Led by who?

A third of all UK buyouts in the first quarter of 2006 have been led by non-private equity sponsors such as hedge funds and wealthy individuals, according to new data. Will these deals work, asks Robert Venes.

New figures from the Centre for Management Buyout Research (CMBOR) confirm that the private equity investment model is increasingly being adopted by non-financial sponsors.
According to CMBOR, in the first quarter of 2006 private equity ‘copycat’ led 33 percent of all UK buyouts worth £100 million (€145 million; $186 million) or more, compared to just eight percent for the whole of 2005 and none at all in 2001.
Tom Lamb, co-head of Barclays Private Equity, which founded CMBOR alongside Deloitte, says competition for private equity deals has come from a number of hedge funds, government-sponsored operators such as Dubai International, family offices and wealthy entrepreneurs such as Robert Tchenquiz.

These new firms don’t have a history of doing these deals, so they don’t have any track record or experience.

Tom Lamb, co-head, Barclays Private Equity

Lamb says recent ‘copycat’ deals in the first quarter of 2006 included  Dubai International Capital’s £700 million secondary buyout of engineering company Doncasters; the £404 million public-to-private of retail group Peacock Group by a consortium including hedge funds Och-Ziff and Perry Capital; and the £162 million secondary buyout of marine management provider Inchcape Shipping Services by Dubai-based Istithmar.
The greater awareness of private equity and its methods has played a significant part in these new types of principal investors coming to the fore, says Lamb. The availability of cheap debt has also been a major factor: “It’s easier for non-mainstream players to raise a chunk of debt now, providing you can give a good story to the banks as to why you need it. If, say, Malcolm Glazer had approached the banks regarding a buyout of Manchester United ten years ago, they would have just stared at him.”
The problem, says Lamb, is that there is a great deal more to private equity than simply raising debt at 7x EBITDA. “Barclays Private Equity is a mid-market firm and we do 12 to 15 deals per year, we’re used to working with different management teams and understanding what motivates them,” he says. “We know about leveraged deals and when changes have to be made in a company based on our experience. These new firms don’t have a history of doing these deals, so they don’t have any track record or experience.”

Lamb: newcomers don’t have relationship with banks

Crucially, adds Lamb, the newcomers don’t have the necessary experience and understanding of deals going badly. “We have a relationship with a number of banks, and most deals go well, but a few haven’t, and we know how to behave when that happens and they know that we will be responsible and try to sort as the problem as we will need to borrow from them again for another deal further down the line. That’s a relationship that these new kids on the block don’t have.”
In less buoyant times, says Lamb, deals such as the £800 million sale of theme park and museum operator Tussauds to Dubai International Capital in March of last year or the aforementioned Peacock Group and Doncasters transactions would almost certainly have gone to private equity houses.
Ultimately, the true test will be how well the ‘copycats’ have absorbed the private equity model beyond simply loading a company with debt. As Lamb says, the private equity model can’t be learnt overnight: “You can teach a turkey to climb trees, but that doesn’t make it a squirrel.”