Moulton: PE today 'not as fun as it was'

Better Capital's Jon Moulton used a speech at London's Cass Business School to criticise the UK government for not tackling the budget deficit. He also lamented the state of the PE industry.

Private equity is no longer generating outsized returns and working in the sector is becoming increasingly “dull” and “not as fun as it was”. That was the message private equity veteran Jon Moulton had for the student audience – most of which plan a career in the industry – at Cass Business School in London on Wednesday evening. 

In a keynote speech, Better Capital’s founder Moulton described the stark changes between private equity in the 1980s and the industry today. “The first portfolio buyout I did at CVC in London had an IRR of 118 percent cash realised. Nowadays, if you’ve knocked out a return of 15 percent the vast majority of investors will be really quite happy. There’s no question about it; private equity returns are no longer superior to public returns,” he said. 

He heavily criticised the UK government and the Bank of England for not doing enough to reduce the country’s budget deficit. When the first [government] budget came out, there was a lot of talk about cuts, but there weren’t any, according to Moulton. “There were some infrastructure cuts but total government spending doesn’t go down across the five years. Basically all they did was bet [on] five years flat public expenditure and five years of 3 percent growth,” he said. 

Additionally, the country’s low interest rates are bad for the UK economy, he said. “[They] encourage debt and encourage the government to actually get more money and they penalise savers, because anybody who’s stacked up money for retirement is now seeing inflation eating their money. It’s actually quite a subtle form of taxation, because you are reducing the government’s liabilities at expense of part of the population,” he said. “Actually to an extent [it’s] immoral”. 

“We don’t allow things to fail; corporate failure in the UK is approximately half of the average in the 1990s. It applies to companies, it applies to banks and it applies to countries. Low bankruptcy rates aren’t good for the economy. Darwin isn’t operating. We are not eliminating weak companies, weak structures,” he said. 

Statistically, it’s definitely better to back a manager that has been divorced once. [But] a manager that has been divorced twice is much worse. By the time you get to three or more divorces you can pretty well guarantee corporate failure

Jon Moulton

The private equity industry was still fun, but “not the fun it [once] was”, he said. “It can be exciting, but it’s duller than it was. If you [now] work in the London office of an international buyout firm there might be 20 to 25 people working in that office and in a typical year, there will be one deal done. But if you can get to the top, drive large deals, make a difference to companies, drive success, it is still enormous fun,” he said, before starting to talk passionately about turnaround investing. “The idiots you deal with make you feel good about yourself,” he said. 

One of the major challenges is having no access to proper information, he said. “We actually go into meetings with managers who can’t answer questions like, ‘how many employees do you have’? Seriously, this happens. They are amazingly bad managers, they don’t know the figures”. 

There also are some universal rules to work out a manager’s capabilities, according to Moulton. A manager’s track record of divorce can be a red flag, he said. “Statistically, it’s definitely better to back a manager that has been divorced once. [But] a manager that has been divorced twice is much worse. By the time you get to three or more divorces you can pretty well guarantee corporate failure,” he said.