“Doing a diversified portfolio with fewer people to support it is more risky than doing a concentrated portfolio but having enough people to look after every individual deal.”
Guy Hands said this five years ago almost to the day, in an interview with our sister publication Private Equity International magazine. An interview well before EMI, in other words.
When Hands’ buyout firm Terra Firma bought the music company in 2008, the deal took this emphasis on portfolio concentration to another level: €2.2 billion of equity is in play with EMI, or 30 percent of the €7.6 billion Terra Firma raised for its two most recent funds.
Following reports this week that EMI might require yet another equity injection to avoid a catastrophic breach of covenants, it now really is crunch time for Hands, his firm and this asset. The funds’ battered LPs might well balk at the prospect of feeding more money into this deal – one which to many has become a poster child of the perils of buying too high and leveraging too deep – even if it is the only way of salvaging anything from it. The pressure is on.
The predicament brings back memories of the last time Hands lost a high-profile investment. Shortly after the September 11th terrorist attacks, Terra Firma wrote off the £213 million invested in Le Meridien, the hotel group. It was a big set-back, but not big enough to hold back Guy Hands.
In the 2005 interview with PEI, Hands described his investors’ reaction to Meridien as “gratifyingly sophisticated”, because they accepted that no leveraged hospitality business could have coped amid the world’s WTC trauma. Neither did the episode call into question the firm’s emphasis on having few eggs in one basket, he insisted: “The reality is that private equity firms on average write off between 10 and 20 percent of their investments. So if we lose an investment out of the seven or eight in the fund, it will not hit us any harder.”
But with 30 percent of its capital at stake this time around, the blow that may be about to hit Terra Firma could be very hard indeed. As PEI reports in its current edition, Hands still has 45 percent of the current fund left to invest – enough to pull Terra Firma back on to solid ground even if EMI sinks without trace. But from where things are today, the task facing one of London’s most respected deal makers seems Herculean.
As of this week, for the very first time, subscribers to PEO can enjoy full access to the new PEI digital archive. Looking through nearly nine years of private equity coverage from PEI, one is quickly reminded that a key ingredient of private equity investing is the engagement with – and management of – risk. Blind pools exist because investors are backing managers to find assets that have the potential to deliver exceptional returns. But no one – be they GP or LP – should forget the fact that they can also deliver exceptional losses.
So if you’re interested in PEI’s latest report on the EMI saga for instance, click here. And if you want to know how Guy Hands saw the world five years ago, click here – it’s a fascinating and revealing read.
“I know where I am aiming to be in 20 years. And I believe I'll get there,” was how he concluded the interview at the time. Right now many must be thinking that the route – let alone the destination – must have changed for Hands. But is that the same as writing him and Terra Firma off? Hopefully not, because another ingredient of private equity evident in our new archive is that of resilience. The fat lady hasn’t sung on EMI – and it hasn’t sung on Guy Hands, either.