Remember, remember…

“Remember, remember the fifth of November…” begins the rhyme taught to children in the UK, lest they forget when Guy Fawkes, a would-be destroyer of the Houses of Parliament in 1605, was foiled in his ambitious gunpowder plot. Fawkes, along with accomplices, was executed. His scuppered act of terrorism is remembered yearly with fireworks displays up and down the country.

It was another Guy, Terra Firma’s founder, chief investment officer and figurehead Guy Hands, who occupied the headlines on 5 November this year. After just four hours of deliberation, a jury ruled that Citi investment banker David Wormsley had not tricked his long-time business associate and sometime friend Guy Hands into overpaying for music group EMI. At stake was a maximum payout of £1.5 billion (€1.7 billion; $2.4 billion) in damages and considerable reputation risk. A win for Hands might have set an interesting precedent for other bankers to be sued where LBOs had gone awry.

The ultimate verdict was unsurprising. Jurors were being asked by Terra Firma’s attorney to award against Citi purely on the basis of Hands’ testimony: nothing was offered in the way of documentary evidence. It always seemed like a long-shot at best or – at worst – a hopeless case for Terra Firma; a tactic to gain some bargaining leverage in debt renegotiations that went too far.

The question now is: what will this outcome ultimately cost Hands and Terra Firma?

For one thing, there is the ongoing risk that EMI Group could pass into the hands of its lender, Citi. Despite being turned around from an operational point of view, EMI has since day one struggled with its £2.5 billion debt burden, consisting entirely of loans by Citi.

If EMI breaches covenants and the equity is lost, Hands will feel it in his pocket. As revealed in the trial, a large portion of his personal wealth is tied up in the music company. And do spare a thought for Terra Firma’s limited partners – their exposure to this deal is massive, too. The next financial test of EMI’s covenants is due at the end of March 2011.

Next, you have the legal cost of the trial, which one insider pegged as being in the “low tens of millions”. The plaintiffs were Terra Firma’s Funds II and III, which means it is the LPs who foot the bill – insult added to injury, one might say.

And then there is the reputational cost to Hands and Terra Firma. This is a man who has built a private equity firm from the ground up, one which – like others – remains closely defined by the presence and influence of its founder. To many the man and the firm are interchangeable.

It has been suggested that he may find it difficult in future to find any bankers willing to do business with him. More importantly, however (and also more probably), trust is at stake between Hands and the limited partner community. Hands’ reputation as a dealmaker has undoubtedly been blemished; the premise of the whole legal action – that he relied on an adviser to guide him on price, rather than his own due diligence and investment judgement – has raised questions about his approach.

He now has to convince his investors that even after EMI, there is still life in him – and Terra Firma. While very difficult indeed, this is not a hopeless case to make. Yes, the €2.2 billion of equity invested in EMI represents an unusually large concentration of capital for the Terra Firma funds, which between them have €7.5 billion of LP money. However, there are eight other assets still in the portfolio, some of them in rude health, according to some of the LPs. Meanwhile, and crucially, Fund III still has around €2.4 billion to invest. This is far and away his greatest asset now. If he can keep his team intact, Hands will get the chance to make up some ground.

Hands has always been willing to address the public – either through the media or via the conference circuit – and this has not relented in the wake of his court defeat. Since his return from New York to Guernsey and to business as usual, he has stepped right back into the limelight.

In late November he addressed conference delegates in Paris. After comparing the process of appearing as a court witness to having his teeth drilled at the dentist, Hands spoke frankly about the way forward: invest the rest of the fund and try to look after the existing portfolio. “If we get that right we will raise another fund, if we don’t we won’t, it is that simple.” 

“Regardless of the court result,” he said, “all I can say is there is always the next deal”. Whether this means he has written EMI off – in his head, at least – is not clear, but it signals, along with his public appearance, his determination to fight his way back.

While he may have been foiled in his attempt to score a historic court victory, Guy Hands – unlike his namesake 400 years ago – could well live to tell the tale.