the original vision,and to those who have ensured it remains aneffective mouthpiece for a very importantsector of the financial services industry.
The role of 3i
The roots of the industry
Baroness Sarah Hogg, Chairman, 3i, looks at the growth of the company and the industry over the past 25 years
At about the same time as the BVCA waslaunched, a pioneering private equity business– with the very catchy name of the Industrialand Commercial Finance Corporation (ICFC) –was going through one of its periodic transfor-mations. ICFC, by then 40 years old, under-went a massive change programme in theearly 1980s under the leadership of JonFoulds, who later went on to chair and floatthe Halifax Building Society.
That was when the ‘3i’ name was born. Thisre-branding of the business was integral toits ambition: to capitalise on a wave of entre-preneurialism in the UK. But the ambitionwas broader than that: to deploy 3i’s skillsacross Europe, to accelerate the develop-ment of buy-outs and to make 3i an interna-tional name in financial services. In manyways, these aims mirrored those of theBVCA, as it sought to promote the UK pri-vate equity industry.
With shareholders’ funds of £461 million, themanagement at 3i also wanted to float thecompany – gaining independence from theclearing banks that had put up the original£10 million to found the business and stillowned it.
Today, funds under management are morethan £8 billion, approximately 60 per cent of3i’s assets are outside the UK, and, as a mem-ber of the FTSE 100 since 1994, 3i hasbecome recognised throughout the financialservices world. In the past 25 years, 3i andthe private equity industry have bothchanged enormously. At times, 3i has led, asin its redevelopment of growth capital, infra-structure and its Asian strategy, its people
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programmes, its use of quoted markets andits approach to public accountability. Butsometimes, too – as in the early part of thisdecade – 3i has felt the sting of competitionand has had to transform itself to regain itsposition, recharge its performance and trans-form remuneration to attract the best privateequity investors around the world.
Naturally, having started life as an economist,I am all in favour of competition. In privateequity, as elsewhere, it has helped to growthe market and improve the products or serv-ices on offer. The rapid growth of the industryand the number of competitors in the markethave stimulated innovation in buy-outs andgrowth capital, and most recently in the appli-cation of private equity skills to infrastructureassets and quoted markets. And it is a furthercompliment to 3i that today a number of ourcompetitors, such as Bridgepoint, BarclaysPrivate Equity and Charterhouse, have beenled by 3i alumni.
The acceleration of the move towards themanagement of external funds in the 1990swas another classic example of increasedcompetition growing a market. The develop-ment of the European buy-out industry hasclearly been dependent upon it; so, today, isthe growth of the market in Asia.
Globalisation has provided a further stimulusto growth, as well as creating the need for adifferent style of management within privateequity firms. The challenges of running multi-country operations, dealing with different cul-tures and markets at varying stages of maturi-ty, played to 3i’s strengths. The emphasis on‘The best team for the job’ and a ‘One room,
The rapid growth of the industry and the number
of competitors in themarket have stimulatedinnovation in buy-outs and growth capital
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The economicclimate looks moreuncertain than for
some time, and the industryhas been in the politicalspotlight. However, it is the challenging times that have led to the greatest innovation
One firm’ approach have enabled 3i to capi-talise on the diversity of talent inside and out-side the company.
Communications technology has played amajor role in the growth of the industry andits internationalisation, as well as its ability totransact at an operational level. The speedwith which our Asian business has grownwould have been impossible with those early1980s phones and faxes. However, some ‘oldtechnology’ has served us well – notably, ourpermanent capital that has enabled us toenter markets before raising funds specific tothem. It has also been very clear that ourFTSE 100 status, the 3i brand and our reputa-tion for transparency and good governancehave helped considerably.
We have recently celebrated our tenthanniversary in Asia and, rather fittingly, tenper cent of our assets are now in this region.We are learning much from the process ofour rapid development there, and gaininggreater benefit for our European and USportfolio companies from our Asian presencethan we had anticipated.
In 2008 we will also be celebrating our 25thyear in continental Europe. This market today
represents approximately 40 per cent of ourportfolio and has been a key driver of returnsand growth. Its development has also taughtus much in terms of organisation and manag-ing cultural diversity both within and outsideof 3i. Building a truly sustainable internation-al business depends so much on how peopleinteract and support each other.
So much has changed over the past 25 years;but not our values or our belief in the impor-tance of investing in relationships. It is thesethat I believe have enabled 3i to deal with thechallenges of economic cycles and thechanges in the competitive landscape.
As this book goes to print, the economic cli-mate looks more uncertain than for sometime, and the industry has been in the politicalspotlight. However, it is the challenging timesthat have led to the greatest innovation. It isalso at such times that relationships matter themost. For more than 60 years, 3i has been atthe heart of the private equity industry. Wecongratulate the BVCA on its 25th anniver-sary and look forward to working with it, andwith others in the industry, in the next phaseof private equity development.
Enterprising spirit
The roots of the industry
Venture capital is still the toughest part of the business to get right, says Anne Glover OBE, CEO and Co-founder, Amadeus Capital Partners
The venture business in Europe has seenmore volatility in its development over thelast 25 years than any other segment of pri-vate equity.
Following the success of a still-young indus-try in the US, Sofinnova was founded as thefirst venture capital company in France in the1970s. This was followed in the early 1980s,at the time of the personal computing boom,by a group of firms in the UK and continen-tal Europe founded, for the most part, bypeople with some US business experienceor education.
These pioneering firms, which includedAdvent, Alan Patricof Associates, ThompsonClive and ECI, backed early stage companies,only some of which were technology-related– venture capital has only become closelyassociated with technology investment inEurope since the mid-1990s.
Venture investing in the early days was localand very hands-on, not least because goodmanagers were hard to find in Europe. Theadvent of secondary markets, the UnlistedSecurities Market in the UK and SecondMarché in France, stimulated the business byproviding an exit route alongside NASDAQ.
Early successes included HATT’s RACALMillicom, which owned the Vodafone fran-chise and was sold for £35.6 million in 1987,and ComputaCenter, which floated on theLondon Stock Exchange in May 1998. But inspite of such successes, Europe failed to gainthe traction of the US. Investments tended to
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be locally focused and local European mar-kets lacked the scale and homogeneity of theUS market, which resulted in fewer large exitsand lower overall returns.
The late 1980s saw an increase in continentalEuropean deals and the advent of the buy-outto Europe. In 1987, established firms wereraising their third funds and by 1989, thenumber of buy-outs exceeded venturefinancings and deals were increasingly cross-border, with or without syndication.
Recession in the early 1990s brought the firstbuy-out boom to an end, but both the boomand the fallout affected venture capital, asfunding had shifted to later stage companiesand the contraction affected virtually all seg-ments. A notable exception was biotechnolo-gy, a sector that produced a cluster of high-profile IPOs and trade sales, including Shire,Scotia and Biocompatibles.
Similarly high-profile and global IT companiesdid not achieve scale until the mid-1990s andthe beginning of the internet explosion, whichwas triggered by the IPO of Netscape in 1995.Initially, few realised just how critical a phe-nomenon for business and consumer commu-nication the internet was. By 2000, this areaattracted plenty of interest and prodigiousquantities of money – representing 90 percent of the total capital raised for IT in the pre-vious 20 years – but in this initial phase, only afew profitable business models emerged.Sadly, many potentially viable young compa-nies were washed away or forced to hibernateuntil the downturn was over.
Recession in theearly 1990s broughtthe first buy-out
boom to an end, but boththe boom and the falloutaffected venture capital, asfunding had shifted to laterstage companies and thecontraction affectedvirtually all segments
The roots of the industry
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The fiscalenvironment since2000 has improved
for founders and owners of businesses – and let us hope that the UKremains competitive on the global stage in this respect
The internet boom also stimulated the cre-ation of many new venture firms in Europe. Anumber of those disappeared in the wake of2001-2002, but a small group of home-grownand US entrants, who had backed successfulcompanies in the late 1990s and invested inbroad portfolios, survived and are the core ofthe resurgence in ventures we are seeing inEurope today.
Although some successful companies, likeLastminute and Kelkoo, weathered the stormof the dotcom and telecoms crash, the ven-ture sector suffered severely. The trackrecord of Europe’s ventures was too smalland too limited to outweigh the excesses of1999-2001, and it took exits such as CSR andSkype for confidence to return.
What we now see is that the firms that havecome through this period, much as those thatbacked biotech in the 1990s, have a realcommitment to supporting young and grow-ing technology companies. Much of ourbusiness is no longer just about start-ups,though of course they remain an essentialcomponent, but about seeing companiesthrough several years of growth with severalrounds of finance and support on all fronts.
What has also changed is that technology isnow completely global and it does not matterwhere a company is founded, where itsinvestors are based or into which markets itsells products or services. This means that theUS, with its large indigenous market – long anadvantage – no longer has an automatic leadin building successful technology companies.
Furthermore, with a number of billion-dollarcompanies established in Europe, we haveno problem today attracting the best man-agers from anywhere in the world into ouryoung businesses.
The growth of successful venture investingglobally will inevitably encounter further upsand downs because the enthusiasm withwhich founders, entrepreneurs and funderstake to new technologies is not always adopt-ed by the market, at least until a first wavebeds down, and inevitably after some failures.Web 2.0 and cleantech may be today’s hotareas, though both are undoubtedly here tostay. What we have learned is that new oppor-tunities always emerge from change andabsolute levels of entrepreneurship and ven-ture investment in the UK have systematicallyincreased as global barriers have come down.
The environment for enterprise today is bet-ter than ever before. The social status of theentrepreneur this side of the Atlantic hasrisen; there is wide recognition that multipletalents are required to build successful busi-nesses and we now see real collaboration,Silicon Valley-style, between technologists,entrepreneurs, managers and financiers. Thefiscal environment since 2000 has improvedfor founders and owners of businesses – andlet us hope that the UK remains competitiveon the global stage in this respect, lest we loseour ability to attract world-class managementinto young companies.
The standing the UK and Europe haveachieved in the creation of innovative busi-nesses will, however, be challenged in thecoming years by the emergence of China andIndia, as well as by the US. Levels of competi-tion for technological excellence and devel-opment are greater than at any time in thepast 25 years, so we need continuously toraise our game.
uidity in the secondary market – becomesmore valuable in tougher times.
Moreover, it would be a mistake to assumethat the sector’s political enemies will becomeless aggressive in these changed economiccircumstances. The same voices that so noisi-ly condemned the profitability of privateequity houses will be just as quick to pick onany bad publicity from the business problemsthat could emerge in an economic slowdown.In these circumstances, as The Economistargued last year: “Perhaps the greatest threatto the continued growth of private equity isregulation.” It concluded that: “The newkings of capitalism must try to prevent thisfrom happening by showing that they reallyare a force for good.”
The sector is well-placed to respond to this challenge.For one thing, private equity firms have sub-stantial amounts of capital at their disposal,and continue to raise large sums of new
money. So if they need to, they have plenty ofcash to support investments that might run into difficulties.
For another, the success of the sector hasmeant that the repayment terms on its loanshave generally become much less onerousthan in past business cycles. Repayment ofprincipal is often delayed for a good numberof years, which means that firms have moretime to put things in order if one of theirinvestments hits trouble.
At the same time, there will still be plenty ofinvestment opportunities in these toughereconomic conditions. The mega deals maybe over for the time being. But business con-tinues to be brisk at the small to medium-sized end of the market, and is likely toremain so as big, publicly-owned companiesadjust their portfolios in response to chang-ing economic circumstances.
Emerging market activities are proving to bevery successful for some private equity hous-es, and distressed debt funds are attractingbig inflows. As was shown in the Japanesebanking crisis, private equity investment canbe the best and sometimes even the only
The BVCA has takena lead over the pastyear in presenting
private equity in its true light,as a dynamic part of thebroad business communityrather than a secretive club
A view from outside the industry
Impressions of the industry – the impact of private equity
The 25th anniversary of the BVCA is a milestone in the development of theprivate equity industry, says CBI Director-General Richard Lambert
The wider business community haslooked at the success of the private equitysector in recent years with a mixture of envyand admiration. Business people have envieda corporate governance model that allowsexecutives to concentrate on the job in hand,without too many distractions from City ana-lysts, regulators and the media, and whichoffers large rewards for success.
And they have admired the results that haveoften followed, in the shape of business turn-arounds, strategic expansion and growth.
This success has had an impact on the waypublicly listed companies are managed. Forexample, a number of PLCs have placed agreater focus on the efficient allocation ofcapital, and have attempted to get morealignment between the interests of managersand shareholders. In the case of some big,publicly-owned companies, the growth ofshareholder activism has added an extrapush in the same direction.
But this admiration has been tempered by theknowledge that business conditions have beenjust about ideal for private equity houses inrecent years. Very low interest rates, a plentifulsupply of credit, rising asset prices, macroeco-nomic stability – these have been exceptionaltimes for raising substantial sums of capital,and for generating very large returns.
