Friday Letter holding versus folding

BC Partners has been vilified in the mainstream press over a high profile deal gone wrong. But its willingness to see UK estate agents Foxtons through turbulent times illustrates an important, laudable quality in private equity investment strategies today.  

Underperformance. Default. Insolvency. These are words no private equity manager wants associated with their portfolio companies. And yet, in these recessionary times affecting the world’s economies, even the savviest of buyout shops has seen some of its investments go deeply south.

It’s inevitable, you might say. Search for the term “Chapter 11” in the PEO archive, and you’ll see private equity firms of all shapes and sizes have encountered difficulties in recent months. Yet some firms and their struggling portfolio companies have attracted significantly more attention than others.

BC Partners’ £400 million buyout of UK estate agent Foxtons is a prime example. A household name, Foxtons’ potential takeover fuelled rampant speculation in the mainstream press for months before the deal was agreed in June 2007.

Bought just weeks before the credit crunch started in 2007, BCP modelled the deal on the assumption that UK property sales could not fall by more than 30 percent. Such a decline would have been equivalent to the lowest level seen in 30 years.

“Obviously, we made the wrong call on the market,” managing partner Andrew Newington said yesterday during a rare press conference. He told reporters that London market volumes in fact fell between 60 percent and 70 percent in a collapse whose steepness and suddenness was impossible to anticipate.

“It’s not been a good story for us,” co-chairman Raymond Svider acknowledged, stressing that the equity investment in Foxtons represents only 1 percent of its current buyout fund and is mitigated partially by a contingent vendor loan linked to performance. And, despite defaulting on its covenants late last year, Foxtons remains profitable and continues to gain market share in an extraordinarily difficult housing market, Newington added.

While it’s unclear how long it will take the UK property market to rebound, BCP may yet rescue the business, for instance by injecting fresh equity – a possibility Newington said the firm will consider “in the right circumstances”, namely if its debt load is reduced. Its lenders, Bank of America and Mizuho, have been described as supportive and the three parties are engaged in monthly discussions. The agreement of a new capital structure post-first quarter earnings reports is a distinct possibility.

All of this, of course, sounds like immense brain power expenditure for an investment representing a £50 million equity cheque and such a small proportion of the firm’s €5.9 billion Fund VIII. Asked if LPs resent the amount of time one of its managing partners spends on the deal given its size, Svider responded with a point rarely mentioned in the inches of newspaper ink that’s been spilled over Foxtons: Just as it has a responsibility to its LPs, BCP has a commitment to its portfolio companies’ management teams.

Simply because a company runs into some trouble is not “a good enough reason to step away”, he said. It would be hugely damaging to any private equity firm’s reputation as a trustworthy proprietor.

While LPs may be frustrated that Foxtons gets as much attention as it does, they surely wouldn’t want to invest with a fair weather private equity firm. Indeed, working hard with the portfolio to get through tough times may well be the dominant private equity theme of 2009 – and what separates the wheat from the chaff.

PS – The final voting round is now open for the Private Equity International Awards 2008. You've chosen the finalists, now choose the winners.