“Is private equity headed for a crisis?”
There is no telling whether William Jackson thinks this a strange question to start the interview with PEI.
You wouldn't blame him for finding it a bit odd, not after the success that Bridgepoint, the private equity firm he runs from brand-new offices in Soho, Central London, has recently enjoyed. Bridgepoint sold 13 businesses last year, averaging a 3.2x multiple on capital invested and returning some €2 billion to investors – not exactly an indication that private equity's good fortune may be about to change.
But Jackson doesn't hesitate to put the good news to one side and instead discuss the notion that private equity could be about to run into serious trouble.
He should have been in Milan this morning before moving on to Madrid later in the day. Running Europe's largest midmarket private equity provider requires at least two days of short-haul air travel across the continent every week. However, industrial action at Heathrow Airport has made today's trip impossible, and Bridgepoint got in touch the day before to see whether Jackson's scheduled date with PEI could be brought forward instead.
So here we are in the firm's boardroom, and Bridgepoint's 43-year old managing partner is contemplating the future of private equity. It doesn't take him long to organise his thoughts around the subject. A lot of people and especially journalists have been making gloomy predictions about the industry recently, and Jackson has clearly thought about the issues, too. “I don't think there will be a crisis,” he begins. What follows is a well rehearsed analysis of why in Jackson's estimation private equity's many critics are on the wrong track.
First he talks about the possibility of a market downturn. Yes, there are of course issues in the economy, but that is not a concern just for private equity – worsening macro-conditions will have an adverse effect on everyone.
Still, he continues, those involved in or watching private equity should be clear that their industry follows a cycle of its own and is “probably” near the mature end of the current one. Some practitioners might be at risk of forgetting this, he warns: “A serious danger is that the positive events and the success of the past four to five years give people the view that private equity is an easy business. It is absolutely not.”
Jackson argues that given the current benevolence of market conditions, it is possible to make “good money from daft decisions”. But this won't last: “When the correction comes, limited partners will need to start asking questions about the quality of returns. Private equity isn't just about buying assets, and taking second-tier managers into the portfolio is dangerous. This is a hostile asset class if you are with the wrong managers.”
The right managers on the other hand should have the requisite competences to weather a downturn, Jackson implies, which to him is one of the reasons why the idea of a pending meltdown – or a crisis – is overblown.
He says the range of asset management skills at the disposal of the best private equity firms have improved markedly since the 1990s – which is why he finds the industry's current reputational problems as “ironic”. He says: “The industry is being accused of asset-stripping, but you simply can't achieve top performance through assetstripping. You need to pursue growth.”
Jackson is equally emphatic in his rebuttal of two other charges commonly brought against private equity: lack of transparency and poor corporate governance.
With regard to transparency, he insists that private equity has improved dramatically in the area where it matters most: financial transparency for the benefit of investors in private equity funds.
“Private equity isn't just about buying assets, and taking second-tier managers into the portfolio is dangerous. This is a hostile asset class if you are with the wrong managers.”
Jackson is convinced that the quality of reporting in private equity is now equal, if not superior, to public market practices: “15 years ago the criticism was valid, because there wasn't an established reporting format. But now things are different. The quality of financial controls and reporting is far higher than many listed businesses. We know this only too well from some surprises that have come out when we've diligenced businesses when doing public-to privates.”
On corporate governance, Jackson's message is that private equity's approach is being fundamentally misunderstood. Financial sponsors and the boards they build at portfolio company level are better at making decisions, including controversial ones, than public market boards, he contends.
As for the governance being exercised at private equity firms internally: “We hand all our money back to our investors every three to four years, we effectively put ourselves up for re-election. Financial performance is of course crucial, but I can tell you right now, if we were to embarrass our investors by behaving irresponsibly and killing jobs, no one would give us any money.”
In essence: those criticising private equity are failing to grasp the checks and balances built into its business model.
Nevertheless, with unprecedented amounts of capital being raised and invested at high prices, is private equity not in danger of overreachinge “There is that danger, and the industry needs to be careful,” Jackson agrees. “What's needed is a careful and honest approach. But I don't believe that mature private equity investors intentionally do the marginal deal or put portfolio companies into a fragile state for the sake of a quick flip.”
Jackson, who is in his 21st year with the firm and took over as managing partner in 2001, is confident that Bridgepoint is well equipped to cope with the numerous challenges facing it at this point of the industry's evolution.
There has been a high degree of consistency to what the firm has been doing for many years. It began as the UK-focused private equity arm of UK retail bank NatWest in 1984 before becoming independent in 1999. Its network of offices in Birmingham, Frankfurt, Madrid, Milan, Paris and Stockholm is well established, and Jackson is fond of saying that the pan-European strategy is “not aspirational”: the Paris office opened in 1991, and Bridgepoint has bought and sold businesses in 14 European countries. 17 different nationalities are represented on the payroll.
“Now practically all our portfolio companies source internationally and are facing global competition, and we have added resources to understand international markets better.We have no choice – the world is coming to us.”
But change has also been a constant theme. For example: the firm, which is currently investing Bridgepoint Europe III, a €2.5 billion mid-market fund closed in May 2005, has significantly reduced the size of its investment portfolio. In 2000, it owned 200 businesses; today, 38 larger companies make up a more concentrated portfolio.
Geographically, the firm continues to develop as well. In February this year, Bridgepoint opened a new office in Warsaw, both to start making investments in Poland and its neighbouring economies, but also to help Western European portfolio companies do costefficient sourcing in the Central and Eastern European region.
Asia is also demanding attention. Jackson notes that until relatively recently, European companies worth less than €1 billion in enterprise value were able to operate as regionally focused entities. “Now practically all our portfolio companies source internationally and are facing global competition, and we have added resources to understand international markets better. We have no choice – the world is coming to us.”
He cites the example of Worldmark, a manufacturer of data labels based in Scotland which Bridgepoint acquired in 1999. “After we bought it, we realised that Worldmark wouldn't survive with a UK manufacturing base. We moved everything to China including the CEO, who lived there for three years.” The turnaround worked, and Bridgepoint sold the once-struggling investment in January 2007 “for an adequate return”.
|Capital under management: €5 billion||Italy: Guido Belli|
|Offices: Frankfurt, London, Luxemburg, Madrid, Milan,||Nordic: Graham Oldroyd|
|Stockholm and Warsaw||Spain: Jose Maria Maldonado, Juan Lopez Quesada|
|Founded: 1984 (formed as NatWest Equity Partners;||Marketing/communications: James Murray|
|independence and rebranding in 1999)||Advisory committee: Penny Hughes, Lord Chris Patten,|
|Total employees: 102||Francis Mer, Sir James Crosby, Sir George Mathewson,|
|Investment professionals: 57||Alan Milburn|
|Partners: 22||Current fund: Bridgepoint Europe III|
|Managing partner: William Jackson||(May 2005, €2.5 billion)|
|CFO: Raoul Hughes||Limited partners: (by commitment)|
|Investor services: John Barber||45% US, 40% Europe, 15% RoW|
|Country heads/regions: UK: Kevin Reynolds||Capital invested since independence: €3.4 billion|
|Central Europe: Khai Tan||Capital returned since independence: €5 billion|
|France: Benoit Bassi||No of portfolio companies: 38|