The big question has been about how muchthese returns have been to do with manage-ment skills, and how much to do with thefavourable economic cycle. Academic stud-ies show that the larger part of private equityreturns over time has been a result of goodmanagement as opposed to financial engi-neering. But as acquisition prices and debtleverage have both risen in recent years, thequestion has inevitably gained more force.
We are now about to discover the answer.Credit conditions have changed dramaticallyfor the worse since the summer of 2007. Asa result, the spread between the yield onlow- and high-risk debt – which had becomeunusually compressed – has widenedsharply. The large European economies arefaltering, and the US faces the possibility of a recession.
So these are going to be much more testingtimes. There are two particular challenges forprivate equity. One is that loans becomeharder to secure at a time when banks facedifficulties in distributing the debt theyunderwrite to other investors, such as pen-sion or hedge funds.
The other is that the one big advantage thatpublic equity has over private – greater liq-
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solution for publicly-owned companies thatrun into serious difficulties. More recently,Northern Rock was attracting interest fromthis kind of finance at a time when publicly-owned companies were keeping well away.
In addition, private equity firms have beenmaking much greater efforts to explain howthis form of corporate ownership has becomean increasingly important component of anefficient capital market. As Blackstone’sStephen Schwarzman told the CBI confer-ence in November 2007: “Private equity’smajor innovation is that it blends the best ele-ments of private ownership with public mar-ket-sized capital.”
It was not, he acknowledged, the right solu-tion for every company. But it filled a crucialgap in the corporate governance spectrum,and in so doing it challenged all companies toreach a new level of performance.
The BVCA has taken a lead over the past yearin presenting private equity in its true light, asa dynamic part of the broad business commu-nity rather than a secretive club of specialistinvestors sitting somewhere on the margins ofthe capital market. It commissioned Sir DavidWalker to produce the guidelines that are nowin place to increase the visibility for large pri-vate equity firms and portfolio companies.
And it is developing a robust database that,among other things, will permit serious analy-sis of the ways in which private equity gener-ates its returns, and of how its performancecompares with that of quoted companies.
The private and publicly-listed sectors arecoming to realise that each has a vital interestin the other’s success, and a shared interest inpublic policymaking.
Private equity needs large and liquid publicmarkets in order to realise its capital gains.Public-listed companies need the spur thatcomes from private equity investment, andthe opportunity it provides to reshape busi-ness portfolios when necessary.
Both have a vital interest in the ingredients ofa successful economy, which include a skilledworkforce, proportionate business taxes andregulation, well-developed infrastructure,energy and environmental security, and a lib-eral approach to the movements of trade,capital, and people.
So, on the 25th anniversary of the BVCA, theprivate equity industry finds itself at a mile-stone in its development in the UK. How itresponds to the economic and political chal-lenges will be crucial in shaping its future as itenters the next quarter century.
Private equity/venture capital investment by UK defined benefit pension schemes
% of schemes which invest Average % of fund invested % of all assets invested(schemes which invest)
2007 2006 2005 2007 2006 2005 2007 2006 200520 20 15 3.2 3.2 3.3 1.7 1.7 1.0
Source : NAPF Annual Survey 2007
The view from the NAPF
Impressions of the industry – the impact of private equity
Pensions funds are increasing their investment in private equity. David Paterson, Head of Corporate Governance at the NAPF, explains why
I once attended a National Association ofPension Funds (NAPF) Investment Conferencewhere the then head of the BVCA spokeabout the attractions of venture capital forpension funds. This was a time – before theMyners review in 2001 – when few funds hadinvested much in the sector, even comparedto today’s modest figures.
Returns in the previous few years had notbeen that impressive, and the conferenceaudience was concerned about high fees andthe lack of transparency around reporting andperformance measurement. We were assuredthat the industry was taking steps to addressthose issues. It is interesting that issues aroundtransparency – albeit to a wider stakeholdergroup – are still being debated today.
What has also changed in the private equitysector since then has been the sheer scale ofthe deals, the leverage and the concernabout the lack of accountability compared topublic equity markets. The calls to takeaccount of the interests of the wider stake-holder group have been addressed by SirDavid Walker’s proposals.
For pension funds, the concept of investmentdiversification has well and truly taken rootduring this period. Private equity thereforehas not been ignored as a potential asset class.
Overall, 55 per cent of assets in defined ben-efit pension schemes in the NAPF’s AnnualSurvey 2007 are invested in equities, downfrom 61 per cent in 2005. A further 29 percent are in fixed interest assets (up 4 per centfrom 2005) and 16 per cent in alternativesand cash (up 2 per cent).
In terms of pension fund investment into pri-vate equity, there has been a clear shift – thepercentage of schemes that invest in privateequity has risen by 5 per cent to 20 per centover the last two years. Private equity nowaccounts for 1.7 per cent of all assets invest-ed, up from 1 per cent in 2005.
There is also a split between the public andprivate sector, with more private equity invest-ment from public sector pension funds (2.4per cent of public sector assets compared with1.5 per cent of private sector assets).
Pension funds are still most likely to access pri-vate equity investment through funds of fundsarrangements, with 64 per cent of the pensionfunds surveyed by the NAPF having adoptedthis approach, compared to 44 per cent whichhave wholly or partly invested via a single pri-vate equity fund.
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A Greenwich Associates survey in 2006 cal-culated that pension fund assets invested inprivate equity had increased by 50 per centover the period 2004-06 to around £9 billion.In addition, the best performing UK privateequity funds have produced returns thatexceeded the FTSE All Share over recent five-and ten-year periods.
The need for diversification is not the onlyreason why pension funds are increasinglyinvesting in private equity, however. It mustbe remembered that pension funds are long-term investors, so commitment to privateequity investment vehicles that may take sev-eral years to invest, and which are committedto generate meaningful returns on capital, fitswell with funds’ investment time horizon.This is particularly the case as Liability DrivenInvestment (LDI) – an investment strategyaimed at establishing a link between a fund’sassets and liabilities – becomes more popularwith pension funds. Some 44 per cent offunds polled by JP Morgan in 2006 said thatthey were either already implementing orconsidering LDI. The LDI approach fits broad-ly with the investment/return cycle of the pri-vate equity sector.
In addition, since the Myners Report in 2001,which was tasked with looking at the impedi-ments to funds investing more in venture capi-tal and private equity, pension funds have beenencouraged to look at investing more widelythan simply in traditional investment vehicles.
However, there are still some obstacles thatcould prevent pension funds directing a high-er percentage of assets towards private equity.There remains some scepticism around trans-parency of reporting – for example, on portfo-lio valuations – and the levels of fees charged,particularly performance-related fees.
Disparity between the best and worst privateequity managers can be extreme, and pen-sion funds must be comfortable that due dili-gence has been carried out on potentialinvestment targets to minimise potential forlosses or default.
Private equity investments tend also to beilliquid, so immediate access to those fundscommitted at short notice can be difficult toachieve and – if possible – would certainlyattract significant financial penalties.
In its response to Sir David Walker’s consulta-tion, the NAPF, along with the UK InvestmentPerformance Committee, stated that it believesthat there was much to be gained from privateequity incorporating Global InvestmentPerformance Standards, or GIPS, into theirreporting guidelines. This would benefit boththe funds themselves and their investors.
The NAPF, though, broadly supports SirDavid Walker’s November 2007 report andits conclusions, including the wider remit thatthe BVCA has been given. The NAPF wel-comes its commitment to greater transparen-cy and looks forward to working closely withthe BVCA in the interests of their investorsand our members.
Disparity betweenthe best and worstprivate equity
managers can be extreme,and pension funds must be comfortable that due diligence has been carried out
A question of image
Six years on from his review of institutional investment for the Treasury, Paul Myners looks again at private equity as an asset class
I argued in my review of institutionalinvestment for the Chancellor in March 2001that private equity had tended to be over-looked as an asset class by UK institutionalinvestors and urged UK pension funds andothers to take a greater interest. The points Imade then remain valid, particularly the needfor the private equity industry to increase dis-closure about its activities and performanceand for investors to increase their under-standing of the relative merits of the publicand private equity markets.
Private equity investment can have good andbad outcomes, just like other forms of owner-ship. The economy benefits from choice as aconsequence of diversity of ownership andfinancing models. This is to be welcomed.Private equity owners can and do makeemployees redundant, cut back on researchand development and default on debt. So dopublic equity and other forms of commercialownership, including sole traders, partner-ships and family firms. In fact, the similaritiesbetween different forms of ownership are farclearer than the differences.
There is little evidence to suggest that privateequity poses any economic or systemic risk
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particular to this form of ownership. I makethis assertion notwithstanding the heat gen-erated by intense public scrutiny of privateequity’s actions, rewards and governance.
Private equity investment returns vary overtime and between different managers, orgeneral partners, and between styles andspecialisations. The message here is simple:investors need to show care and skill in theselection of managers, the best of whom pro-duce stellar outcomes. But this is a sectorwhere Alpha identification is critical – Beta isunlikely to be sufficient.
Of late, in the period before the credit crunchmade its mark, we saw better relative returnsfrom private equity funds, reflecting benigneconomic conditions, abundant credit andfavourable exit valuations. Over time,investors should expect private equity to pro-duce superior returns to public equity to com-pensate for the higher risk from private equi-ty’s portfolio concentration, greater use ofdebt and lack of liquidity.
These superior returns are likely to reflectbetter oversight of management in investeecompanies. That private equity has not
Private equityinvestment returnsvary over time
and between differentmanagers, or generalpartners, and betweenstyles and specialisations
Impressions of the industry – the impact of private equity
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Private equity-ownedcompanies directlyemploy more than
1.1 million people in theUK, with a significantadditional numberdependent in some way on businesses owned under this model
always, on average, produced returns superi-or to that of public equity is a source of worry– although I think the general quality of man-agement in private equity has improved sig-nificantly over the past ten years, which givesgrounds for optimism.
A new feature of private equity that becameobvious from 2006 onwards was the emer-gence of very large private equity funds mak-ing offers or proposals to acquire leading pub-licly-quoted companies, lock, stock and barrel.
Private equity appears to have two distinctadvantages when bidding for public equity:firstly, its use of debt and secondly, a set ofless restrictive governance protocols.
Why can it be that one form of ownershipshould favour an entirely different level of financing risk and approach to gover-nance from another, given that both forms ofownership work under the same tax regime and are ultimately largely funded by the same beneficial owners, pensions and endowments?
The answer may lie in the second explanationfor private equity’s competitive advantage:governance. The direct engagement betweenthe private equity general partner and theinvestee company promotes much greaterconfidence and comfort with higher debt lev-els and implicit increase in equity volatility.
I also think the weight of corporate gover-nance process and focus has promoted anincreased risk aversion among the non-exec-utives on many public company boards. Thishas not always been to the benefit ofinvestors in these companies. And it has cer-tainly led to strategies that private equity hasidentified as suboptimal and capable of improvement.
Private equity has many positive qualities but,as an investment sub-sector, remains poorlyunderstood and suffers from a negative image.It is in the interests of the private equity indus-try to make greater efforts to explain the sec-tor’s activities and the performance of the com-panies in which they invest. Put simply, privateequity is more likely to prosper if the industryhas a positive image, which will encourage oth-ers to invest and deal with it and will not causealarm to employees, trade unions, suppliers,customers, regulators or legislators.
Sir David Walker’s proposals set a clearmap for progress in this respect, a routethat wise managers will follow with enthusi-asm. To my mind, he could have gone fur-ther, but he has made a major and welcomecontribution to promoting the cause of pri-vate equity. Those who disregard Walkerwill do so at some risk of seeing restrictionsplaced on the industry’s licence to operate.
Private equity-owned companies directlyemploy over 1.1 million people in the UK,with a significant additional number depend-ent in some way on businesses owned underthis model. Many companies and their stake-holders have benefited from this approach. Itis not a bad way to own or invest in a busi-ness. The private equity industry has a goodstory to tell and should not be shy abouttelling it.
Paul Myners is Chairman of Land SecuritiesGroup, Guardian Media Group, the Low PayCommission and Tate, and Advisory BoardMember of Englefield Capital. He is also aMember of the Court of the Bank of England.
The evidenceappears to suggestthat employment in
businesses owned byprivate equity in Europe has grown at a faster rate than in comparablequoted companies
Private equity and economic performance
Impressions of the industry – the impact of private equity
Research into the performance of major UK businesses underprivate equity ownership could pose interesting questions forquoted companies and their boards, writes Sir David Walker
The guidelines now in place in the UK forlarge private equity firms and portfolio compa-nies will increase transparency where, untilrecently, substantial business activity wasshaded from the glare of the public spotlight.The guidelines are both substantial and uniquein the world of private equity buy-out activityand the structure now being put in place by theBVCA provides for independent monitoring ofthe industry’s compliance.
My hope is that the guidelines and the frame-work of self-regulatory commitment thatunderpins them will come to be seen as a prag-matic and workable model that has relevancefor others, as with the original Takeover Codeand, later, the evolution of the ‘Londonapproach’ in banking situations.
