From trailblazing dealmakers to asset gathering giants: The changing face of European private equity

When I started out in private equity in December 1994 at Nomura, the European market was very small. Most deals were in the tens of millions of equity rather than the hundreds of millions seen today.

This was a time when financing buyouts using securitisation was unimaginable and complex debt structures were largely unknown. The main players were banks, which predominantly provided capital for management buyouts.

We came on to the scene using Nomura’s balance sheet at the extreme end of the transformation spectrum, and we mostly undertook highly complex deals, financing through the securitisation markets. The years from 1995 to 2000 were a golden period for us, with deals including Angel Trains, when we ended up owning just over a third of the trains in the UK, and Annington Homes, when we bought 57,000 military homes from the Ministry of Defence.

As the deals grew in size and number in the second half of the 1990s, the European finance markets grew up to facilitate them. As well as financing the dealmakers, many banks decided to source their own deals to earn the fees. At the peak, there were about 30 banks setting up their own captive private equity firms.

In 2000, the market began to change. Regulators clamped down on banks pursuing these higher-risk dealings and many people spun out to form their own private equity firms. PFG [Principal Finance Group] was one of these firms, spinning out from Nomura to form Terra Firma in March 2002.

Many of us found the transition from one investor to many investors difficult, particularly as institutional investors favoured those with a long track record who had grown up in the traditional private equity world. However, despite being the new kids on the block, our first-time fund raised just over €2 billion and we capped our second-time fund at €5.4 billion. Looking back, it seems extraordinary that within five years we were in the top 10 firms in the world with around €8 billion of funds under management. To be as relatively big today, we would need more than €100 billion under management.

The industry was growing at pace during that time and we went from doing deals in the tens of millions of equity to the billions in just eight years. When I was raising the second blind-pool fund, one investor warned me that something was bound to go wrong because of our lightning growth, and he was of course correct.

We invested in EMI at the end of the boom period, just before the crash. The deal relied on a securitisation refinancing but the markets dried up within a few months. We could not refinance the deal and were stuck with an extremely challenging debt package. After a huge fight with the lender, EMI was taken back by the bank in 2011 and sold off. The 2008 credit crash highlighted that the European institutional market lacked the depth of the US market, and its mutual support systems, with US firms generally emerging with far fewer scars than their European counterparts.

By 2012, the markets were recovering and by 2019 they were bigger than ever. However, the industry looked very different, becoming more about asset-gathering than dealmaking. Funds became bigger and institutionalised, which meant less volatility for investors but lower returns: where we had in 2000 aimed for returns of around 30 percent and got higher returns, by 2020 to aim for 10-12 percent was standard and actual returns after fees were lower.

Institutional objectives have shifted the focus away from dealmaking towards investor relations, risk management and PR. This has changed the type of person entering the industry today: those who would have been attracted to the risk and excitement of dealmaking in the 1990s now are more likely to go into venture capital or start-ups and technology instead. There are of course a few individuals who still believe they have an idea that will make a difference in the traditional buyout industry and are able to execute on it, but they are harder and harder to find.

As the next generation rightfully take their place at the helm of the industry, I suspect we will continue to see the decline of the dealmaker in favour of institutionalisation. The current business environment does lend itself to a lower risk strategy, but I hope that the pursuit of the perfect deal will not be lost forever and that the industry will not lose its soul completely in the pursuit of fees rather than returns.

Guy Hands is the founder, chairman and CIO of Terra Firma. He stepped down from his post on 31 July, 2023