When it emerged last week that Terra Firma was seeking €3 billion for a new buyout fund, the obvious question was whether it could shake off the reputational and financial damage done by its ill-fated takeover of music group EMI and subsequent court case against lender Citigroup.
“They’ve tried on a number of occasions to raise capital but haven’t been successful,” said an investor in previous Terra Firma funds. “But the market is very liquid at the moment with a lot of capital. If ever he were to succeed, now is the time.”
The firm will try to do this by pointing out a number of factors to prospective investors; it has had a frenetic year of activity, exiting two businesses, establishing a credit arm labelled Support Capital, which made its first investment in May, and developing a new secondaries business. It can look back proudly on the sale of power supply business Infinis for a 3.2x multiple and, going back to 2015, the exit of German service station operator Tank & Rast at a 7.5x return.
While these make for compelling individual case studies of value creation, investors will want more than that in order to commit capital. According to figures calculated using data from Canada Pension Plan Investment Board, Terra Firma Capital Partners III – the fund which bore the brunt of the EMI loss – had achieved a net multiple of 0.66x as of September 2016. A more respectable net multiple of 1.66x for Terra Firma Capital Partners II, which was also hit by the EMI loss, however, is a reminder that the magic may not have blown away completely.
Beyond the performance numbers, an important point for LPs will be personnel.
Since 2015, the firm has reshaped its upper echelon of management to take certain responsibilities away from the firm’s charismatic founder and figurehead Guy Hands.
It has brought in Justin King, the former Sainsbury’s chief, as vice-chairman and head of portfolio businesses with a new CEO in the form of Andrew Géczy, former chief of international and institutional banking at ANZ.
This new team has clear, delineated responsibilities. Hands will use his eye for a deal to size up investment and divestment opportunities, King uses his operational savvy to handle the day-to-day operations of Terra Firma’s portfolio companies, and Géczy would use his experience in M&A and financing to manage the processes that tie it all together.
“I think they will market this as ‘new team, new people’,” a market source told PEI.
Beyond the firm’s leadership, however, the picture becomes more complicated. Recent years have seen a spate of departures. In 2014, renewable energy financial managing director Damian Darragh, a highly regarded dealmaker, was abruptly removed and replaced by Mike Kinski, Stefan Thiele and Ingmar Wilhelm, with Thiele now departed. In May 2016 the firm hired three new managing directors in the form of energy specialist Alex Williams, Nordics-focused Jyrki Lee Korhonen and direct secondaries-focused Michele Russo. Only Russo remains.
“Some [of those have departed] due to retirements – both as a result of age and the substantial amounts of money individuals have made from a number of highly profitable exits in the last few years. Others have occurred to make room for the extremely high quality talent we've recruited at graduate level in the past few years. Many of whom have been promoted within the firm, right up to managing director level,” said a spokeswoman for Terra Firma.
This is what they will have to convey to investors.
“One of the first questions asked in any due diligence meeting is ‘what has team turnover been?’,” an advisory source told PEI. “How is he going to respond to that? It’s not an easy story at all.”
Story updated to include statement from Terra Firma spokeswoman.