Interview: Through the eye of the storm

SVG Capital’s chief executive officer, Lynn Fordham, has not followed the comfortable career arc associated with a chartered accountant. Her early work with oil major Mobil landed her some “absolutely plum” postings, in the likes of Zaire, Papua New Guinea, Ivory Coast, Cameroon and Togo, as well as some more well-trodden business paths in Hong Kong and New Zealand.

These exotic postings, Fordham later tells me, were the least stressful of her career. Following her time in the oil and gas sector she moved to British American Tobacco and then to Man Group where, as chief financial officer, she led a restructuring of the group’s sugar division.

After her spell at Man and taking some time out for maternity leave, Fordham returned to work in search of something that would give her “a bit of work-life balance”. What she found was quite the opposite: a seven-year period peppered with complex, difficult transactions.

Lynn Fordham



She joined security business Chubb, which was sold to UTC. She then moved to UK retailer Boots in time for the sell-off of subsidiary company BHI and the group’s first merger with Alliance. Then followed airport operator BAA. “I think I was there eight weeks before the call came in with the hostile bid and never got around to finishing my induction.” With BAA subsequently acquired by Spain’s Ferrovial, Fordham once again moved on, this time to a six-week consulting project with housebuilder Barratt Homes. It turned into an 18-month spell overseeing yet another merger and integration.

When she joined SVG Capital in July 2008 as chief financial officer, perhaps alarm bells should have been ringing for the listed private equity investor.

SVG Capital is a London-listed company that both owns a fund of funds management business – SVG Advisers – and invests its balance sheet capital into funds managed by Permira. Its genesis was a £187 million listing in 1996 designed to allow limited partners to access the numerous funds managed by what was then called Schroders Ventures Europe (and subsequently spun off to become Permira). Since 2001 the company has raised external capital for fund of funds programmes, and now has €3.7 billion of funds and commitments under management or advice.

TROUBLE BREWING

Fordham arrived at SVG a matter of months before the financial markets collapsed in September 2008. In August that year, SVG had announced interim results which included its first write-down of its net asset value in seven years: the most dramatic devaluation being applied to its holding in German television company ProSiebenSat.1 Media, written down by £79.8 million or nearly 80 percent.

But while write downs were applied to various degrees across the portfolio of Permira-managed assets, the markets had not been spooked. Chairman Nicholas Ferguson told analysts that while public market comparables were dragging the valuations down, the actual earnings performance at the companies had been strong, and increasing overall.

It became clear though, as markets further deteriorated, that earnings were about to take a hit, says Fordham. “Values in the portfolio had fallen dramatically from June, mainly because of multiples. But if you think that through, then it is logical that the next thing to go is earnings,” she says.

“As of September/October people were coming out saying they were still seeing strong earnings. We were saying ‘That’s fine, but we’re not going to value on that basis’. We valued on a fairly dramatic cut in earnings.” An interim management statement from November 10 said the portion of the firm’s portfolio valued on a quoted basis had seen more than 50 percent of its value destroyed since the June valuations.

“The market was incredibly difficult to read,” says Fordham. “It was lonely when we came out in
November/December, because I think we were probably ahead of the pack in our bearish view of the world.”

In November and December the management team set about preparing a series of measures to shore up the company’s balance sheet, so before the year was out it had renegotiated the covenants on its revolving debt facility and was in a position to launch a £200 million rights issue with irrevocable undertakings from nearly 50 percent of shareholders.

Furthermore, SVG snapped up an offer from Permira to let LPs cut commitments to the €11.1 billion Permira IV fund. SVG took the maximum possible cut to its original €2.8 billion commitment, freeing itself from £796 million in future drawdowns.

The SVG management, which was at that time led by chief executive Andrew Williams, took the view that debt markets would soon dry up. “Which is why we went out for the debt very early,” says Fordham, adding: “It also became clear to us that when the debt markets dried up people would have to go elsewhere: the capital markets.” So the next thing to tackle was the rights issue.

“We were the first out there and I think it was a shock for the market when we announced it,” remembers Alice Kain, SVG’s investor relations director, who has been at the firm for 11 years. Kain was 38 weeks pregnant when the rights issue had been announced: a fact that Fordham jokes led to some quick meetings with investors and helped secure the irrevocables.

Alice Kain



At the same time as announcing the various liquidity measures, SVG said it had taken a 40 percent impairment on the value of the portfolio since June, which Kain reflects the market viewed as “rather extreme”.

