Hands tops up bonus pool with £20m of own cash

Terra Firma's chairman has opened his wallet in a bid to retain executives unlikely to receive carried interest.

Terra Firma’s losses on EMI have left its most recent buyout fund with virtually no prospect of paying carried interest to its investment team. In a bid to retain those dealmakers, the firm’s chairman and chief investment officer, Guy Hands, has taken the brave step of committing £20 million of his personal wealth to the firm’s bonus pool, as initially reported by the Financial Times.

Hands' and his wife's personal fortune amounts to £100 million, according to the Sunday Times Rich List 2011.

The firm’s wage bill of £40 million will now be boosted with an additional £20 million from Hands over two years.

Bonuses will be allocated based on performance, a source close to the firm said. The other component of private equity remuneration after carried interest, the management fee, is also set to fall.

Income from the management fee charged by Terra Firma to investors is set to decrease to €30 million from €75 million  this week, as the fund reaches the five-year mark. The fee percentage will fall from 1.5 percent to 0.75 percent, and will be paid on remaining investments, which no longer include EMI after the company was seized was its lender, Citigroup, last year.

There have been a number of departures from the firm in the wake of its severe losses on music publisher EMI, although fewer amongst the investment team than in its general staff. The move by Hands, a source said, is designed to ensure as many of the remaining team remain in place to help the firm manage current investments and deploy its next fund.

Terra Firma is expected to raise a fund later this year, or early next, sources said. Terra Firma Capital Partners III, its 2007 vintage fund, is all but fully deployed following the acquisition of Four Seasons Healthcare for £825 million in late April. The fund is currently valued at about 0.6x invested capital, according to an investor source, who added Terra Firma is hoping to bring that up to 0.7x by year end, and ultimately reach par.

Terra Firma declined to comment.