Much of the political, media and wider publicconcern about large-scale buy-out activityfocused on how the financial benefits of thelarge returns generated by private equity aredistributed, and the tax regime appropriate tothem. These are important issues but, as I con-ducted my review and the associated consulta-tion process, I have become increasingly con-cerned at the inadequacy of our understandingof the overall economic impact of large-scalebuy-out activity.
Of course, many have views as to how and towhat extent private equity generates employ-ment and improves economic performance,but the database is partial and insufficient tosupport rigorous evidence-based analysis.This matters because, if private equity isindeed more effective in adding real econom-ic value than comparable quoted companies,why should this be so and what lessons mightbe learned?
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This is why I have attached such priority andimportance to construction of an authoritativeand comprehensive database for the industryand the development of a methodology foranalysing how private equity generates oftenexceptional returns and how its performancecompares with that of quoted companies.
The need is to find a rigorous way of analysingthe weight to be attached respectively tofinancial leverage, to change in the overallmarket environment in the relevant businesssector, and to improved operational andstrategic performance. Inevitably such attribu-tion analysis and the integral comparisonswith quoted company performance involvesome key subjective judgement, for examplethe appropriate comparator index for decid-ing on the weight to be attached to marketdevelopments in quoted companies in similarbusiness sectors and geographies.
It should be possible to reduce this subjectivitythrough the development of a reasonably stan-dardised methodology. The priority for now isto complete development of a rigorousprocess and to produce results from it in whichconfidence can be dependably placed in thewhole industry.
Substantial work is now in train, building onthe review process and research by Ernst andYoung, to create a template that should permitcompletion of an industry-wide, aggregateattribution analysis. It is envisaged that thefirst report on this work will cover exits bymajor private equity firms from portfolio com-panies in the UK over the three-year period2005-2007, to be continued on a rolling basisfor later periods.
On the basis of valuable but limited analysesundertaken so far, the evidence appears to sug-gest that employment in businesses owned byprivate equity in Europe has grown at a fasterrate than in comparable quoted companies,that both enterprise value and earnings beforeinterest, taxes, depreciation, and amortisation(EBITDA) have grown faster on the basis ofsimilar comparisons with quoted companiesand that a large part of the growth in EBITDAcame from business expansion.
If the broader-based, industry-wide analysisnow in train shows results that are broadlyconfirmatory of these findings, this shouldfocus attention on major questions for bothquoted company boardrooms and for theoverall regulatory arrangements that bear onquoted companies.
Specifically, what would quoted companiesneed to do differently to achieve business per-formance levels closer to those achieved by pri-vate equity? And does the regulatory regimefor quoted companies, in particular in relationto their governance arrangements, promotethe right balance between the capacity ofboards to contribute effectively to corporatestrategy alongside discharge of their regulatoryand related responsibilities?
These are difficult issues to be addressed, andbetter data and analysis of the performance ofprivate equity in ownership of major UK busi-nesses, hopefully to become available in thecourse of this year, should be a major input tothe debate.
(The author is a Senior Adviser at MorganStanley but is writing in a personal capacity.)
Private equity in Europe
Javier Echarri, Secretary General of the European Private Equity & Venture Capital Association, gives an overview of the way in which the European industry has developed over the past 25 years
The BVCA was founded in the same yearas the European Private Equity & VentureCapital Association (EVCA). Together, the twoassociations have played a major part in pro-moting and establishing what began in theearly 1980s as a new feature on the financialand business landscape in the UK and Europe.
EVCA has been closely involved at theEuropean level in all the major discussionsand decisions affecting private equity regula-tion, fundraising and investment over theyears, but we could not have succeeded onour own. The 27 national associations inEurope, particularly the BVCA, have played acrucial part in supporting our efforts.
As we now enter the second 25 years of thisindustry’s development, it is more importantthan ever that we continue our work togeth-er to defend and promote private equity inEurope and beyond.
From seed finance through to the largestbuy-outs, private equity is now an estab-lished asset class in Europe, attracting capitalfrom institutions worldwide, facilitating thecreation of new businesses and supporting
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established businesses to become globallycompetitive. When EVCA was founded in1983, we had fewer than 50 member firms.Today, we have more than 1,200 memberfirms covering Europe’s general partners(GPs) and the major US and internationalfund managers investing in Europe, as well asaffiliated limited partners and intermediaries.
Conscious of the increasing globalisation ofour industry, the EVCA and the BVCA aredeveloping stronger ties and working closelywith the National Venture Capital Association,the Private Equity Council in the USA, theInternational Limited Partners Association andnational associations in Asia-Pacific and LatinAmerica. In the next few years, I believe weshould, in all continents, harmonise our guide-lines, data methodologies and self-regulation.
The development of private equity inEurope has not always been smooth. If wehave learned anything from the peaksthrough 1997-2000 and 2004-2007 and thesubsequent adjustments, it is that this indus-try is highly cyclical and its fund managersconstantly inventive.
As we now enter thesecond 25 years of this industry’s
development, it is moreimportant than ever that wecontinue our work togetherto defend and promoteprivate equity in Europe and beyond
indices; entrepreneurship is no longer derid-ed, but lauded – even when it includes adegree of failure; world-class managers joinEuropean private equity-backed businesses;and governments understand the industry’srole in their economies, though not alwayshow that role is played.
What are some of the landmarks at aEuropean level since 1983? The associations have battled successfully ina number of countries, including the UK,Spain and France, for fiscal incentives forowner-managers and for appropriate nation-al and EU regulatory frameworks.
In 1996, leading GPs supported by EVCAestablished a short-lived pan-European exitmarket, EASDAQ, following the early suc-cess of the Unlisted Securities Market andthe Second Marché. These efforts led in thelong term to the emergence of AIM as acomplement to venture funding, which,together with Euronext, now offers a realalternative to NASDAQ for IPOs. For laterstage deals, we have seen the emergence ofsecondary (and tertiary) buy-outs to provideexits when public markets and trade salesare less accessible.
On self-regulation, EVCA’s first ValuationGuidelines were published in 1993, followedin 2005 by the publication of InternationalValuation Guidelines, produced togetherwith the BVCA and the French national asso-ciation – AFIC, which have been adopted bynearly 40 national associations worldwide.Guidelines on corporate governance andreporting have also been published. The
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current challenge is to find appropriate waysto communicate to wider audiences, whileensuring the efficient functioning of the pri-vate equity industry.
Although we have not succeeded in all ourcampaigns in Europe to avert regulation thatmight adversely affect the industry’s develop-ment (notably the consolidation of financialstatements under IAS 27), we have notchedup a substantial number of achievements ofwhich I am proud.
These include the 1988 European SeedCapital Funds Scheme and other pro-grammes to promote private investment ininnovative, technology-based companies; theearly 1990s’ Phare programmes, which weled, to create the first funds and to train man-agers across Central Europe; the harmonisa-tion of certain tax and legal aspects of fundstructures – though we are not at the end yet;averting the taxation of private equity groupsas conglomerates; and the Pension FundDirective of 2003 that allowed pension fundsto apply the ‘prudent man’ rule to investmentin private equity funds.
In 2006, EVCA was asked to nominate repre-sentatives to the EU’s Expert Group exploringthe activities of and barriers to success for pri-vate equity in Europe. The Group, whichincluded leading EVCA members from the UKand the rest of Europe, reported in June 2007.It argued strongly for – among other things –a common private placement regime acrossthe EU for alternative investment funds. This,when it happens, will be a huge leap forwardfor the industry and remains a priority. Other
expert groups have since been established toreview other aspects of the industry.
After 25 years of rapid growth, especially inthe past five years where credit has enabledtypes and sizes of deal never before seen,perceptions of our industry have changed.This is the main challenge facing us all today.Our audiences are wider and more informed.At times, our opponents can be politically-motivated and quite vocal. We have to workhard to turn this round, particularly in a lessbenign economic environment. With thecommitment of our members, the EVCA,BVCA and other national associations canachieve this.
After 25 years of rapid growth,especially in the
past five years where credit has enabled typesand sizes of deal neverbefore seen, perceptions ofour industry have changed
Impressions of the industry – the impact of private equity
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Fundraisingsuccess in the earlyyears was driven
by ups and downs oflocal economies. Today,investors around theworld follow those fund managers
Fundraising success in the early years wasdriven by ups and downs of local economies.Today, investors around the world followthose fund managers, both individuals andteams, with track records of delivering strongreturns in all stages of the cycle. Such returnstend to be achieved by shrewd identificationand sourcing of investments, by anticipatingeconomic drivers, by looking at the benefitsof long-term ownership and by exploitingprice arbitrage opportunities that occur inindividual sectors or in the wider economy.
Through the 1980s, the industry in Europe,led by the UK, focused on backing early stagebusinesses, and investments were not alwayseasy to find. Most capital came fromEuropean banks and government agencies,with only a small proportion from US pensionfunds and endowments.
Today, Europe’s industry is a much larger busi-ness. Funds in 2006 came from a much widerbase of investors, led by the largest pensionfunds and endowments. Investment opportu-nities, even on the public markets, abound.Structuring deals for good returns has becomemore complex and managers work hard toimprove portfolio companies’ performance.
In the early and mid-1980s, EVCA and theBVCA spent time and money providing infor-mation on what our members did and why,and on educating entrepreneurs, managersand investors.
Today, our main activity is public affairs andcommunication. The case for investment hasbeen made through long-term performancethat has exceeded that of public market
The view from the US
Timothy Spangler, Partner and Chair of the investmentfunds group at US law firm Kaye Scholer LLP, explains why the British private equity industry matters to America
Private equity enjoyed – or endured,depending on one’s perspective – enor-mous public spotlight last year on both sidesof the Atlantic.
In many ways, 2007 can be seen as anotherrecord year in global private equity. However,challenges to the continued success of theindustry remain unaddressed and, going for-ward, many US firms and observers will belooking to the UK for signs of how to over-come these obstacles.
The relevance of the UK experience to theUS private equity industry is clear. The twoleading countries for private equity remainthe US and the UK, although the history andevolution of the two markets has been dif-ferent in certain significant respects.Despite once being primarily seen as auniquely American invention, private equityis rapidly becoming a global force and UK-based firms and professionals haveserved, in part, as the international face ofthe industry.
Similar to America, the British private equityindustry possesses great breadth and depth.Private equity is now quite a broad church.
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The term itself is commonly used to covernumerous investment styles and firms.However, meaningful generalisations are stillpossible and ‘private equity’ can be brokendown into three broad categories: venturecapital, buy-out, and turnaround.
Both the US and the UK have producedworld-class contenders in each category,although the nature of the domestic markethas left its mark on each side of the industry.Many of the same developments – such asthe rise of so-called ‘mega funds’ andincreased Government concern over the tax-ation of carried interest – have occurredsimultaneously in both countries.
US private equity houses have been increas-ingly expanding their international operationsover recent years, in search of new opportu-nities to leverage sector specialisations andensure their ability to compete against globalfirms for larger deals. When contemplatingsuch expansion, London is a compelling firstpoint of call, both due to the language andlegal similarities and the success of privateequity investing in the UK over the past twodecades. With a London base, many US firms
The two leadingcountries for privateequity remain the
US and the UK, althoughthe history and evolution of the two markets hasbeen different in certainsignificant respects
access to most private equity funds, theirindirect exposure has potentially grown sig-nificantly in the past two years, through boththe increasing allocation of public and privatepensions to the asset class on the one hand,and the increase in publicly-offered opportu-nities to either participate in funds of funds ortake positions in a particular private equityfirm itself. The economically rational driverfor such exposure increases has been theover-performance of private equity invest-ment compared to investment in the public market.
Many British and American investors, legisla-tors, regulators and tax professionals, how-ever, are now thinking about private equityfunds and the industry as a whole more thor-oughly and deeply than ever before. In partthis has been a result of ever larger and morefamiliar companies becoming subject to pri-vate equity ownership. What had been ofcursory interest to certain disparate parts ofthe financial markets has in recent yearscome front and centre.
As ‘mega’ buy-out funds take more high-pro-file public companies private, attention hasbeen drawn to the industry in the mainstreammedia. As a result, efforts are underway inboth countries to reconsider how private
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equity firms and funds are regulated andtaxed. In the UK, Sir David Walker’s workinggroup has proposed a code of conduct toaddress concerns about transparency in theprivate equity markets, consisting of guide-lines and recommendations for funds to fol-low in dealing with their investors and their investments.
In both the US and the UK, the debate overhow best to tax the carried interest earned byprivate equity professionals has been unfold-ing. The UK announced in October 2007 thatall capital gains – including carried interest –would soon be taxed at 18 per cent instead ofthe former rate of 10 per cent, potentiallyreducing the country’s attractiveness to pri-vate equity funds. In the US, the question ofwhether it is right and proper to tax carriedinterest as capital gains is being discusseddirectly, although at this stage it is unclearwhether such a change is politically palatablein a presidential election cycle.
