On Wednesday morning, Guy Hands, the founder and chairman of Terra Firma, took his seat in the witness box of court number 26 in the Rolls Building, the modern home of the UK’s High Court of Justice.
This was part two of the legal battle between Terra Firma and Citi, which it claimed pushed it into buying EMI under false pretences in 2007. Terra Firma lost the first round – a court case which took place in New York in 2010 – but that verdict was overturned in 2013, opening the door to a retrial.
The ill-fated investment in EMI ultimately cost investors in Terra Firma’s second and third funds around £1.6 billion ($2.3 billion; €2 billion), which the firm sought to win back from Citi in the courtroom.
This afternoon Hands dropped the case.
“These claims were brought in good faith,” he said in a statement on Friday afternoon. “However, it has become evident that our documentation of the fast-moving and complex events, and memories of these events after nine years, are no longer sufficient to meet the high demands of proof required for a fraud claim in court.”
Citi said it was “very pleased that Terra Firma has unreservedly withdrawn the allegations, agreed to the dismissal of the proceedings and will pay Citi's costs in relation to this matter”.
The stakes had been high. For Terra Firma’s LPs, a successful claim would have meant a marked improvement in the performance of their investments.
Terra Firma Capital Partners III, the €5.4 billion 2006-vintage fund which bore the brunt of the EMI investment, was valued at 0.6x investors’ money as of March 2016. Approximately a third of that fund’s equity (circa €1.6 billion) has been absorbed by the EMI loss. Had the claim been successful – according to a “back of a cigarette packet” calculation – it would have pushed the fund nearer to 0.9x.
Citi’s legal counsel presented the case as a last roll of the dice by a man whose reputation had been destroyed and who saw this as a route to redemption. “The outcome of this litigation is extremely important to you professionally and personally. That is correct?” asked Howard in the early stages of his questioning. “This is how you resurrect your reputation.”
Hands maintained the opposite was true: this legal process – pursued in the interest of investors – further tarnished his already battered reputation. His ambitions for Terra Firma to become a “mega-firm” had been thwarted not necessarily by the investment loss relating to EMI, but by the aftermath.
“What has caused our problem, is that we haven’t moved on,” Hands told the court. “The reality is lots of firms lost £1.5 billion or more and moved on.”
Well now it seems Hands will move on. The firm has been busy building a new team and readying a return to investment mode, using balance sheet equity that totals more than €1 billion, says Hands.
“The matter is now closed,” he said in his statement. “Terra Firma is now looking to the future.”