Terra Firma Forecasts Lower PE Pay, Firms Going Bust

MIAMI (Reuters) – Private equity executives will be paid far less, fund sizes will shrink and some firms will go out of business, the chairman and chief investment officer of British private equity house Terra Firma said on Wednesday.

“Life on the whole will get a lot tougher and a lot less financially rewarding for GPs,” Guy Hands said at the Super Return private equity conference in Miami. He was referring to general partners, the executives who run private equity firms.

“Sitting back, using financial leverage and flipping companies to another GP or strategic buyer will no longer be an option,” he said, adding that executives are going to have to work much harder for their money.

“GPs will become nicer, more humble members of the human race,” he added.

Hands estimated that GPs will be paid about 75 percent less and fund sizes will shrink by about 50 percent.

“I estimate that many private equity firms will simply go out of business,” he said.

He estimated that the amount of money limited partners or LPs — the powerful pension and endowment funds that invest in private equity — commit to the asset class will shrink by 50 percent in the coming few years.

Terra Firma announced in March that it was handing back some 80 million euros ($101.2 million) of performance fees after the firm wrote down the value of its assets by 1.37 billion euros, which included a significant writedown on its investment in music business EMI.

“It is absolutely right that if our LPs are suffering, we suffer along with them and hence the cash went back,” he said.

He said EMI is doing well operationally, but Terra Firma values the company by comparison with the share price of publicly traded rival Warner Music Group Corp (WMG.N) which has declined from about $8 a year ago to around $5.

Private equity firms have struggled to keep investments above water and investors happy while facing the problem that there are few opportunities to exit companies they own through initial public offerings or sales.

They have also been hit by the sharp reduction in availability of lending by banks, which has meant that doing deals of any significant size has been nearly impossible since the credit crisis began.

Hands, on the sidelines of the conference, said there is no clear sign that the banking markets will ease up soon.

“To put together even a few hundred million you have to speak to probably ten or so banks at the moment,” he said.

He also does not see a meaningful economic recovery unfolding until late 2012 and said that recovery would not feel “genuine” until 2013.

Hands, previously chairman and chief executive officer of Terra Firma, relinquished day-to-day control of the firm in March to concentrate on investments and building relations with investors. Tim Pryce stepped up to the post of chief executive.

Terra Firma is one of three groups to bid for American International Group Inc’s (AIG.N) aircraft leasing business, International Lease Finance Corp, which drew offers under $5 billion, a source familiar with the matter told Reuters earlier this week.

Hands declined to comment on whether Terra Firma bid. (Reporting by Megan Davies; editing by Gerald E. McCormick and Matthew Lewis)