(Reuters) – One of the best ways to get inside the head of British private equity boss Guy Hands is to study what gift he gives for Christmas. For years, Hands has sent friends and business associates a book he has recently read along with a letter discussing the work. The gift is designed to be both thoughtful and thought provoking.
Last Christmas, Hands chose “The Trouble with Markets,” a work by London economist Roger Bootle. “I was particularly struck by his view that financial markets are distributive by nature and provide little benefit to society, rewarding those involved in markets out of proportion to the value of their work to society,” wrote Hands of the book, which is subtitled “Saving Capitalism From Itself.”
“That analysis seems particularly apt in view of the quick and remarkable return of the bonus culture to the banking world. Furthermore, in my view, such high pay levels attract many of the most talented individuals in society thus removing them from more entrepreneurial, creative or leadership roles in the ‘real’ economy.”
Cynics might laugh at the idea of Hands as a defender of the real economy. In his heyday, the outspoken financier was known as the king of British private equity. More than anyone, Hands brought to Europe the idea of using cheap debt to pump apparently miraculous returns from dowdy businesses.
Three years ago, at the height of the bubble, Hands and his group Terra Firma [TERA.UL] bought British music company EMI — home to artists from the Beatles to Kylie — for 4 billion pounds, loading up on debt to finance the deal. As the financial crisis tightened, the deal began to unravel. Crippled by debt and spiraling interest payments and hit by a stronger U.S. dollar (in which some of the debt is priced), Terra Firma has struggled to keep control of its prize.
The EMI deal has become a symbol for the worst excesses of the boom era private equity world. Hands himself stands as “an example of what has always been wrong with private equity,” says a former colleague at Nomura, who asked not to be identified so he could speak frankly. “They rode the wave of a bull market in debt but were not humble enough to know that was what they were doing.”
ALL THAT GLITTERS
Famously tough and a fiery-tempered negotiator, Hands, 50, seems determined to hold onto his music firm. Despite debts of 3.3 billion pounds, Terra Firma has been unwilling to give its bankers Citigroup (C.N) an inch in restructuring talks.
On June 14, Terra Firma is due to stump up the 105 million pounds needed to push EMI back within the terms of its loan. Failure would put the music company in the control of Citigroup, which advised Hands on EMI and put up 2.6 billion pounds for the purchase. The relationship between Hands and his creditors has so soured over the past couple of years that Terra Firma is suing Citigroup, accusing the bank and its principal dealmaker David Wormsley of fraud. Citigroup is contesting the suit.
But if the cash injection happens — Terra Firma seems confident it has convinced enough of its current investors to open their wallets again — Hands will have another year to nurture his real economy company back to success. “Terra Firma is putting it all into EMI. If it blows up, they are finished. It’s that binary,” said an investor who sold his investment in Terra Firma in April because he didn’t want the fund sinking more money into the music company. “It’s a high concentration, high risk strategy.
* Video: Reuters Insider’s Angeline Ong takes a look at Guy Hands and his EMI deal. Plus: What EMI should do to increase its buzz: link.reuters.com/jah98k
* Video: Reuters Insider’s Richard Lee digs through the details of the EMI deal metrics: link.reuters.com/bar98k
* Factbox: Abbey Road Studios — recording history
People who know Hands say he has always been an outsider. Singled out as a misfit at school, he was diagnosed with both dyslexia and dyspraxia, a motor learning difficulty that can affect co-ordination.
Numbers presented no such challenge. Hands could find things in a company’s balance sheet that not even the company had noticed. He graduated from Oxford with a third class degree in politics and economics — he dropped philosophy after a disagreement with a professor as to whether quantity or quality of pleasure was more important; Hands went for quantity — and joined Goldman Sachs as a bond trader. The year was 1982 and London’s markets would soon boom thanks to the ‘big bang’ of deregulation. By 1992, Hands was heading a new Goldman unit called Global Asset Structuring.
Securitisation was still relatively unknown in Europe — but Hands aimed to change that.
His plan was to work out ways to securitise assets in unfashionable industries such as real estate. His chance came when he joined Japanese bank Nomura, which promised him use of its large balance sheet at a low cost and with free rein to do deals. Hands dived straight in, financing everything from UK Ministry of Defence houses to train engines and carriages to high street gambling chain William Hill.
His financial wizardry was the envy of colleagues and rivals alike. Early successes were based on his ability to identify a target company’s stable cash flows and then, once he had bought the firm, refinance the purchase by using securitisation based on those cashflows. This was years before securitisation became tainted because of its association with sub-prime lending and the credit crunch.
Nomura’s principal finance group, led by Hands, also invented the concept that a bank could compete with private equity by using its own capital to buy assets.
Not all of the deals worked. Nomura’s purchase of leading UK consumer goods rental firm Thorn turned bad because Hands failed to see that the rise of cheap electronic goods would kill the television and video rental business. (Luckily, Hands found another buyer — WestLB’s principal finance unit — for Thorn before things got really bad).
There were also grumbles from his colleagues. “He never shared the juice with his team,” said a former rival banker. “He tried to make every important decision. When we did business with him, I’m not sure there was any robust internal debate.”