From the outside, all may seem quiet in the world of private equity, but looks
can be deceiving.
Away from the headlines spelling out the threat of recession, hidden from the
economic doom and gloom. the masters of the universe are quietly rejoicing.
For them, it is only a matter of time before the market will have fallen far
enough for their next shopping spree to begin — and this time they will be
shopping in the bargain aisle.
The truth is that while the credit crunch has frozen private equity's buying
bonanza in its tracks, a thaw is looming. In due course, it will provide the
cash-rich financiers with some of their richest pickings.
“The broad thesis is what happened last time will happen this time — and that
means there's a period of opportunity coming up here for private equity,”
says Robert Easton, a managing director of Carlyle, the American private
equity firm, who runs its British buyout business. “Right now, we're still
in a period of disconnect, where buyers and sellers are living in two
different worlds.”
A world in which sellers are clinging to pre-crunch valuations and buyers are
scoffing at prices, a stand-off that Dr Easton calls “valuation inertia”.
“So what needs to happen is that overall valuations will come down over
time. The FTSE is down, but it's not horrible yet.”
In the last downturn, the slump began in 2001, but Dr Easton argues that it
was not until the back end of 2002-03 that the good deals got done. “Now
we're about six months into that, so it will be the end of this year at the
earliest before we start to see those deals happening. I don't think the
economy will have recovered by then, but you have to buy ahead of that.”
In the meantime, the buyout business needs a selective touch and a willingness
to dig a lot deeper for that all-important equity.
With a glint in his eye, Dr Easton recalls a deal that Carlyle pulled off on
Boxing Day, 2002, in which the group had to stump up 50 per cent of the
price tag in cash to clinch the deal. It may sound like a lot, but the
market picked up and Carlyle was able to take out half its cash about a year
later.
At the height of the M&A frenzy last summer, the amount of equity in
so-called “mega deals” had fallen to about 22 per cent. That compares with a
long-term average of about 30 per cent for all deals and about 35 per cent
today.
Yet being forced to pause for breath is no bad thing for an industry that was
going at breakneck speed, tripping over itself with acquisition after
acquisition. It is also a relief to be out of the limelight after last
summer's high-profile Treasury Select Committee investigation.
Dr Easton was one of the private equity bosses who took the stand in defence
of his industry after a series of attacks from trade unions and politicians.
“It was an intense experience at the time, but the basic thrust that the
industry needs to do a better job of getting its message out there was
right,” he says.
Ironically, the credit crunch did private equity a favour. Just as the
arguments around capital gains tax and transparency were reaching fever
pitch, along came the sub-prime mortgage meltdown in the United States and
attention switched away from private equity and toward the banks.
Nevertheless, it was not before Sir David Walker had introduced his code of
conduct for the besieged industry that many - not Carlyle,
Dr Easton says — are now begrudgingly implementing. Unlike many who criticised
the guidelines as a harsh, knee-jerk reaction to union-led propaganda, Dr
Easton believes that the private equity industry cannot afford to sit on its
laurels. To drive that message home, Carlyle and Dr Easton helped to set up
the new Global Buyout Committee, which was announced last week by the
British Venture Capital Association, the industry's main lobby group.
The line-up of participants reads like a Who's Who of the London buyout world:
David Blitzer, of Blackstone; Philip Costeletos, of TPG; Lord Hollick, from
Kohlberg Kravis Roberts; and even the publicity shy Donald Mackenzie, from
CVC — and many of his colleagues say privately that it was Dr Easton's
efforts that persuaded them get on board.
“The climate has changed, but in my mind we should absolutely not stop the
messages getting out there,” Dr Easton says. He will chair the new
committee, which plans to meet once a month, but concedes that there is a
“range of willingness” to engage with Walker and the wider general public,
even if he is optimistic about his chances of getting private equity to sing
from “a common hymn sheet” on every topic.
“I certainly don't expect to have everyone communicating with the same voice
the whole time, because that's like asking the FTSE 50 to have the same
voice and that would never happen. But I am very encouraged by how the
bigger firms are behaving on this. The Treasury Select process has
kickstarted a lot more dialogue between government, the unions and private
equity and dialogue in these circumstances is good.”
Dr Easton talks with ease and authority about the FTSE and the differences
between public companies and private equity. After attainting a doctorate in
organic chemistry at Oxford, he worked as a banker and then did stints at
two public companies, Trafalgar House and Invensys, where he was responsible
for acquisitions and disposals.
After selling so many businesses to private equity, he finally decided to join
them at Carlyle in September 2000.
He continues to specialise in chemical and industrial companies and his face
lights up at the prospect of snapping up a few more underperforming
businesses hit by their exposure to a weak US dollar.
“There's a cycle, but there's billions of euros of private equity money to put
to work and billions to put to work on banks' balance sheets,” he says.
Nonetheless, it will take at least two years, he believes, before the
industry is able to pull off another $10 billion deal.
When private equity does emerge with guns blazing once again, there will be a
much more formidable competitor in its back yard. The sovereign wealth funds
have made their mark already by bailing out some of Wall Street's biggest
banks — Abu Dhabi even has a small stake in Carlyle — but it won't be long
before they are competing with Carlyle and others head-on.
It is not a prospect that intimidates Dr Easton, who thinks of the funds as
competitors already, but he does believe that they need to become more
transparent in the same way as private equity funds.
He has plans to try to get groups such as Dubai International Capital, “the
most Western of Middle-Eastern sovereign funds”, on the Global Buyout
Committee, but he acknowledges that it will be tough given that the funds
are not regulated in London.
One senses that Dr Easton will use every bit of his influence to try to change
that. For the man who has taken on the Treasury Select Committee and
survived, sovereign wealth funds and entrepreneurs such as Sir Philip Green
are no daunting prospect.
“If the suggestion is that we're going to disappear back into a hole in the
ground, it's not going to happen.”
The leader questioned
If you could change one thing in the financial and commerical environment
what would it be?
Trade more innovation and creativity, for less red tape and administration
Who is or was your mentor?
My parents, a constant source of great advice and the best back team on the
planet
What is the most important event of your working life?
The decision to work at Carlyle
Does money motivate you?
Yes, but fun motivates me more
What does leadership mean to you?
Thoughtful and fair, yet forceful and decisive (no dithering permitted)
Which business person do you most admire?
Sir Denys Henderson, who always challenged the obvious and made the difficult
decisions
What gadget must you have?
Unfortunately my BlackBerry, which is never far from my side, but I’d prefer
if it were my iPod
How do you relax?
Family movie night, holidays in Scotland, dinner with friends and watching my
kids ice skate
CV
Born: Hamilton, Scotland
Age: 44
Education: John Hanson School, Andover, Hampshire; BSc Chemistry,
Imperial College, London; Doctorate in organic chemistry, Oxford
Employment:
1987-90: Credit Suisse First Boston, M&A advisory; 1990-95: Wasserstein
Perella, also M&A advisory; 1995-96: Trafalgar House; 1996-2000:
Invensys, corporate M&A departments; 2000-present: The
Carlyle Group
Family: wife and two daughters
