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Border lines

Sitting in a television studio the other week, I was asked to comment on the latest cross-border acquisition by a continental company of a British concern. In this case, the acquirer was Spanish – again.

Fomento de Construcciones & Contratas (FCC), Spain’s third-biggest construction group, had agreed to buy Waste Recycling Group (WRG), a waste management business. It had been bought in 2003 by Terra Firma Capital Partners, the private equity business set up by financier Guy Hands when he left Japanese investment bank Nomura. Indeed, it was the first deal he completed so looking at how it had panned out for Mr Hands and his fellow investors was bound to be interesting.

This was an example of private equity reshaping a business before selling it on. The waste management business of Shanks was grafted on to WRG and a renewable energy operation separated out. Overall, the total cost of these acquisitions looks to be in the region of 700m. The Spanish agreed to pay 1.4billion for the waste management businesses and Terra Firma still owns the renewable energy operation, which is expected to be floated on the stockmarket for around 700m. Not a bad return for a three-year investment in my book.

Of course, not all private equity deals will deliver such spectacular returns but it does go to show why investments of this nature are so popular at present. Little wonder that KKR chose this year to list a fund on the Euronext exchange in Amsterdam. KKR Private Equity Investors raised around $5bn as a consequence of the flotation, bringing the total of funds they have raised to some $30bn.

Private equity does not always get a good press. The use of complex financial structures and the loading of the businesses acquired with significant debt have earned criticism in the past. Moreover, the moral dimension – the fact that those engaged in this activity seek only to make, hopefully swift, returns for themselves and their investors rather than build businesses and create employment and wider wealth can be hard to digest. Yet the reality is that these firms can fulfil a useful purpose, taking out weaker businesses or marrying complementary operations.

The availability of private equity investment vehicles has been growing for some little while. Interestingly, figures published recently by the Association of Investment Trusts disclosed that the best-performing trusts over the past 10 years had indeed been those engaged in private equity. Little wonder, if returns of the magnitude of that achieved by Mr Hands are anything to go by.

Some of the private equity funds are well known to the sophisticated investor. 3i is perhaps the most famous in this country but there are plenty of familiar names among the 30 or so funds listed in the Cazenove Private Equity Bulletin. How suitable they are for the average private investor is hard to assess. The appetite for them is significant, however, and this despite the fact that the underlying portfolios are notoriously difficult to value – for obvious reasons.

But the attraction that funds such as these have for investors is symptomatic of the way in which riskier assets have increasingly been in demand. Remarkably, despite evidence that the shake-out in markets that took place in May and June is leading to a more risk-averse approach by investors, pivate equity seems, if anything, even more in demand. But then, with corporate activity still continuing at a high level and deals such as the FCC acquisition of WRG demonstrating just how much money can be made, little wonder that people will pursue that elusive pot of gold.

Brian Tora is investment communications director at Gerrard Investment Management


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