Vintage Moulton

Given the identity of its guest speaker, a celebratory Guernsey Finance event was always likely to have a bitter-sweet outcome, writes Andy Thomson.

At Old Billingsgate gallery, the site of a former fish market on the banks of the Thames, Guernsey Finance officials were clearly pleased to have attracted charismatic Alchemy Partners boss Jon Moulton to their “Private Equity Masterclass”, an event designed to highlight the success of the small Channel Island in attracting private equity fund management business (and perhaps, in the process of telling the story, lure some more).

The presence of around 150 attendees shoe-horned together in a claustrophobic ante room suggested that Moulton had, as usual, proved a compelling attraction. But I couldn’t help wondering whether the enthusiastic Guernsey representatives had a clear notion of what they had let themselves in for.

The first part of the presentation kept smiles on faces. Moulton, now a resident of the island and a fan of its favourable tax laws and professional levels of service, was of the view that if London’s private equity firms haven’t yet considered Guernsey as a fund location of choice, perhaps they should. Many already have: in 2007, the net asset value of private equity funds in Guernsey grew by two-thirds.

So far, so good. Then came a sudden rumble of thunder from a loudspeaker within the room with a cluster of menacing grey clouds on the overhead projector. Moulton’s assessment of the market was underway.

What followed would have come as no surprise to those by now familiar with Moulton’s prognostications of late – gloomy and entertaining in equal measure. Paying the highest price in auctions by leveraging target companies “to the armpits” before swiftly unloading them onto other private equity firms had been, for a while, “a very good idea – it just didn’t look right.” There were other things that hadn’t looked right either: for example, vendor due diligence “based on reported speech and powerpoint presentations”; or “proforma, normalised, adjusted EBITDA”, based on – well, let’s just say questionable assumptions. Such quirks will inevitably “come home to roost”, Moulton noted.

And he didn’t stop there. Deals struck at 8 times EBITDA – never mind the handful that touched peaks of 10 or 11 times – only need “a small bump in the road” to be in trouble. Defaults kill companies, he pointed out – and it was clear he anticipates plenty. A lack of covenants would only delay problems, not avoid them. Returns, ultimately, will slump into negative territory. If, that is to say, GPs are honest and mark to market. If they’re not, Moulton said, expect litigation in the fullness of time.

At the conclusion of the speech, and after a short period of silence, Connie Helyar of fund administrator Ipes, which has a Guernsey office, gamely asked Moulton about the fundraising climate – and, by implication, whether Guernsey’s private equity boom would continue. He replied that, as distributions to LPs dry up, it won’t be long before investors are over-allocated, the tap will be tightened and fundraising will decline.

Even Moulton was capable of seeing through the gloom, however. “At the previous [fundraising] rate, you would have run out of capacity soon anyway,” he pointed out to his hosts. Laughter ensued – but I would hazard a guess it was of the nervous variety.