Friday Letter: Sharpen up on PTP's

So the ending to that story was not as happy as Kravis and Co might have wished; the returns from RJR Nabisco were far from stellar. But they did at least do the deal.

This is more than can be said of the UK private equity firms that recently reached for and failed to privatise a growing list of quoted assets, including HMV, a entertainment retailer; De Vere, a hotel group; McCarthy & Stone, a care homes operator; WHSmith, a retailer, and ITV, a broadcaster.

Much has been written about the turning of the worm. Quoted fund managers are said to be keen not to suffer the double mugging of a private equity bid that supposedly takes a company off the markets for a steal and returns it a few years later for a king’s ransom. Instead they are looking to management to deploy some of the tricks of the private equity industry to return value to shareholders.

But according to one debt banker the worm’s perspective is not the whole story. The stalling public to private market is as much the fault of Europe’s buyout managers, who are costing him too much time and money.

Talking to PEO earlier this week, the banker was both indulgent of his clients’ growing pains and only beginning to lose his patience with them.  He said that Europe’s mid-market firms that had stepped up the deal range to go toe-to-toe with US firms were finding it harder to land the bigger take-private deals.

Public to privates are expensive, more so than ordinary buyout transactions. Even failing at them is far from cheap. Our banker said each time success eluded them it still costs the private equity firms €1 million in due diligence and other associated expenses. And even if they can afford to fail repeatedly, the banker’s goodwill for his otherwise valued private equity customers was not inexhaustible.

His advice to the buyout firms was simple: do less. “They are not in the same volume game as the banks. So why look at everything in the market? Instead of 10 take-privates, find three you really want to win and you stand a better chance of walking away with one of them.”

The private equity firms may argue bad luck has kept them from acquiring the assets they targeted. Bad luck and higher rival bids. But there is a strong case to suggest that better tactics, sharper advisers and a more focused approach might create a bit more good fortune for the firms as they step up the take-private chain to ever bigger deals.

Or perhaps they just need a few more practice runs for the sake of the experience. In which case they would be wise to beg their suppliers’ indulgence and to stock up on some instructive reading for the beach. The Da Vinci Code just won’t cut it this summer.