One of the big questions raised by the economic travails of the past 18 months has been the issue of just how private equity ownership would pan out for the UK's recession-hit middle-sized businesses. So many of the nation's not-too-big, not-too-small firms were taken private during the mid-noughties LBO boom - and loaded up with debt in the process - that there have been numerous dread warnings that, for no end of them, the downturn would make the repayment burden too great to carry.
But rarely is reality so conveniently black-and-white. There have been casualties, especially among firms whose owners were less interested in them as ongoing businesses than in the cash to be extracted from them - as our feature on off-licences (pp48-52) demonstrates.
But for every PE-owned basketcase out there threatening to collapse under the weight of its own borrowings, there is another such firm which has been through the storm and emerged weatherbeaten but intact, and potentially more vigorous as a result of the experience.
Take tool and plant hire business HSS, bought at the height of the LBO boom in June 2007 for £310m by Archie Norman's investment company Aurigo and hedge fund Och-Ziff. The intention was to restructure the firm and move it out of DIY and into the more lucrative trade and building markets before selling it on at a healthy profit.
With Norman as chairman, it was to be a classic turnaround job, but it hasn't quite worked out that way. 'It went like a train for the first 18 months. We used to say that we were doing too well, that it was hard to explain why big changes were needed when times were so good. But since the recession, it's been tough,' he admits.
In case you've forgotten, Norman rescued Asda in the '90s before selling it to Walmart for £6.5bn, then dragged Energis back from the edge of disaster too. He's done a stint as a Tory MP, and last month added to his portfolio one of the most uphill jobs that UK plc currently has to offer: chairman of struggling broadcaster ITV. No shrinking violet, he means it when he says things have been tough.
After record 2008 revenues of £173m, 2009 began badly and got worse, as sales in two quarters plummeted. Even including the boost given by a much-improved second half, revenues were still off 13% over the year. 'Things have clearly not gone according to the original plan,' says Norman with restraint.
Inevitably, HSS began to feel the weight of its financial gearing dragging it lower in the water. As of 31 December 2008, net bank debt (the sum owed by the business to its banks) stood at £196m, while total net debt (including shareholder debts as well as those of the business itself) were at £330m. Enough to convert an operating profit for the year of £43m into a loss of £60m after charges and exceptional items.
By mid-2009, stories were circulating that the firm was in danger of breaching its bank covenants. This is the corporate equivalent of exceeding your agreed overdraft limit, except that the penalty for doing so tends to be rather more than a £35 fee and a stiff letter from the manager. Media reports speculated that, if covenants were breached, a partial or total sale of the business might be forced. 'We cut costs and battened down the hatches,' says Norman.
As its troubles deepened, senior managers at HSS were meeting their bankers with increasing urgency. By last spring, says chief exec Chris Davies, it was clear that the firm couldn't go on without revising the terms of its loans. 'It was the covenants - those covenants were set when the market looked a lot better than it does today.'
Norman, Davies and the team were close to a position that all the textbooks say you must avoid - over a barrel and with the bank calling the shots. But, says Davies, they had crucial things in their favour. First, cashflow remained healthy. 'It was never a cash issue. We're going to make around £30m this year and we will pay the bank £15m, so we have plenty of cash.'
Second, they had a decent relationship with their lenders, led by Barclays. 'Even in the good times, we had regular meetings with the bank; they always knew what was going on. So when we reached the point that we needed to renegotiate, they knew it was coming. There were no surprises - the worst thing you can do is to surprise the bank. Banks don't even like nice surprises.'
Davies believes that being owned by private equity boosts HSS's credibility, helping it to punch above its weight in the crucial bank talks. 'It gives us access to a very high calibre of senior people. You wouldn't normally expect to see Archie Norman as chairman of a company this size, would you?'
So between them, the HSS team was able to cut a new deal with the bank. Says Norman: 'We managed to negotiate our way through it, we got a good banking agreement and the damaging uncertainty is gone.'
The fact that private equity-owned firms don't have to live up to the same standards of openness as their publicly held rivals has given rise to one of the other major criticisms of the model - that it's hard to tell what's really going on, because the figures are kept secret.