In the post-Sarbanes-Oxley era, governmentsrealise that the unilateral changes that theymake with regards to their financial marketscan have significant repercussions on theircountry’s ability to compete internationally inthe global economy. In the case of privateequity, Americans realise that their chief com-
petitors are the British and any steps taken toresolve perceived problems locally need to beconsidered in light of the concurrent situationin the UK.
The private equity industry is in the processof charting its next phase of development.The questions on the table include the appro-priate level of regulatory oversight and self-regulation; the proper level and method oftaxation that funds, investors and sponsorsshould be subject to; the impact of the recent‘credit crunch’ on returns and investorappetite for traditional private equity invest-ing; the impact of hedge funds – both posi-tive and negative – on the private equityindustry; and many others.
For all of these answers, the US will continueto look to the UK for insight, examples of suc-cess and alternative ways forward.
In the post-Sarbanes-Oxley era,governments realise
that the unilateral changesthat they make with regards to their financialmarkets can havesignificant repercussions on their country’s ability to compete internationallyin the global economy
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US and UK privateequity funddocumentation
demonstrates a surprisingamount of consistency, both intellectually and commercially
can more easily expand to include a Europeanpresence, tapping in to the UK’s proximity tothese countries. They can also benefit fromthe strong calibre of international talent onoffer in London.
Fortunately – given the strong commercialdrivers that lead US firms to establish UKoperations – US and UK private equity funddocumentation demonstrates a surprisingamount of consistency, both intellectually andcommercially. This is despite certain localchanges to deal with the peculiarities ofdomestic taxation and historical differences inpartnership law. This common base of under-standing and practice means that Americanfirms and professionals can look to theirBritish counterparts for examples of howthings can be done differently, or better.
Private equity funds, whether British orAmerican, are typically established for similarperiods of time – usually for eight to ten yearsto allow a series of investments into portfoliocompanies. They are also structured to havemonies drawn down from investors over simi-lar timeframes – often three to six years,reflecting the time needed to identify suitabletargets and deploy the investor’s capital effec-tively. In each country, these funds charge amanagement fee on the committed capital to
be able to cover the operating expenses of thefirms that are managing the assets of the fund.
The general partner’s true upside in thesearrangements has continued to be the carriedinterest earned on the profits of the fund,designed to create an alignment of interestwith limited partners. There have, though,been increasing profits made from manage-ment fees.
The US-UK private equity model remainsbased on a limited partnership structure usedto embody commercial and economicarrangements between an investment team(the general partner) and their investors (thelimited partners). This model differs funda-mentally from the corporate model that hasdominated listed and unlisted commercialbusinesses for over a century.
One driver for the success of American andBritish private equity firms has been the rela-tive legal and fiscal stability that has predom-inated over the last decade, thereby fosteringthe growth and success of these funds.
Private equity has historically been focusedon raising investment monies from a limitednumber of sophisticated institutionalinvestors rather than retail investors.Although the general public still lacks direct
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Developments and challenges in buy-outs
The buy-out industry’s ownership model – which aims to align the interests of a company’s management and shareholders – is central to its success, says Dr Robert Easton, Chairman of the BVCA’s Global Buy-out Committee and Managing Director at The Carlyle Group
In 2002, Firth Rixson was a troubled UKmanufacturing business listed on the LondonStock Exchange. During that year, its shareprice declined rapidly from 70 pence anddespite the best efforts of its managementteam, the business was unable to reverse itsfortunes as a listed company.
But where public market investors saw abusiness in decline, struggling with an eco-nomic downturn, Carlyle saw the opportuni-ty to create real and long-term value. By thetime we acquired the business for £106 mil-lion in early 2003, Firth’s share price hadplunged to less than nine pence. When weannounced our tender offer, it represented a120 per cent premium to the stock market’svaluation. The shareholders were delightedto accept.
Fast forward five years and Firth Rixson is aworld leader in aircraft engine component-making, with 11 facilities across the world andcontracts with every major aerospace enginemanufacturer. Through customer contract
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wins and the acquisition of complementarybusinesses, annual sales doubled during ourownership to more than £500 million, whileheadcount remained stable at around 2,000employees. As a result, both productivity andprofitability soared at Firth Rixson. OakhillCapital Partners bought the business for £945million in November 2007.
Having spent seven years driving mergersand acquisitions and corporate strategy in list-ed companies, followed by seven years atCarlyle, I have seen first hand the differentapproaches to business management andvalue creation that the private equity andpublic market models employ. The transfor-mation that took place at Firth Rixson is agreat example of the advantages that privateequity ownership can bring to a business.
In the first instance, public markets oftenundervalue assets, unable to support theinvestment of time and capital that can berequired for a company to deliver on its fullpotential. Firth Rixson in 2002 was a prime
I have seen first hand the differentapproaches to
business management andvalue creation that theprivate equity and publicmarket models employ
example. Conversely, the buy-out industry isoften best placed to realise hidden valuefrom such companies because of the uniqueway that we own and govern businesses andour longer-term investment horizons.
A typical public company will have in theregion of 100,000 shareholders, very few ofwhich will be able to exert any meaningfulinfluence. Institutional investors in a privateequity-backed company, by contrast, willnumber in the hundreds at most, and cruciallywill abdicate control of the investment, hand-ing responsibility to the private equity firm todrive the business forward and realise value.
This closely-held structure results in shortreporting lines between controlling share-holder and management, enabling the buy-out backed business to be fleet of foot.Decision-making is fast and not confused bymixed motivations. For example, where apublic company may have obligations forcapital allocation spread between divisions, aprivate equity-backed company is focusedon investing with one central aim – increas-ing the value of equity.
This ownership structure also enables a buy-out house to inject debt into a company – amuch misunderstood financial practice. Theapplication of leverage is simply efficientcash and balance-sheet management prac-tice, optimising the cost of capital of any busi-ness, although each case needs to be stress-tested in order to demonstrate that the busi-ness will be able to support debt repayments,even in the event of fluctuating economicconditions or a prolonged downturn.Successful private equity firms have deepexpertise in financial structuring, and therelated risk assessment, to make sure theirportfolio companies have sufficient head-room with respect to their financing banks.
The nuances of the debt structure havebecome more complex as the industry hasevolved – with the emergence of instrumentssuch as second lien and PIK (payment-in-kind)notes – but the basic premise remains thesame: that the intelligent use of leverage canincrease balance sheet efficiency and helpdrive returns to the equity. Interestingly, pub-lic companies are now re-visiting the use ofleverage to optimise their own cost of capital.
A key differentiator of the private equitymodel of company ownership is that it alignsthe interests of management with those of theshareholder – the private equity firm – whichare, in turn, aligned with those of the business.Where public markets remunerate executiveswith generous pay packages and stock
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options, the private equity-backed manage-ment team, having invested their own capital,has plenty to lose as well as gain – which iswhy the buy-out model is so attractive for hun-gry management teams that want to share inthe success of the businesses they run.
A KPMG survey carried out in 2006 found thatthe vast majority of private equity-backedmanagement teams believed that their shareof the equity was the surest way to createmeaningful personal wealth and most wouldhave been happy to renegotiate their basicsalaries and bonuses downwards for a biggerequity stake in their business. One of the buy-out industry’s advantages has been its abilityto attract top-class management throughoffering attractive equity ownership schemes.
Management is instilled with a renewed senseof urgency following a buy-out because, whilea private company need not concern itselfwith the vagaries of quarterly earnings volatil-ity, private equity management is workingwithin a defined timescale with clear targetsand objectives. Resistance to change nolonger holds any rewards, and all eyes in a pri-vate equity-backed company are fixed firmlyon the same medium-term goal, maximisingall the owners’ equity value in the years beforea liquidity event is reached.
In many respects, this focus on value creationis simpler in a private equity-backed businessthan a quoted company equivalent. Privateequity is single minded in its pursuit of cash-flow improvement – the ultimate measure ofbusiness success – and incentivises manage-ment teams accordingly, through both theequity ownership and annual cash bonusschemes. Where public companies often use abalanced business score card, seeking to takenumerous complex metrics into account whenmeasuring managements’ performance, a buy-out-backed business has a very short list of keyperformance indicators, all closely monitored,but with the focus on generating cash.
Private equity-owned businesses also benefitfrom the release of management time previ-ously spent addressing the public markets –another big attraction for managementteams. Before Carlyle came on board, theFirth Rixson team was battling to integrateacquisitions and drive productivity, simulta-neously with maintaining quarterly earnings-per-share growth and communicating with abroad base of public shareholders. Removedfrom that kind of short-termism and distract-ing time commitment, the management teamwas able to effect real change at Firth Rixson.Importantly, while the close governance of
One of the buy-out industry’sadvantages has
been its ability to attract top-class managementthrough offering attractiveequity ownership schemes
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As we enter a morechallenging period, it is important
to remember what it is that really makes buy-outs succeed
private equity-backed businesses resultsfrom the alignment implicit in the ownershipmodel, there is also no need to appeal to theinterests of many and minority stakeholders.This is vital for allowing the boards of buy-out backed businesses to concentrate on thejob at hand. Therefore, it was heartening tosee Sir David Walker recognise the successof private equity governance in his recentproposals for the asset class and it is impor-tant that heavy-handed regulation regardingthis area of the industry continues to be keptto a minimum.
Deals such as Firth Rixson are examples ofthe fundamental benefits of the buy-outindustry ownership model. However, FirthRixson is not unusual among private equitytransactions. Recent research by Ernst &Young took the 100 largest buy-out exits inthe US and Europe and compared them tolisted businesses based in the same country,operating in the same industry, over the sametime period.
Enterprise value, which discounts the effectof leverage, increased by 33 per cent in theUS and by 23 per cent in Europe for the pri-vate equity-backed companies, compared to11 per cent and 15 per cent in their publicmarket equivalents.
There is no doubt, of course, that privateequity has benefited from a unique set offavourable circumstances over the past fewyears. A benign economic environment, cou-pled with the unprecedented availability ofboth debt and equity, has propelled theindustry to new heights in terms of funds
raised, and the size of the companies thathave been targeted.
But as we enter a more challenging period, itis important to remember what it is that reallymakes buy-outs succeed. And for this, it isuseful to look at another Carlyle investment,Dutch cable company Casema, acquired fromFrance Telecom in the midst of the last eco-nomic slowdown. We signed the Casemadeal over Christmas 2002 after many monthsof negotiation, during which time severalother cable businesses went bankrupt. A clubbank deal, by necessity, we had to provide 50per cent of the transaction enterprise value inequity and to arrange and effectively under-write all of the debt ourselves – a situationthat may well feel familiar to private equityinvestors looking to buy companies today.
Recruiting a new Chief Executive, we invest-ed heavily in Casema’s network and infra-structure, transforming the business from autility-like analogue TV provider to the lead-ing triple-play operator in the Netherlands.Revenues grew by 10 per cent a year duringour holding period, EBITDA (earnings beforeinterest, taxes, depreciation and amortisa-tion) doubled and the headcount increasedfrom 750 to 1,050.
Other buy-out houses may do things differ-ently, and those choices are what set the bestfirms in the industry apart from the ordinaryfirms. But all BVCA member firms benefitfrom the ownership structure outlined above,and that is a fundamental advantage for anycompany backed by private equity.
Developments and challenges in venture capital
Jo Taylor, Chairman of the BVCA’s Venture Committee and ManagingPartner of 3i’s venture capital business, looks at how the current challenges in the industry might shape the years to come
Over the last 25 years, the UK venture cap-ital industry has helped a vast number of aspir-ing entrepreneurs and ambitious managementteams turn their dreams and aspirations intosuccessful companies. In the UK, wealth cre-ation and the deployment of capital has beensecond only to the US over that period.
In the early 1980s, venture capital, asopposed to private equity, was the bedrockof the BVCA’s membership and activity.Local investors sought to back talentedmanagement teams developing disruptiveresearch and technology or innovative serv-ice models that could overturn the statusquo in their targeted markets. Sums invest-ed were modest and the risks were – andstill are – high when backing pre-revenuefledgling companies. That said, the returnsthat were made rose as high as 20-30 timesthe capital invested on the successfulinvestments.
So why has the UK provided such a success-ful environment for venture capital over thelast 25 years?
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First and foremost, the UK has provided thesedynamic companies access to capital – in theinitial stages from private investors, then fromselective professional investment firms culmi-nating in access to a thriving and generallysupportive stock market. This vibrant stockmarket has allowed many venture-backedcompanies access to more significant sums ofdevelopment capital to allow the continuedgrowth when required, or when the totalfunding of the business is beyond theresources of their venture investors.
The stock market has also enabled early stageinvestors to sell on their minority sharehold-ings to new investors more easily, and gener-ally on more attractive terms, than wouldhave been the case had the businessremained private.
