Hysteria over high-profile buyouts isn't helping the North West's providers of private equity in a tough market. Neil Tague looks to redress the balance
Not many business books trouble the best-seller lists. But nearly 20 years after its publication, Barbarians at the Gate, which documents the Kohlberg Kravis Roberts-led takeover of US food giant RJR Nabisco in 1988, remains an instantly recognisable classic, due largely to how the title evokes imagery of bloodthirsty raiders who'll stop at nothing to get their hands on a business.That message has been referenced heavily in recent months. With money swilling around private equity funds, giant brands previously thought of as untouchable, such as Boots, Sainsburys and British Airways, are seen as threatened.
European private equity deals in 2006 totalled x80178bn, up 41 per cent on 2005. In the UK, food giants Birds Eye and United Biscuits have been bought in billion pound-plus deals. It is estimated that one in five private sector employees now work for private equity-owned companies.
While Manchester has one of the UK's largest private equity communities, it has a problem of perception. With the exception of heavyweights like Montagu, it is a community that deals with mid-market companies, a community that is at pains to point out that the world they work in is far from barbarian country.
"There is a massive difference in how we work and the level these guys operate at," says Pete Clarke, director of Manchester private equity house Isis. "We're driven by different motives. Our deals are driven by making the business more attractive to a wider pool of potential investors in the future. Generally, that's done by investing in and growing a business, not by sacking people to falsely inflate profits."
Mike Reeves, director of corporate finance adviser Clearwater Corporate Finance, is bullish in defending private equity: "Of course private equity houses focus on profits - every business does. Their aim is to maximise shareholder value and they do so very successfully. Pension funds account for a significant proportion of private equity funding and in return receive a large share of the profits. If private equity companies didn't seek to maximise value, they would effectively be reducing the value of people's pensions and acting against the nation's long-term interests."
Reeves adds that in comparison with publicly quoted companies, which are tied into a quarterly reporting structure that can make long-term planning difficult, the free hand that private equity operators enjoy is used to the investees' benefit. "Private equity investors take a more strategic approach than public limited companies. As they are not subject to the same pressures to achieve steady earnings growth and pay regular dividends, they have greater autonomy to make decisions that benefit longer-term interests. They are also more likely to return funds to investors when they are not required, thus creating better shareholder value," he says.
"There has been criticism about private equity companies engaging in highly leveraged deals. However, it is not in their interests to take on debt levels a business cannot afford to repay. As for accountability, private equity houses are answerable to their investors. They are at least as attuned to corporate governance than most public companies."
One would expect the dealmakers to defend themselves. But the investee companies are also prepared to speak of their positive experiences.
Take Decorpart. The Nelson-based business, which makes aluminium components for the cosmetics industry. The company found itself in limbo in 2005 when previous backer 3i had seen enough of a then ailing manufacturer. Chief executive Nigel Clark takes up the story: "We were in a funny situation. We had virtually done a $50m deal with Alcan, dependent on us building a facility in China. We thought it was a golden opportunity and approached Endless in November 2005 to look for some backing. They stepped up to the plate."
The factory in question started production in March 2007, a year after turnaround specialist Endless backed a £35m management buyout (MBO). Now the market is on the up, orders are increasing and a new high-margin specialist product range will soon be launched. Decorpart expects minimum 20 per cent sales growth during 2007.
Clark says: "I guess there are those in private equity who asset-strip companies, but our experience has been good. They're very involved in a positive way and it feels like we're working as a team in what have been difficult circumstances. They're not a walkover by any means, expectations are tight, but it's all going well."
Neville Johnson, a Manchester-based supplier of bespoke furniture, is another business that Endless picked up from 3i. Chief executive Nigel Pailing says: "We were part of a 1999 MBO backed by 3i and HSBC and although both were supportive they both decided to get out. In February 2006 Endless came in. It enabled us to restructure our debt more efficiently and allowed the business to breathe.
"We've been able to carry out a much-needed capital investment programme to update our machinery - cash had been very tight before then, but it was necessary. Endless have done everything they said and more and we're very comfortable with each other."
There are also cases where private equity buyers have supported businesses in places where a trade buyer would have rationalised. Craig Hopwood, senior investment manager at Aberdeen Asset Managers, says: "We invested in Plaxton, the coach builder. Scarborough's a decent enough place to run a business from, but is it at the centre of an automotive cluster? No. A trade buyer would look to make savings by consolidating that location with another. People forget that when companies buy other companies they do close things down."
Isis' Clarke says: "For me, the acid test is if the management team believe we're adding value. With Americana Clothing we took it from a £330m-turnover business to £380m by developing strategy, developing the team and upgrading the supply chain. We can add value by leveraging our experience from different businesses - there are a lot of common themes regardless of the sector."
Andy Marsh, director of Gresham Private Equity in Manchester, says: "You can either cut costs or grow sales and you can't do the latter on thin air. You can invest in the sales force or make a capital investment in production, like at Flowcrete, where we've improved productivity 7 per cent."
Research from the British Venture Capital Association (BVCA) suggests Marsh has a point. In the five years to the year 2005 to 2006, private equity-owned businesses increased staffing levels by 9 per cent, a higher growth rate than companies in the FTSE 100 or FTSE 250.
Is private equity completely blameless? Hopwood concedes that there may be some culpability: "There are some secretive types in the industry and, for the general good, we probably need to talk more. It's not all smoke and mirrors, but it must appear like that to some people. We don't want to be outcasts. We're mostly local businesses helping other local businesses."
Stuart Warriner, who heads PricewaterhouseCoopers' corporate finance team in the north, says: "The industry is quickly realising that it needs openness and should do more to articulate the good that it does."
The BVCA has set up a working committee to look into disclosure. A step in the right direction, feels Hopwood. "There's nothing fundamentally wrong with most of the industry, but we need to take steps to ensure we're not hit with a big stick," he says.
On a global scale, commentators are warning that private equity has indeed over-reached itself: that the mega-deals caused by funds simply needing to invest money somewhere are simply too highly geared to be sustainable. But in the mid-market, there is no panic.
Clearwater's Reeves says: "Private equity is here to stay. The reason investors support it is that it provides superior returns. Public companies who want to avoid unwelcome attention from private equity buyers would do well to sharpen up their own act, ensure they are achieving maximum efficiency and creating the best possible value for shareholders."
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