With its public nature and strong links to one of the industry’s most renowned buyout firms, SVG captured the attention of the press as a bellwether for an industry that looked to be on the ropes. A number of reports chronicled SVG’s pain alongside that of Candover, another London-listed private equity investor with strong links to buyouts.

Fordham and team had to keep the press attention at the back of their minds: “Because we were out there quite early, we did attract a lot of attention. But I think you just have to get on and do things right. You can’t worry about what is written about you if you believe in what you are doing, because you are doing it for the investors. You’re not doing it for press accolades.”

NO TIME FOR PAIN

When asked whether it had been a painful six months, Fordham reflects that “busy” would be a more fitting descriptor. “We didn’t have time to feel pain,” she says, adding that the whole process “involved very little sleep and a lot of chocolate”.

Fordham describes the actions taken as being “fairly destructive” to the share price, but leading to a stronger balance sheet and “a company that now has options”.

In the end the rights issue raised £171.3 million, with Coller Capital, the secondaries specialist, seizing the opportunity to build up what was at the time a 24 percent stake in the business with a £50 million investment (Coller now holds 19.97 percent).

“We went into 2009 with a strong balance sheet, which was great if you think about what then played out in 2009,” says Kain, referring to a subsequent rights issue from 3i Group and various listed funds of funds having to sell secondary fund interests into a down market.

In April 2009, just before Fordham was elevated to chief executive officer, and on the back of a five-month strategic review, the company said it would make no new fund commitments for up to two years.
With its liquidity measures enacted, SVG’s cash balance going into 2010 was £144 million. Uncalled commitments were at £371.1 million, which was around 90 percent covered by the cash position combined with a revolving credit facility of £191 million.

New commitments, however, remain off the agenda for the foreseeable future. The sort of meaningful cash distributions that would allow SVG to reconsider this position look unlikely this side of Christmas. The impending “wall of cash”, which Kurt Björklund, co-managing partner of Permira, had promised LPs a year ago, has yet to materialise.

“I don’t think we see anything major coming,” says Fordham. “We will have Cognis [a €3.1 billion exit] in November, which is a very good uplift. But the things that we tend to talk about – things that will very much change the balance sheet – are the assets in [Permira’s fourth fund]. Getting them up to cost and making realisations will be significant. We don’t have any visibility on that at the moment.”

‘IS PERMIRA DEAD? NO’

Despite arriving in private equity just as it faced its toughest battle ever, Fordham retains a bullish view on the asset class as a whole.

“If you look at returns through the cycle, you can see that, for example, Permira had net returns of 32 percent net over previous funds. This last fund had a difficult start, but does that mean private equity is dead? No. Permira is dead? No. It just means P4 had a difficult start.”

The industry does, however, face a significant challenge in winning back “marginal” investors: those newcomers to the asset class who are forming their opinions based on more recent developments.

“It’s been a very turbulent few years,” she says. “The challenge will be in reassuring investors that this is a sensible long-term asset class. Investors who have been in the asset class for some time may be OK, but it is the marginal ones who will need convincing.”

With September’s final demise of Candover, are we going to see more household names consigned to history? Not as many as people think, says Sam Robinson, SVG’s head of global investment and a 12-year veteran of the company. There will be firms which fail to raise money again, but they will be the exception to the rule.

Sam Robinson



“The reason that people have been able to raise a €10 billion fund in the past is because they had very experienced and talented teams,” he says “There have been firms with issues, but in the good firms, quality breeds quality.” He points to a 2004 fund of IK Investment Partners, formerly known as Industri Kapital, which raised just €825 million: less than half its €2.5 billion target. Despite its dramatically reduced size, “we went into that fund and it has been very good,” he says.

SVG has continued to produce encouraging news for investors in 2010. It was able to write up several underlying investments in August, including ProSiebenSat, which was written up by £25 million over the year and Freescale, written-up by £13 million. 

In terms of the longer-term future for SVG, a lot hangs on what the shareholders – a major one being Coller Capital – elect to do when the money does come in. “They have yet to decide what to do going forward in terms of new investment strategy,” says Iain Scouller, a London-based analyst with Oriel Securities. “They have also indicated they will return some cash to shareholders.  They have a fairly concentrated shareholder base, and a lot will depend on what these want.” 

 The future for SVG is, therefore unclear. What does Fordham think SVG Capital will look like in four years time? She admits that while the forward view on the markets is improving, it is “not an easy thing to call”. “Do I believe we will still be investing in private equity? Absolutely.”