The London Stock Exchange (LSE) has sup-ported many venture-backed companies thathave gone on to be a great success, compa-nies such as ARM, Autonomy, CAT, CSR,Lastminute.com, Shire, and Wolfson Micro-electronics to name a few. However, it is per-
In the early 1980s,venture capital, as opposed to
private equity, was the bedrock of the BVCA’smembership and activity
So, what challenges face the UK venture cap-ital industry, and how might this shape itsperformance in the coming years? While theindustry was able to provide spectacularreturns at the turn of the century, this cyclewas short-lived. The damage caused on thedownward part of that market cycle by highcompany valuations and ultimate businessfailures hit fund returns for the industry hardover the last five years. As this has also coin-cided with attractive returns made by privateequity firms, some UK investors have begunto question the attractiveness of venture asan asset class. Looking forward, I wouldexpect the venture asset class to regainfavour with investors as the difference inreturns narrows and competition within theprivate equity industry drives prices to lessattractive levels.
The second challenge facing the UK venturecapital industry is a structural one. Many ven-ture funds are more naturally suited to a smallinvesting team investing from smaller fundsizes than their counterparts in private equi-ty. However, many would-be investors inthese funds now wish to deploy capital in vol-ume and more cost-effectively, and in manysituations the maths does not work so well –particularly when maximum exposures of 10-15 per cent of the fund size is applied.
Another challenge facing the industry is howbest to maintain an environment of entrepre-neurship in the UK. This begins with our edu-cation system – are we teaching and devel-oping the skills that will be needed in busi-
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ness life? At the same time the UK needs asupportive regulatory and tax regime that willreward those willing to take the risk involvedin founding a new business venture.
It would be helpful for the UK to replicatethe positive cultural attributes found in theUS around entrepreneurship. It would berefreshing if success can always be celebrat-ed, and failure seen as personal develop-ment. If we can achieve this, then we maystart to create an environment better suitedto serial entrepreneurship, and avoid thecurrent social stigma associated with busi-ness failure.
The final challenge facing the UK in a globalage is how early stage investors can continueto nurture leading edge technologies andresearch without the international visibility tojudge the flaws and advantages of the com-panies that they support. For years, a vibranttransatlantic bridge has operated betweenthe US and the UK for access to investmentcapital, knowledge transfer and marketaccess. In the coming decade, UK companieswill need to look increasingly to Asia as keymarkets for growth and a benchmark of tech-nological progress and cost competitiveness.
UK venture investors are getting smarterabout how to back products and services thatwill succeed in a global marketplace. Peopleprogrammes and advisory boards is one solu-tion, coupled with partnering with sister oraffiliate firms in other geographies to broadennetworks and visibility. Often a more spe-cialised investment approach by sector or
The outlook for UKventure capital is the best it has been
for many years, and thisalternative asset classshould appeal to investors
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The final ingredientin the successfuldevelopment of the
UK venture capital industryhas been access to topquality management with the requisite skills andentrepreneurial flair needed
haps the Alternative Investment Market(AIM), building on the support provided byOfex and previously the Unlisted SecuritiesMarket, that gives the best prospect for ven-ture-backed companies to realise theirpotential over the next five to ten years. Thiswill certainly be the case if AIM is given moreof a focus towards high-growth companies,with a degree of risk attached, than the LSE.
The other source of capital has been fromlocal and overseas corporate acquirers,which have viewed the UK as the first desti-nation to access leading edge technologycompanies. In the UK this can be done in acultural, linguistic and legislative environ-ment that is the most supportive in Europe.
Also vital in creating a successful environ-ment for venture capital is the availability ofleading edge, disruptive technology that iscapable of competing on a world stage. Overthe years, the UK has been blessed with a
strong culture of design, research and engi-neering, which has laid the foundation forsignificant wealth creation. The universitynetwork in the UK, together with significantentrepreneurial activity within research anddevelopment centres in UK corporates andconsultancy firms, has created a regular flowof groundbreaking innovation.
The final ingredient in the successful devel-opment of the UK venture capital industryhas been access to top quality managementwith the requisite skills and entrepreneurialflair needed to build fragile young companiesinto more significant businesses. While therehas been some market cyclicality in the avail-ability of this management talent, the UK ven-ture industry has been fortunate to sourcecapable managers to lead companies frominception and then through first- and second-stage evolution.
sub-sector can also give a critical edge inmaking the right investment choices.
The outlook for UK venture capital is the bestit has been for many years, and this alterna-tive asset class should appeal to investorssearching for experienced investment teamsstill able to pick out high-growth companies,on attractive investment terms, and makingthe most of the more turbulent economicenvironment that I would expect to prevailthrough 2008.
Delivering transformational change
How private equity works in practice
Private equity firms stand out for their ability to transform underperformingbusinesses. Andrew Cornelius, adviser to Homebase and Halfords, looks at how three well-known businesses were given a new lease of life
RHM, Homebase and Halfords were all household-name businesses underachiev-ing within the confines of bigger groups untiltaken under private equity ownership.
Although RHM is one of the largest foodgroups in the UK, with brands like Hovis in itsportfolio, it was effectively managed as a fed-eration of separate businesses by Tomkins, the‘guns to buns’ conglomerate, until DoughtyHanson took control in a £1.18 billion deal inAugust 2000.
It took five years of private equity ownershipto reorganise and reposition the businessbefore Doughty Hanson exited via an IPO,which placed a £1.67 billion enterprise valueon RHM in July 2005.
The turnrounds at DIY retailer Homebase(after its buy-out from J Sainsbury by Permira)and of Halfords (from The Boots Company, byCVC) were quicker, but both companies werere-energised by the increased focus andchange in strategic direction after being setfree from their parent groups.
Doughty Hanson recalls that “a number ofbusinesses were underperforming and a stag-nant management culture needed to beaddressed” prior to its takeover of RHM.
The new owner’s first task after buying RHMwas to establish a Value Enhancement Group,which carried out a detailed review of eachbusiness. The Group discovered that eachbusiness operated separately from the other,there was a manufacturing-led culture, per-formance and rewards were not aligned, theManor Bakeries operation was seriouslyunderperforming and there was a £520 millionpension deficit.
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During the 30 month transformation periodthat followed, more than half the top 50 exec-utives in the business were changed. Thisincluded the appointment of a new ChiefExecutive and Chief Financial Officer. Themanagement team’s objectives were thenaligned with those of shareholders, so thatthere was clear accountability and more lucra-tive rewards for outperformance.
RHM was also restructured, with centralisedprocurement, human resources and financefunctions and reorganised so that 18 inde-pendent businesses were grouped into threecore divisions to maximise economies of scaleand operating synergies. Five non-core busi-nesses were sold and one closed. The pro-curement savings alone topped £40 million,but there were also further significant savingsin logistics, administration and group market-ing. At Manor Bakeries, £20 million of savingswere achieved.
The newly focused business then invested inproduct innovation and development andincreased the marketing support for its keybrands, including Hovis. This resulted in mar-ket share gains, including a 4.5 per centincrease for Hovis over the 30 months, togeth-er with a 30 per cent increase in its prices. Theterms of the pension plan were also renegotiat-ed, which helped achieve a reduction in thedeficit to £125 million by the time the businesswas sold.
This transformation under private equity own-ership left RHM in a stronger competitive posi-tion and on a more secure financial footing.
DIY business Homebase had its fortunesrevived in similar fashion. At the time of its
The managementteam’s objectiveswere aligned with
those of shareholders, so that there was clearaccountability and morelucrative rewards foroutperformance
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Management alsoembarked on anambitious plan to
source more product,including cycles and in-car technology product,direct from overseasmanufacturers, rather thanbuying through wholesalers
acquisition by Permira in March 2001,Homebase was entrenched in a battle with itslarger rival, B&Q (part of the KingfisherGroup), in the UK market, with both compa-nies determined to adopt the US model ofbuilding ‘big DIY sheds’.
But B&Q already had 75 of these big shedsand had greater buying power because itowned a sister company in France. It was alsodifficult to envisage how the smallerHomebase business would generate enoughcash to fund its ambitious plan to competehead-on with B&Q.
Charles Sherwood, the Permira Partner whoran the Homebase transaction, says that theacquisition was complicated by the fact that JSainsbury, the company’s owner, had made itclear in the City that the asking price forHomebase was £1 billion, leaving little roomfor negotiation. “This meant the business wasbeing sold on a multiple of 25 times EBIT[earnings before interest and tax] and tentimes EBITDA [earnings before interest, taxes,depreciation, and amortisation], which waspretty challenging,” says Sherwood.
Permira’s decision to go ahead with the acqui-sition was based on a complete strategy U-turn for Homebase. It abandoned the plan tocompete head-on with B&Q, which Sherwoodsays was an example of a public companyfocusing more on creating a business on agrand scale than creating shareholder value.
Instead, Permira pushed for a repositioning ofthe business at the softer end of the DIY mar-ket. “Homebase was a distinctive number twoin the market because its customer base waspredominantly female,” says Sherwood. “Ourstrategy was to focus on giving a room a newlook rather than building a new room.”
The new team again defied convention byembarking on a programme of building mez-zanine floors in the Homebase stores, whichhad been rejected as an idea by the previousSainsbury management. This changed theeconomics of the stores by increasing the sell-ing space at no extra rental cost and accelerat-ed the softening of the stores by providingmore space for curtains, linens, bathroom andbedroom fittings. In the meantime, the spaceallocated for heavy duty and space-consum-ing products like cement was reduced by cut-ting the number of brands on offer.
Once the strategy was agreed it was imple-mented with dizzying speed. Whereas headoffice was scheduled to grow to implement
Halfords’ existing products, including cyclesand car enhancement products, while thecompany began developing its own financialservices business.
Management also embarked on an ambitiousplan to source more product, including cyclesand in-car technology product, direct fromoverseas manufacturers, rather than buyingthrough wholesalers.
Like the equally successful restructurings atRHM and Homebase, it was a clear demon-stration of how private equity firms can unlockthe potential of underperforming businesses.
the big shed expansion, head office numberswere now reduced as key employees wereredeployed to the stores. The interests ofemployees and shareholders were alignedwith rewards for performance and more effi-cient SAP and CPOS touch-screen equipmentwas installed in the retail stores.
In its 22 months under private equity owner-ship, before the sale to GUS in November2002, Homebase achieved a 17 per centincrease in like-for-like sales and a four-fold increase in operating profit on a full rent-ed basis.
But Permira and its management team, whichcomprised private equity entrepreneurs JohnLovering, Rob Templeman and ChrisWoodhouse, would not have achieved theirstellar six times return on equity invested forPermira funds without unlocking the hugeproperty value hidden within Homebase.
One part of this was a conventional sale andleaseback of the Homebase stores, which gen-erated about £250 million and helped makethe initial challenging numbers less daunting.However, the new owners were also able toextract a price of £270 million from B&Q, ninetimes the £30 million book value, by selling alandbank of 30 sites earmarked for Homebasebig sheds. B&Q was prepared to pay to pre-vent US big shed operator, Home Depot, get-ting the sites.
Halfords, the third of our trio of unloved com-panies, was bought from The Boots Companyby CVC Capital Partners for £427 million inJuly 2002.
Jonathan Feuer, the CVC Partner responsiblefor the Halfords investment, teamed up withRob Templeman, who, fresh from the successat Homebase, chaired the business, againimplementing a rapid change in culture as management and shareholder interests were aligned.
This time the new owners decided to unleashthe huge growth potential in the Halfordsbusiness, identifying new sites, including anexpansion into the Republic of Ireland. Theyalso adopted the now proven strategy of soft-ening stores and unlocking more sales spaceby introducing mezzanine floors.
Stores were re-branded and Halfords used itsstrong position in car audio and entertainmentto capitalise on the huge potential of the widerin-car technology market. Additional mezza-nine space allowed better projection of
The experience of multiple owners
How private equity works in practice
An increasing number of companies have had more than oneprivate equity owner. Sarah Butler and Philip Hoult examine how three major UK businesses have used multiple privateequity owners at different stages of their life cycle
In the early days of private equity, the tra-ditional methods for exiting from an invest-ment were a trade sale or a stock marketflotation. As the industry matured, a thirdoption emerged – selling the business toanother private equity house. Secondary andeven tertiary buy-outs are now a commonfeature of the market.
One household name to have had a series ofprivate equity owners is Gala Coral. Back in1997, Gala was a struggling business in adeeply unfashionable sector. Fast forward adecade and it has been transformed – withthe backing along the way of some eight dif-ferent private equity firms – into one of thecountry’s biggest privately-owned compa-nies, employing more than 19,000 peopleand reporting turnover in the year to 29 September 2007 of £1.3 billion.
Gala was first bought out from brewinggroup Bass in a £236 million deal in 1997.Chairman John Kelly, who led the originalbuy-in backed by PPM Ventures (now PPMCapital) and Royal Bank DevelopmentCapital, says it was an obvious target. Profitshad fallen by more than 40 per cent in thethree years before Kelly took control, as Galastruggled to compete against the newly-launched National Lottery.
The business was not core to Bass and hadgone through four managing directors in fiveyears. Bass had nevertheless ploughed morethan £100 million into improving Gala’s bingohalls. Kelly thought he could work thoseassets much harder and also saw a big oppor-
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tunity to consolidate the fragmented bingoand gambling sector.
