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 In this edition of Pilot’s Log Katherine Steiner-Dicks speaks with Stephen Keating, founder of private equity turnaround fund Privet Capital. Stephen offers his thoughts on the need for private equity to get back to improving businesses; getting hold of underwater stakes; why he is focusing solely in the UK for deal opportunities and what he’d change about the private equity turnaround sector--if he could.
How has deal flow changed since the credit crisis first took hold (around September 2008)?
It was still pretty slow in late 08 and early 09 – many of the opportunities that were around were poor businesses, which only needed a little push to tip them over. I saw more activity in June and July, most of which included decent underlying businesses, just not run as well as they could be, so fixable.
Do you always change management when you take on a new investment? If so, is sector experience more important than just using someone you know who has a successful track record, regardless of sector expertise?
I will almost always at least supplement management, and often make changes, but it’s not a case of just getting rid of them all. Going through a crisis usually needs extra resource, so some of the extra help is relatively short term, to implement the changes to turn the business around.
The right experience varies between situations and roles. Some sectors need specific knowledge (such as retail), although there is usually good knowledge within the business below main board level. Otherwise, I think turnaround skills are applicable across most businesses – the basic approach of learning how a business makes money and applying common sense. I also think there are roles in which sector experience is not necessary, for instance finance.
Which sectors are you most keen to follow for distressed deals?
I’m looking at all sorts, and am more focussed on whether I can work out what’s gone wrong and how to fix the business rather than specific sectors. Having said that, you won’t be surprised to hear that I’m seeing lots of consumer facing businesses, such as retail and leisure. I think there are attractive opportunities if you pick the right ones, possibly with further bolt-on acquisition opportunities over the next one to two years.
Do you think that there is profit in bundling up other private equity firms’ underwater assets as opposed to waiting until they are either ready for pre-pack or go bust?
I haven’t seen many private equity houses ready to let go that easily yet. If there is no current value, then selling doesn’t help if they’re trying to realise cash. If they believe in the business they may spend time on it themselves, and if not, it’s probably the bank’s problem. Some of the poorer performing investments have been bundled up with better ones though – there are some specialist funds doing this, like Vision and Coller.
In principle, getting hold of underwater stakes could be interesting as it would get you a seat at the table, allowing you to bring new money and negotiate a restructuring from the inside, which is a good place to do it from. I can certainly see this happening on a deal by deal basis – we’ve looked at some – and I expect it will develop as a technique.
Do you look outside the UK for deals, especially in countries even worse off than the UK for example Eire or Spain?
No – there’s plenty to do in the UK!
Do you think that the private equity business model has changed forever? Will the UK asset class shrink back to those who are prepared to go back 20 years and/or do solely equity deals?
Private equity is still a relatively young industry and continues to evolve. I am a great believer in the private equity ownership model, where professional investors act as owners of a business – this brings focus and professionalism to the running of a business. However, for the last few years it has been too easy to make money by just the financial engineering – actually adding value is harder work. Private equity does need to get back to improving businesses, which is about operations and strategy rather than funding structures.
If there was one thing you could change within the private equity turnaround sector, what would it be?
That’s tricky, and anything I say will probably sound self-serving. It’s a very small sector at the moment, with different models being put to the test, for instance the balance of skills required, so it will evolve quite quickly I think. More broadly, there are elements within the sector, like the Institute for Turnaround, trying (and succeeding to an extent) to make our voice heard in and amongst the noise and political positioning. So, if there is one thing, maybe it’s that appropriate weight is given to the views of those who are directly involved in turnaround, rather than it being driven by media hype. We can dream I guess!
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