Private equity group Terra Firma said that it had written off half of the €2.6bn it invested in EMI, the record label that has plunged in value since the deal was completed in August 2007 (just as the credit crunch hit - whoops). As a result, Terra Firma was forced to take a total impairment charge of €1.37bn last year, with the value of its portfolio slumping 45%. In other words, a pretty disastrous year – though investors in the fund do at least have the consolation that boss Guy Hands has chosen to give back all the performance bonuses the firm has earned since 2004…
In the firm’s annual review, Hands said ‘the operational performance of our portfolio has been strong, but the investment climate has been harsh on the valuations of our businesses’. So he’s decided to give back the €80m in carried interest (basically the performance-related bonuses the firm gets when a company does well) that have been accrued in the last five years - around half of which was supposedly due to go into his own deep pockets. This, he said, was ‘absolutely right’, on the grounds that ‘our investors have suffered and therefore our rewards should suffer at the same time’. In fact, Hands added scathingly, if the banking world had taken a similar long-term approach to incentives, we might not be in the current mess.
It’s likely that Hands didn’t technically have a choice, since he’s apparently required to do this under the terms of his agreement with investors (or limited partners, as the PE lot prefer to call them). But this clause is by no means ubiquitous in the PE world, so its inclusion shows that Terra Firma takes a more enlightened approach to its investor relationships than some. Nonetheless, there’s clearly more pain to come for his LPs. Until pretty recently, Hands was apparently insisting that he’d make his money back on EMI eventually - and his cost-cutting measures do seem to be bearing some fruit (with profits up from £12m to £104m at EMI Music). But this write-down may suggest the firm is resigned to losing at least some of its shirt.
A few years ago many in private equity seemed to think that they’d make money in good times and bad, but the events of the last year have exposed this as a myth. Candover’s listed UK fund has just admitted that its portfolio has halved in value in the last year (its investment in Gala Coral is now apparently worthless - it seems bingo's not such a good bet after all), while KKR’s listed fund took 32% of write-downs last quarter and Blackstone said its portfolio has lost nearly 30% of its value. So it’s clearly a rotten time to be a PE investor – even if you’re backing the most prestigious fund managers...
In today's bulletin:
UKFI gets a kicking - and Rock sinks to £1.4bn loss
Terra Firma hands back £70m after EMI slump
Doing business in the family way
Denise Kingsmill: Tone comes from the top
Route to the Top: Eight ways to manage change