But it doesn't have to be that way, says Davies. 'There's never any secret about our financial performance. I don't believe in the "need to know" approach. Our top team consists of 30 people, we all get together once a month and everyone gets the same pack - the one that I also send to Barclays and to Archie Norman. Everyone has the same information, that's how I like to work. I am not a very political animal.'
With the new banking terms in place, it was time to get back to reviving the business. Davies - who worked for Disney and Staples before he joined HSS in 2006 - thinks the PE model helps speed things up here, too. 'Your investors aren't remote fund managers, they are on the board. The interaction is more intense and you speak much more frequently. It's also much less bureaucratic - we can take decisions in a day or two that public companies would think about for weeks.'
Before the downturn, Davies had already identified his strategic priorities. 'When I joined, it was very hierarchical and product- focused, and there was no salesforce. Very old-fashioned. I had been used to big American companies, so it was all a bit of a shock.'
Founded in 1957 in London's Baron's Court, HSS had grown up serving the needs of DIYers and small tradespeople, hiring out ladders, power tools and lifting equipment. But the market was changing - cheap tools from the Far East meant that more and more of their traditional punters were buying rather than hiring equipment.
'We needed to go after a different kind of customer. When I joined, it was all DIY. Only 3% of our business was from national accounts.' To get at these new customers, Davies undertook a wholesale re-jig of the 500-strong branch network, closing many of the traditional small high-street branches in favour of fewer, larger depots. HSS now has only 230 outlets, a dozen or so of them brand-new, large-footprint warehouses serving national customers 24/7. The firm also operates a successful and growing training division.
'I took all the money I saved from closing branches and invested it in a sales team,' he says. As a result, HSS is now well on the way towards meeting its target of 30% sales from national customers, supplying fit-out tool kits to the Sainsbury's shopfitting team, as well as managing the specialist tool requirements of lift engineers Otis and the trackside small-equipment needs for the whole of Network Rail.
'Every night, our teams go out to Network Rail depots all over the country and swap all the tools and equipment there for new sets, which are fully tested and maintained and have a full usage history.'
Although practically minded homeowners can still hire a ladder to clear their gutters, the new-look HSS is about helping trade customers mitigate the risk of equipment failure, according to Davies. 'For most firms, equipment hire represents a tiny proportion of their total contract values. Labour is the big cost. But if the equipment fails, you can have all those expensive people standing around, unable to work.'
As a result of the downturn and ongoing restructuring, about 300 jobs were lost in 2009, some 15% of the total workforce.
What about the accusation that PE investors are only in it for the money and have little understanding of businesses they get into? 'I have talked to people in other firms where there's a sense of "them and us". That's very damaging,' says Davies.
'I try to draw the investors in a bit, to use them more effectively. For example, our investors have access to great analytical people, so when an opportunity to buy a business comes along, I ask them if they would mind having a look at it for me. There's a resource there we can use.'
HSS was also fortunate, says Davies, in the quality of its in-house IT system. 'Our IT is a great asset, it's a bespoke system that was developed here in the '90s, and many of our rivals still don't have anything like it. It tells us where all our equipment is at any given time, and allows us to move it around the country to where it is needed very easily.'
Building on that capability, HSS has launched an online hire management service called LiveHire, which allows its trade customers to manage all their equipment needs on the web in real time. It's particularly popular, as it eliminates the thorny issue of what's known as off-hiring. A regular gripe levelled at hire firms is that they make a lot of money from kit that customers don't need any more but forget to 'off hire' (return) promptly. With LiveHire, 'customers can off-hire equipment they don't need at the click of a mouse'.
What about the investors' exit strategy? Isn't knowing that your three-year get-rich-quick plan has suddenly turned into a fiveor even 10-year marathon de-motivating? Says Norman, who has some of his own dosh in HSS: 'In private equity, investors need an exit strategy, but it's not healthy to think about the business in those terms. Our role is partly to help the investors make money, and we haven't done that yet. But what we do is maximise the value of the business through the stewardship we provide.'
It would be glib to suggest that HSS has survived relatively well because of its ownership model. But it might very well have helped, and certainly hasn't proved the fatal drag that critics might have predicted.
For Norman, who has worked in both private equity and plcs (and who has well and truly stepped back into the limelight at ITV), success under either regime calls for the right state of mind. 'I try to think what owners would do - and I mean real owners, not pension funds.' Do that, he says, and the difference between the two capital models is really not so great after all.