Hindsight is a wonderful thing

Yesterday Guy Hands of Terra Firma lost his landmark case against Citigroup which he tried to sue claiming it had misled him over other parties potentially bidding against Terra Firma in its institutional buyout of EMI Music back in 2007. For me this was a fascinating case to be brought in the first place and I am sure it has been watched with intent by both advisors and other private equity firms alike. I suspect as well that this morning those on the advisory side of private equity deals have breathed a sigh of incredulous relief.

If you look at the deal history of Terra Firma, it has invested over £16bn in companies in the last 8 years, it has successfully exited a number of its investments and currently holds 10 companies in its portfolio including EMI over which the legal case has been fought.

However, when it acquired EMI in September 2007 pre “BC” (banking crisis) it invested at the very top of an M&A bull market that had been rising since 2003, only for the subprime and credit crisis to hit in 2008 and stop overnight the ability to access cheap debt.

This was not a scenario unique to Terra Firma – this was truly a global crisis that affected private equity investors the world over. The financial press has been full of stories over the last two years of private equity-held companies which with the economic downturn have not performed as expected, leading to either a breaking of their debt covenants or frantic re-negotiations of existing debt covenants by their PE investors.

I myself have bought the odd expensive item – granted it doesn’t compare to the billions invested in EMI, but it’s all relative to each individual – and then I too have suffered buyer’s remorse the following day, in terms of “should I have spent x on y” “perhaps I should take it back”, but ultimately I was the one who made the decision. Just as I am sure there will be many private equity professionals who in their quiet moments will have wondered why they chose to invest in particular problem portfolio companies.
I had always believed that part of the investment-making decision was supposed to be detailed due diligence; yes I am sure there will always be an element of brinkmanship to try and drive up interest in potential targets, but at the end of the day everyone, no matter whether they are private individuals or private equity firms, have to take responsibility for the decisions they have made. As they say “hindsight is a wonderful thing”.

Filed under: PE, advisors