Together with PPM, Kelly developed a three-pronged strategy. They aimed to rebuild Galaby motivating management through newincentives, reducing the bingo firm’s heavybureaucracy and its associated costs, and byfocusing capital spending more aggressivelyon areas where it would generate income.“With private equity behind you there is onlyone stakeholder to answer to and that makesdecision-making quick, which is what it need-ed to be,” Kelly says.
Although the cast of private equity ownersmay have changed over the last decade –Duke Street Capital, Credit Suisse PrivateEquity, Candover, Cinven and Permira areamong those to have had a stake – Kelly andhis team have always been backed on theacquisition trail. This culminated in 2005 withthe £2.2 billion takeover of Coral Eurobet, thebetting shop business – a transformationaldeal, which created Britain’s largest privateequity-backed company.
Neil Goulden, Gala’s Chief Executive since2004, says the Coral purchase demonstratedthe flexibility that private equity backers cangive a company. “There is no way Gala wouldhave been able to buy Coral, a company big-ger than our firm, if we had been a publiccompany,” he says.
Goulden adds that Gala’s private equity back-ers have added value, not just through a will-ingness to put up funds for acquisitions, butin using their expertise to put together a suit-
Gala was a strugglingbusiness in a deeplyunfashionable sector.
Fast forward a decade andit has been transformedinto one of the country’sbiggest privately-ownedcompanies
est costs and allowed for additional capitalexpenditure on the villages. Center Parcs isundertaking a £100 million programme toupgrade its accommodation and improve facil-ities. It has struck deals with restaurant groupTragus (another Blackstone-owned business)and Starbucks, and invested in technology tobolster its online booking facility.
“We certainly could not have raised [on thestock market] the money that has now beenmade available,” says Dalby. But it is not justabout funding, he adds – Blackstone has, forexample, provided expertise in areas such asrevenue and yield management that has sig-nificantly helped Center Parcs.
With turnover of £253.2 million for the yearending 17 April 2007, occupancy rates ofover 90 per cent and repeat business of morethan 60 per cent, the business continues toperform strongly.
Center Parcs also received a major boost inSeptember 2007, when it won approval todevelop a fifth village at Woburn inBedfordshire. The business, which alreadyemploys more than 6,000 staff, expects thenew village to create a significant number ofjobs when it opens in 2010.
Although Dalby does not rule out a return tothe stock market, he describes both periodsof private equity ownership as “very satisfy-ing”. “In both cases, they took time to under-stand the business model and have backedthe management all along,” he says.A third business to have grown substantiallywith the backing of multiple private equityowners is Tragus, the restaurant group.
In 2002, ECI Partners backed a managementbuy-in of the Café Rouge and Bella Pastabusinesses for £25 million from Whitbread,which was keen to dispose of the operationsbecause of their historic underperformance.“A lot of people in the trade press argued thatwe had overpaid,” says ECI’s CharlieJohnstone. “But we saw the potential toreposition the business.”
The new management team, with ECI’s back-ing, set about reviving the operation byreturning Café Rouge to its French roots, re-branding Bella Pasta to Bella Italia and dispos-ing of non-operating sites. A development
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kitchen was built and instead of the restau-rants being chef-led, most of the food wasprepared off-site and only cooked on-site.Other investments, such as a £17 millionrefurbishment programme and a new elec-tronic point of sale system, also paid off.
These improvements meant that, during ECI’sownership, turnover at Tragus increased from£95 million to £113 million and the number ofemployees rose by 5 per cent. Johnstone saysit was a classic example of a successful turn-around. When the company’s managementfelt they had delivered on their plan andwanted to move on, ECI chose to exit withthem, selling to Legal & General Ventures(LGV) in 2005 for around £90 million.
The business continued to go from strength tostrength while under LGV’s wing. During itstwo years of ownership, LGV introduced anew Chief Executive and promoted a numberof members of the operational team to themain board. Tragus embarked on a majorexpansion plan, which saw 13 new branchesopened, contracts exchanged on 12 and a fur-ther 35 openings planned. Meals served bythe group rose by 20 per cent to 12 million,and plans for a new business offering Spanishfood, Ortega, reached an advanced stage.
Tragus was sold to a third private equityowner – Blackstone – in December 2006 in adeal worth £267 million, and has continued toexpand apace. The acquisition of the Italianchain, Strada, for £140 million in May 2007added another strong brand and a further 55sites to its stable.
ECI’s Johnstone argues that Tragus’ experi-ence of multiple private equity owners showshow the industry has provided additional liq-uidity to the market. The firms have alsohelped the business progress from a timewhen 3,600 jobs were at risk to a positionwhere it is now one of the largest independ-ent restaurant groups in the country. “Theshareholder base may have changed but thebusiness has continued to grow,” Johnstonesays. “It is a fantastic story.”
With more and more companies coming underprivate equity ownership for a second, third oreven fourth time, it is a story that is likely to bere-told again and again in years to come.
“The shareholderbase may havechanged but the
business has continued to grow”
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“They took time tounderstand thebusiness model and
have backed themanagement all along”
able financial structure. Their active interestin the running of the company and vast expe-rience in all types of businesses were alsomajor advantages.
“The business has been brilliantly successfuland I am as proud as punch of it,” says Kelly.“It is not down to financial engineering – it isa mix of organic growth and sensible, value-adding transactions.”
Center Parcs, a leading short-break holidayoperator, has had a similarly positive experi-ence. At the beginning of the decade it wasa successful but small part of a quoted plc –Scottish & Newcastle – before being sold toprivate equity house Deutsche Bank CapitalPartners in 2001. A flotation on AIM fol-lowed in December 2003, with the companymoving to the London Stock Exchange’smain market in September 2005. It returnedto private equity ownership in April 2006,when Blackstone bought the business for£265 million.
Martin Dalby, Center Parcs’ Chief Executivethroughout this period, agrees with Gala’sKelly that one of the main advantages of hav-ing private equity owners is the pace atwhich change can be implemented. “Onceprivate equity people make up their minds,then you can just get on with it,” he says.
By contrast, under Scottish & Newcastle’sownership, there were layers of approvalsthat management had to go through beforethey could implement their strategy. Thestock market listing in turn meant a hugeamount of management time was spentexplaining the company’s position and strate-gy to the City. While quite enjoyable, Dalbysays, this was a distraction from running thebusiness. “We are a mid-sized business thatdoes not have the resources of a FTSE 100company,” he explains.
Dalby says Center Parcs’ two private equityowners have both created value through theirfinancial structuring skills, but adds that theirperiods of ownership have also been markedby significant investment.
Under Deutsche Bank Capital Partners, thebusiness was able to buy the Oasis holidayvillage in the Lake District, its only rival. It alsobuilt more accommodation on its existingsites and increased the range of services,such as restaurants, on offer.
With Blackstone on board, the investment pro-gramme has been even more impressive. Soonafter it bought Center Parcs, the private equityfirm acquired the freeholds to the propertieswhere the holiday villages are located. A £1 bil-lion refinancing in early 2007 has reduced inter-
Creating value through acquisitions
How private equity works in practice
A private equity-backed buy-and-build strategy can rapidlytransform a business into a market leader. Helen Dunne reportson the impressive results such an approach can bring
When Bridgepoint Capital acquiredAlliance Medical for £111 million in a second-ary buy-out in January 2001, it recognised thepotential to expand the presence of the health-care company.
Six years and 16 acquisitions later, it hasbecome the largest medical imaging compa-ny in Europe. The number of scannersAlliance Medical operates rose from 31 in2001 to 190 in 2007, while employee num-bers increased from 177 to 690.
Revenues have meanwhile grown six-foldover the same period to £132 million.Bridgepoint generated a return in excess offour times its investment when it soldAlliance Medical for £600 million. It has beena remarkable buy-and-build success story.
“When we acquired Alliance Medical, withthe exception of a small joint venture inEurope, 99 per cent of its profits came fromthe UK,” explains Bridgepoint Director JamieWyatt.
“The first acquisition, in 2002, was to buy outthat joint venture, and ultimately avoid con-flicts as we used Alliance Medical as a plat-form for growth within Europe. Each subse-quent acquisition helped Alliance Medicalgrow faster than it could on its own, just pur-suing an organic growth strategy. We wereable to accelerate growth through a buy-and-build strategy.”
In common with other buy-and-build invest-ments, an incremental fund was set aside fromday one to pursue acquisition opportunities.
Alliance Medical, which provides diagnostic
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and imaging equipment to hospitals, operat-ed in a fragmented marketplace with hugepotential for consolidation. This is the idealbackdrop for a buy-and-build model, which,in the majority of cases, involves small-scaleacquisitions. Nine of the acquisitions made byAlliance Medical, for example, involved oneor two-man operations.
Many private equity experts dismiss sectorswith dominant market players as unsuitablefor buy-and-build strategies. However, this isnot a hard and fast rule. Alliance Medical, forexample, was the dominant player in its sec-tor within the UK – seven of its acquisitionsinvolved market leaders within their countryof operation.
“The most suitable sector for a buy-and-buildstrategy is highly fragmented with lots ofoperators, where there are many opportuni-ties for deals to take place,” explains SteveO’Hare, Investment Director at BarclaysPrivate Equity. “But the key thing is not just toidentify synergies. It is vital that you havebuy-in from the companies involved.
“You have got to have staff that believe inwhat you are trying to create; you needhearts and minds to make a buy-and-buildstrategy work. An acquisition will not work ifexecuted poorly or if the cultural and strate-gic fit is not as first envisaged.”
There is always a risk in acquiring any compa-ny, whether large or small, that it diverts man-agement attention away from the core busi-ness. As a result, many private equity firmspursuing a buy-and-build strategy set asidefunds to finance an additional management
“You have got tohave staff thatbelieve in what you
are trying to create; youneed hearts and minds tomake a buy-and-buildstrategy work”
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A successfullyexecuted buy-and-build strategy creates
stronger, better businesseswith more scope to grow
resource within the platform company that istasked with identifying potential acquisitionsand, following a deal, integrating the target.
Sovereign Capital, which typically investsbetween £5 million and £20 million of equityto support proven management teams, iscommitted to the buy-and-build model. Inthe past three years, for example, the privateequity firm has made 14 new platform invest-ments and 33 follow-on acquisitions involv-ing £160 million of equity.
However, its model takes the pressure awayfrom management teams to identify and inte-grate acquisitions by employing a four-per-son research and development team withinSovereign to do the work for them.
For a private equity firm the size of Sovereign,this is a huge investment in personnel anddemonstrates its belief in the importance ofgetting the target company right.
“The management of our companies may befantastic at organising their businesses anddelivering results, but they may not be thebest corporate financier,” explains ManagingPartner Ryan Robson. “Our research anddevelopment team identifies those business-es that they should want to buy.”
Sovereign’s research and development teamwill help with integration, although the firmmay also bring in extra management. “Whenyou are pursuing a buy-and-build strategy,the platform company needs a much biggermanagement team than the initial size of thebusiness would dictate,” explains Robson.“Without that extra investment, any acquisi-tion will fail.”
Wyatt at Bridgepoint agrees. AllianceMedical pursued acquisitions across Europe,and each market brought different chal-lenges and characteristics.
“You need to have both the infrastructureand management team right in the first placeto grow the business, both through organicgrowth and bolt-on acquisitions,” heexplains. “Internal controls are a vital part ofthe buy-and-build strategy, and it is neces-sary to have appropriate resources availableto support management and the acquisitionsthey make.”
The first acquisition does, however, general-ly create a template for further transactions.For example, the same legal and accountancyfirms are usually used for all transactions,
which can reduce the timeline for subse-quent acquisitions.
David Novak, London-based Partner atClayton, Dubilier & Rice, prefers todescribe buy-and-build as “creating valuethrough acquisitions”.
Clayton, Dubilier & Rice invests in platformcompanies that have the potential for sig-nificant organic growth, even if it subse-quently proves impossible to identify suit-able acquisitions.
Novak oversaw the purchase of Paris-basedRexel, a market leader in the wholesale distri-bution of electrical products, from Pinault-Printemps-Redoute in 2005. It has sinceacquired Dutch rival Hagemeyer andAmerica’s GESCO, which doubled its sales,and made bolt-on acquisitions in Australia,France, Belgium, America, the UK and China.
“Rexel is a market leader in a highly fragment-ed market,” explains Novak. “It had meaning-ful operational efficiency opportunities, butwas also in an industry space where therewere meaningful acquisition opportunities.”
There are also benefits for the platform com-pany in pursuing a buy-and-build strategy.Efficiencies of scale arise across all aspects ofthe business model. Costs are removed asduplication in areas, such as central officefunctions and IT systems, is eliminated.
The platform company also gains greaterleverage in areas such as purchasing andrecruitment. Rexel, for example, is able tonegotiate better rates with global suppliers.
3i successfully adapted the buy-and-buildmodel, and reaped the rewards when it sold its75 per cent stake in Azzurri Communicationsfor £115 million, representing an IRR of 38 percent and a money multiple of almost five timesits initial investment.
“We had a clear strategy about what we weretrying to build, and we worked with sectorspecialists who would be successful at achiev-ing that,” explains Julian Davison, partner at 3i.
Through its People Programme, the privateequity firm met Martin St Quinton, formerChief Executive of Danka’s internationaloperations. 3i offered to back St Quinton,whom they teamed with a Chief FinancialOfficer, to create a buy-and-build vehicle forthe telecoms reseller market focused onsmall to medium-sized businesses.
St Quinton was initially given £25 million. “Hehad a clean sheet of paper to start with. Afterthree or four acquisitions, there was enoughto start integrating to create a platform com-pany,” explains Davison. “We then refinedour strategy and carried on acquiring.”Subsequent purchases were funded fromcash flow and new debt facilities. Over fiveyears, 15 acquisitions were made.
“We built a business, Azzurri Communications,that did not exist before,” explains Davison.“We consolidated a highly fragmented indus-try, but it is hard work doing it the way that wedid.” Azzurri’s annual turnover is now in excessof £100 million.
“It is hard work pursuing a buy-and-buildstrategy,” concedes Sovereign’s Robson.“You take a safe, stable platform companyand, through acquisitions and investments,turn it into an exciting new business. But thereturns should be higher on exit.”
A successfully executed buy-and-build strat-egy creates stronger, better businesses withmore scope to grow.
As Bridgepoint’s Wyatt points out: “IfAlliance Medical had remained as a purelynational business, then it had only got a cer-tain bandwidth. The value was createdbecause we expanded its breadth. It is alsonow a more diverse company and notexposed to just one client or market.”
Turning point – turnarounds
Turning around ailing businesses is not for the faint-hearted. Neil Rosespeaks to the private equity specialists who thrive on the challenge
Saving struggling businesses can takeyou a long way in life. Having rescued thelikes of pizza chain Domino’s, the Salt LakeCity Winter Olympics and the finances ofMassachusetts, Mitt Romney sought the USPresidency. The Founder of Bain Capitaltrumpeted his record of turning around diffi-cult management situations.
His UK private equity counterparts are alsoset to come to the fore following the creditcrunch. Jon Moulton, Managing Partner ofAlchemy Partners, says the lack of cheapcredit will pressurise management actually tomanage, and that is where turnaround spe-cialists come in.
“We positively select for bad management,”Moulton explains – if the management isgood, it can sometimes be hard to see whatnew owners could add. He also looks for “abusiness with a viable base somewhere in it”.When you do a turnaround, you are “buyinga dream”.
One man’s dream has often been anotherman’s nightmare, but while poor manage-ment is usually a feature of underperformingcompanies, it is not always the case – it canbe the ownership, says Paul Cartwright,
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Managing Partner of Rutland Partners.Darren Forshaw, a partner at regional privateequity firm Endless, adds: “Just because abusiness has a structure that doesn’t allow itto trade properly, it is not necessarily themanagement’s fault.”
When Endless bought product design andsourcing company Peter Black in July 2006, ittook on a company with revenues exceeding£240 million, an operating profit of £13 mil-lion and, Forshaw says, a “grade-A manage-ment team”. But there was too much debt inthe business. A combination of injecting morecapital and backing the ideas of the manage-ment – changing how the company went tomarket, as well as some of its products – sawturnover grow by 7 per cent and profits by 23 per cent. Endless exited 13 months laterwith an internal rate of return of 215 per cent.
So, turnaround is not just for companies onthe brink. Forshaw looks for situations wherethey can make a quick impact, by cutting thecost base, improving the top line or changingmanagement. “There are a lot of businessesthat have significant debt burdens, whichmake the bottom line look negative,” he says.“But on an operating level, they’re doing OK.”
While poormanagement isusually a feature
of underperformingcompanies, it is notalways the case – it can be the ownership
tier management. Bringing in a new top tier,motivating that second tier, as well as strip-ping out the costs of being a PLC, have madea huge difference to the business. A yearlater, both companies are in profit and havea clear direction and strategy.
Though Ferranti has grown the workforce inthis case, turnarounds are inevitably associat-ed with redundancies. It is often under-appreciated that such cuts may be essential toprotect the long-term viability of the businessand the jobs of those being kept on. Andtears are not always shed if there is a clearoutof the bosses who caused the problems.
While the arrival of a private equity ownerbrings the feeling that at least something ishappening, a major problem is simply theperception that an asset-stripper is in town.This reputation troubles Moulton and is par-ticularly unjustified in his field, he reckons.
Whatever needs doing, speed is often vital –“you need the bravery and/or insensitivity tomake decisions fast,” he adds.
Rutland uses a tool it calls a “180-day plan” toturn around the business, which is task- andtime-orientated (but not necessarily to a strict180-day timescale). Cartwright says: “Wehave a view of the key changes that need tobe made, and come up with a detailed planthat supports each initiative. You will get
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some things wrong. If you get 70-80 per centright, you will turn around the business.”
Forshaw warns that “it always takes longerthan you think”, a lesson Endless learnt withits first acquisition after opening in 2005:Speed Frame, the UK’s largest manufacturerand distributor of PVC windows. The compa-ny had long been profitable, and had anattractive core business, but a failed overseasexpansion precipitated a cash crisis. “It need-ed focus, new investment and new manage-ment,” he says.
Endless closed the overseas operation,strengthened the management and injectedworking capital, partly through a refinancing.The focus was changed from the difficult res-idential market to new-builds, and costs driv-en down, mainly through direct materialsourcing from China. “It will achieve notableprofits this year,” Forshaw says. “It took a lotlonger and more capital than expected, butwe allowed for that to a certain extent.”
Those involved in turnarounds maintain thatthere is greater satisfaction in transforming astruggling business and the fortunes of thepeople in it. Alchemy’s Moulton says: “There’snothing better. You feel very pleased with your-self and you should be. You’ve done somethingvery useful.”
While the arrival of aprivate equity ownerbrings the feeling
that at least something ishappening, a majorproblem is simply theperception that an asset-stripper is in town
How private equity works in practice
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In the first instance,public markets oftenundervalue assets,
unable to support theinvestment of time andcapital that can be requiredfor a company to deliver onits full potential
The UK’s largest pawnbroker, Harvey &Thompson Group (H&T), was a profitablecompany that generated cash, but Rutlandconsidered that it was underperforming, withflat trading, when it bought H&T for £49 mil-lion in 2004. Cartwright actually worked in astore to get to know the business, and out ofthat came an analysis of the right employeelevels, resulting in 15 per cent staff savings.
He says this created a template for the stores– which also benefited from developing otherlines, such as third-party cheque cashing –and by the time Rutland floated H&T on AIMin 2006, there were 12 new stores. Therehave since been further openings and H&Tnow employs more staff than it did in 2004.
Sometimes the business really is on its knees,however. Uskmouth power station in Wales wasin the hands of the receiver when Rutland tookthe bold step of recommissioning the plant,investing £23 million of equity and negotiating £10 million of bank overdrafts and credit fromsuppliers and service providers. The firm’sappointment of an independent operating andmaintenance contractor – Alstom – to run thestation was key, and within four months the firstpower was sent into the grid.
The Rutland-owned company behind thebusiness, Carron Energy, hired 15 manageri-al and administrative staff, while Alstomrecruited 120 engineers and operatives –
many of whom had worked at Uskmouthbefore it went into receivership.
When assessing potential targets, MikeCampbell, Managing Director of FerrantiCapital, looks for a strong brand name, well-established distribution channels and ideally“a unique or enabling technology or capabili-ty”. This is in part driven by Ferranti’s distinc-tive exit strategy – either to sell to a Chinesecompany looking to expand into the West, ormerge with a capable Chinese company inthe same market and then float.
This approach was adopted three years ago –up until then, Ferranti was a conventionalLondon-based venture capital company.Ferranti was keen to identify a way it couldexploit the huge economic growth in Chinawithout the risk of investing in Chinese com-panies. Campbell says: “We found that whenwe visited Chinese companies in the manu-facturing and engineering sectors, most said‘we don't need your money, but we need helpto expand into the West’.”
A Ferranti success story is the purchase inDecember 2006 of premium brand precisionengineering companies Jones & Shipmanand Holroyd from Renold. The businesseswere not core to Renold, and both wereunderperforming and suffering from under-investment. They also had a lacklustre seniormanagement, but Ferranti liked the second-
The road to success – venture capital
How private equity works in practice
Venture capital firms provide vital backing for spin-out businesses. Andrew Cave looks at how their support helped technology group CSR go from start-up to a £240 million stock market flotation in less than a decade
CSR, the Bluetooth technology groupthat started life as Cambridge Silicon Radioin April 1999, has rapidly become that rari-ty – a British company that dominates itsglobal market.
Its silicon chips are ranked number one inevery segment of the Bluetooth market, witha unit market share in excess of 50 per cent.In terms of products, its market share is evenhigher, with 60 per cent of all Bluetooth prod-ucts containing CSR’s integrated circuits.
However, CSR is not only a success for its threefounding directors, six original engineers andthe management and 1,000 staff who nowoperate the company – it is also a resoundingtriumph for the venture capital industry.
After an initial $9 million of funding from 3iGroup, Amadeus Capital Partners and theinformation technology fund of Dutch ven-ture capital group Gilde, CSR completedanother three rounds of private fundraising,backed by the original venture capital firmsand new investors.
When it floated in 2004 on the London StockExchange at £2 a share, valuing the compa-ny at £240 million, Amadeus and Gilde stillhad 13 per cent holdings, while 3i held 14per cent.
Actually, 3i held on to some of its stake until2007 and Partner Laurence Garrett is delight-ed with the investment. “Overall, we madeabout ten times our original investment in thecompany,” he says. “It’s a very good return.” Existing shareholders took out
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£38 million at flotation, but investors whoremained shareholders also made goodreturns, as turnover more than trebled from$253 million to $850 million between 2003and 2007. The shares reached as high as £15before falling back, due the effects of 2007’scredit crunch.
Headquartered in Cambridge, CSR now has15 locations around the world and a 20 percent operating margin.
However, its story dates back five yearsbefore its formation as a spin-out fromCambridge Consultants, where foundingdirectors James Collier, Glenn Collinson andPhil O’Donovan and the other six staff workedon developing silicon for clients in the tele-coms, automotive and healthcare industries.
The team came up with radio frequency sili-con products using complementary metaloxide semiconductor (CMOS) silicon, withthe aim of providing major size and cost effi-ciencies in mobile phones.
“Their strapline was that they wanted todemocratise radio technology and make itmuch easier for people to use,” says PaulGoodridge, CSR’s finance director since2000. “This was the vision that the venturecapital firms bought into.”
Garrett of 3i agrees. “It was pretty obviousearly on that they had something we couldnot ignore,” he says. “They were the first peo-ple in the world to achieve radio frequency atbaseboard on one single CMOS chip. It was atechnological breakthrough.”
CSR is not only asuccess for its threefounding directors,
six original engineers andthe management and 1,000staff who now operate thecompany – it is also aresounding triumph for theventure capital industry
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“Back in 2001, the technologymarketplace was
a very hard one to be in and Bluetooth was just not happening”
Hermann Hauser, Co-founder of Amadeus,adds: “People ask me why we invested insomething that had not been done beforeand was completely new. But the answer isthat if you have the chance to do that, this iswhere the big wins are. Living in Cambridge,you learn to recognise a five-star wizardwhen you see one and James Collier is a five-star wizard.”
Amadeus, 3i and Gilde provided $9 million inthe 1999 fundraising and were joined by IntelCapital in a $7 million second round in 2000.
A third round later that year raised $48 mil-lion and saw nine more investors, includingthe venture capital arms of electronicsgroups Philips, Siemens, Compaq and Sony,join the shareholder register as part of a con-certed move to not just get financialinvestors, but also build relationships withcommercial partners.
Then in 2002, a fourth fundraising brought inScottish Equity Partners and LDC to take CSRthrough to flotation.
“Everybody was excited by the enthusiasm,energy and intelligence and skills of the orig-inal team,” says Goodridge. “James Collier, inparticular, had this real vision for where thecompany could go with its technology and hehas a very good commercial brain as well asgreat technical expertise.
“The three Founders saw that Bluetooth wasgoing to be a huge market, but they werealso highly competent managers and wereable to elucidate what would make CSR intoa significant business.”
The founders did not develop their technolo-gy for Bluetooth and originally toyed withusing it on short-range wireless or wirelesslocal area networks. However, afterBluetooth was adopted as the European stan-dard, they decided to focus on it.
Hauser recalls: “With hindsight everyonesays that of course we went with Bluetooth,but it was a pretty gutsy decision. There wasno Bluetooth market at the time and theAmericans said we were crazy and there waszero chance of success because there was noroom for another wi-fi standard. We had tobelieve that making an investment in this
In addition, the venture capital backers wereable to use their industry knowledge andexperience to help CSR grow, recruiting JohnHodgson, a highly experienced Briton in theUS computer industry, as Chief Executive.
Later, Garrett introduced CSR to three of 3i’sother investee technology companies, whichCSR ended up acquiring.
“The venture capitalists were not just there tolook after their money at board meetings,”says Goodridge. “They were able to bringskills to the table as well.”
CSR’s experience has been “an example of private equity working really well,”Carlisle concludes.
“This was plainly a high-risk start-up that waswell-backed by venture capital. The companyhas been properly managed at every level.”
European standard called Bluetooth was theright approach.
“Were there difficult moments and timeswhen we doubted whether we should bedoing it? Absolutely. But every time, we andthe other two venture capital firms made thedecision to move forward and believed thatthe team would be able to pull it off.”
Bluetooth took some time to take off. By2000, less than ten million Bluetooth unitshad been shipped worldwide. Now, howev-er, this figure is more than one billion.
“Back in 2001, the technology marketplacewas a very hard one to be in and Bluetoothwas just not happening,” says Goodridge. “Butwe presented a very strong story about whywe should continue to invest as a companyand recruit quality engineers while they wereavailable. The venture capital backers stayedinvested and continued to support us.”Hauser says the turning point came whenCSR’s CMOS chips were used in a Sony phone.
“The phone was a total flop,” he says, “but atotal flop in the mobile phone businessmeans you sell six million products.
“It was fantastic to show that the productcould do what we said it could do all along. Itwas an early success and then the productstarted being designed into phones. Whenthat happens, it becomes very profitablebecause so very many mobile phones arenow sold worldwide.”
CSR’s chips are now used in the mobilephones of Motorola, Nokia, Panasonic,Samsung and Sharp, the wireless headsets ofHutchison ‘3’ and Logitech, almost all newmodels of laptop personal computers withBluetooth capability introduced since 2003,and the communication systems of Saab,Audi and BMW cars.
Tony Carlisle, the Chairman of financial PRfirm Citigate Dewe Rogerson who joinedCSR as a Non-executive Director in 2005,gives credit to the CSR management fordevising a business strategy that sought toadd value to the products. Fierce price pres-sure was offset by production improvementsthat cut costs.
Developing business potential– development capital
Private equity firms supply much-needed development capital to growing businesses. But, writes Derek Bedlow, their wide experience of helping to build companies is equally in demand
If you’re not growing, you're slowing.Securing seed capital and getting a businessoff the ground is only the beginning of thestory for most companies – having got air-borne, the real crunch comes when it is timeto take advantage of its market position andmove the business up a level.
This is where development capital comesinto play, funding the expansion of the busi-ness and diversifying some of the risk for thefounders, while allowing them to retain aninterest in the company when the timecomes to seek fresh funding.
This was very much the story of Fat Face, anactivewear brand and retailer which startedlife in 1989 as a T-shirt printing businessdesigned to fund the ski-bum lifestyles of itsfounders, Tim Slade and Jules Leaver. By thetime that ISIS Equity Partners came on thescene in 2000, the pair had developed thecompany into a £7 million business selling arange of branded clothing from a chain of 25 shops. It had, nonetheless, reached thepoint where significant development wasvital to maintain its growth and Slade andLeaver were far from sure they were the peo-
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ple to do it. ISIS persuaded them otherwiseand bought a minority stake for £3.5 million.
“We saw that the founders were stillextremely able to contribute to the businessover the next few years and one of our keyroles with Fat Face was about giving theFounders the confidence to keep growing,”says Mark Advani, Director of ISIS and for-mer Non-executive Director of Fat Face. “Theother option for them was to sell the compa-ny outright, but we persuaded them thatthey could remain involved so that theycould continue to grow it.”
This faith proved to be justified. By the timethat ISIS made its exit in 2005, selling its staketo Advent International, the Fat Face empirehad grown to 97 outlets, complemented by aburgeoning mail order business, and grownits turnover eight-fold to £60 million.
“When we invested, it was a business thathad grown quickly, but was still a bit of asecret,” Advani says. “We saw that the brandhad developed a really good relationship withits customers and that there was an opportu-nity to roll it out further and to expand intomail order.”
The real crunchcomes when it is time to take
advantage of its marketposition and move thebusiness up a level
“The business plan couldn’t take into accounthow much the business needed to change,”he says. “Having expanded from 150 to 1,600people during the period of our investment,the organisation was almost unrecognisableby the end.
“Private equity is absolutely fantastic in theearly years of a business like this, where youneed all the shareholders to take a longer-term view and be prepared to invest in peo-ple and systems and infrastructure. No otherform of finance could have achieved for FatFace what private equity did.”
Perhaps the most valuable feature of develop-ment capital, however, is the time and flexibil-ity that it provides for companies to find theirfeet compared with other sources of finance.Private equity investors are a long-term part-ner rather than a short-term investor.
For example, although Fat Face hit all theright notes financially, it did not do so in quitethe same order as originally envisaged in itsbusiness plan. Advani argues that the com-pany may not have enjoyed its ultimate suc-cess had it raised capital by another method.
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“Private equity isabsolutely fantasticin the early years of
a business, where you needall the shareholders to takea longer-term view”
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Perhaps the mostvaluable feature ofdevelopment capital,
however, is the time andflexibility that it provides for companies to find theirfeet compared with othersources of finance
Development capital is also invaluable whengrowing companies look to expand throughacquisition. This was the experience ofSoftware Solutions Partners (SSP), a softwarehouse focusing on the insurance industry,which teamed up with Lloyds DevelopmentCapital (LDC) in 2004 by exchanging a 30 percent stake for an investment of £11.3 million.“We had a very good business,” says DavidRasche, who co-founded the company withLaurence Walker in 2001. “We were enjoyingit and we thought we could add more value.We wanted to take some of the risk off thetable for the founders.”
The money enabled SSP to finance a series ofstrategic acquisitions worldwide, whichallowed it to distribute its core product, the‘insight’ software package, on a global basis.The business was also able to significantlydiversify its generic client bases into otherareas of the financial services industry. As aresult, when the company was floated onAIM in 2006, its value had risen to more than£70 million.
“The track record of the management wasstrong, they had developed strong contractedrevenues and we could see significant growthpotential in their insight product,” says LDCSenior Director John Swarbrick. “They hadidentified opportunities to promote their prod-uct by building on their relationships withinsurance companies and intermediaries.”
LDC brought more to the deal than justmoney. Swarbrick joined SSP’s board as aNon-executive Director and his, and his col-leagues’, experience of corporate acquisi-tions proved to be invaluable as the companyexpanded. “The key question for companiesat this stage is: does this acquisition enhanceshareholder value? Our experience of buyingand selling companies is very helpful in thisregard. We were able to contribute to thedebate over which companies to pursue andprovide the benefit of our experience when itcame to the execution and structuring of theacquisitions,” Swarbrick says.
More generally, LDC was able to provideadvice on managing a growing business,based on its experience of investing in com-panies at similar stages of development.“John Swarbrick and others at LDC gave usvery good non-executive advice,” saysRasche. “They were objective in their adviceand weren't just looking out for their owninterests. We got a contribution from LDCthat was very fair.”
In many respects, bringing this kind of expe-rience to the deal is as essential as the capitalprivate equity houses supply to growingcompanies – it provides private equity with adistinct advantage over other forms offinance available at this stage of develop-ment, whether bank debt, a trade sale or anAIM listing.
For sandwich chain EAT, the prior experienceof its main investor Penta Capital in helpingrestaurant chain La Tasca to grow from 14 outlets to 67 is certainly proving to be asvaluable as its money. When Penta bought itsstake in August 2005, EAT had 42 outlets, buthad plans to develop a further 100 shops andexpand its production capacity to supplythem. Already, it now has 85 shops and 2,000staff, and profits have risen three-fold.
“Growing a business rapidly can be quite adangerous venture if you don't have the rightpeople and infrastructure in place – you canovertrade quite easily,” says Penta Capital’sTorquil Macnaughton, who serves as a Non-executive Director on the company’s board.“The more experience you have in a sector,then the more you can help with forwardplanning – you know what happens whenyou reach certain levels. In this business, suc-cess is down to micro-management, makingsure that you get the best deals from yoursuppliers and minimising costs. It's concen-trating on the small details that ultimatelydeliver the bottom line. EAT has grown rapid-ly, but without losing control.”
A common issue for companies at this stageof development is moving away from theowner-manager mentality to develop anorganisational structure that can bear theweight of a growing business. At Fat Face, forexample, the input of ISIS proved to beinvaluable when it came to creating the seniormanagement roles necessary to oversee thecompany's expansions – and finding the rightpeople to fill them.
“The real issue for Fat Face was that the busi-ness was expanding by 50 per cent per annumand, as a result, was constantly outgrowing itsorganisational structure,” says Advani. “Thereal difference we made was to help themjudge when to recruit new organisationalheads and helping them to do that. We alsohelped them to appoint a chairman and, ulti-mately, advised them on when it was the righttime for the founders to take a step back.”
Looking ahead to the next 25 years
The future
Private equity has come from nowhere to play a vital role in the UKand world economies. Its importance will only increase in years
to come, predicts Simon Walker, Chief Executive of the BVCA
Predicting the future is a notoriouslydangerous business. History is littered withpeople who looked into a crystal ball andgot it wrong. The man at IBM who saidthere would only ever be demand for threecomputers worldwide. The ParliamentaryCommittee which said that there was nofuture for electricity. The man in the 1870swho said that telephones would nevercatch on.
So, it is a tall order to predict what the worldof private equity will be like in 2033. Whatseems a safe bet is that given the way thateverything is speeding up, the changesbetween now and then will be even greaterthan the changes we have seen in the last 25 years.
Back in the early 1980s, we didn’t exist as anindustry. Today, we have come fromnowhere to play a central part in the world’sindustrialised economies. And yes, there’sno doubt that the speed of our growth hasbrought controversy.
I predict that 25 years from now, we will beplaying an even bigger role, but with oneimportant difference. We will no longer beseen as something mysterious or controver-sial. We will be an accepted part of the eco-nomic mainstream, just one form of owner-ship among others which makes a vital con-tribution to the overall well-being and pro-ductivity of the economy. And where, if youwork in the private sector, it will be just asnormal to work for a company owned by pri-vate equity as it is to work for one which ispublicly listed.
That will partly be simply because of greaterfamiliarity. But I think it will also be because,as the pace of globalisation and economicchange hots up, so the disciplines and skillsthat private equity and venture capital offerwill increasingly come into their own.
Why am I so sure? Because we know thateconomies in the developed world are goingto have to find ways of becoming more pro-ductive. There will be more of a premiumthan ever on intellectual capital and the abili-ty to develop new technologies. The compa-nies that flourish will be those who are first tospot new opportunities in world markets, tokeep fleet of foot and retain entrepreneurialflair. There are going to be fewer and fewerhiding places for businesses that duck diffi-cult decisions or trade on past glories.
So where are we going to find these skills andattributes? They are, of course, to be foundin all sorts of businesses, but I do believe thatthere is a concentration of them in venturecapital and private equity. People who are
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prepared to take risks with their own capital.People who know how to take a businessfrom start-up and help it to expand into newmarkets. People who can take existing busi-nesses and help re-energise them, takingtough decisions to focus on areas of growth,empowering management to drive the busi-ness forward and take a longer-term view oninvestment decisions away from the glare ofthe public markets.
In an era of globalisation and consolidation, italso seems a safe bet that economies willincreasingly have to concentrate on theirareas of strength. When you look at the UK,financial services is one of the relatively fewareas where we have a genuinely world-beat-ing industry. So we need to build on that,making London as attractive a place a possi-ble for private equity and venture capital.That’s the only way in which we will continueto attract the brightest and best from all roundthe world to come and work here.
But while I think the future for private equityshould be very bright, it is by no means in thebag. If the wrong political decisions are takenin the US, the UK and in Europe, there is analternative future. A future where privateequity is so tied up in regulation that itbecomes indistinguishable from other formsof ownership and so loses the focus and rela-tive freedom which has been the very reasonfor its success.
That’s why it is so important for us to win theargument that is currently being wagedbetween those who believe that the rightresponse to globalisation is protectionism andregulation, and those, like me, who believethat in the long-run, open markets and compe-tition will serve society best. Win it, and weshould see faster growth, increased productiv-ity, more innovation, and a higher tax take tohelp fund our public services. Lose it, and wewill see falling productivity, worse pensions,lower investment and a sclerotic economy.
I am confident that we will win that argumentbecause the facts will increasingly speak forthemselves. The result, in 25 years’ time, willbe an industry which will be even moreimportant than it is today, but one that willhave become boring in that it will be as muchpart of our national life as public companiesare today.
While I think thefuture for privateequity should be very
bright, it is by no means inthe bag. If the wrongpolitical decisions are takenin the US, the UK and inEurope, there is analternative future
