The British like old-fashioned pubs. They enjoy smoke and sawdust, frayed dartboards, packets of che...
The British like old-fashioned pubs. They enjoy smoke and sawdust, frayed dartboards, packets of cheese and onion crisps and bottles of beer with German names that are actually brewed in Sunderland. But, surprisingly, they don't like their pubs as much as the giants of the global capital markets.
Whatever local boozer you happen to stumble into any King's Arms or Duke of Devonshire will probably turn out to be owned by some remote financial conglomerate. The people running, say, Nomura or Deutsche Bank probably don't know an ale from a bitter or a pork pie from a pork scratching, but that hasn't stopped them staking billions on British pub trade.
Nomura is now the biggest landlord in Britain, while Deutsche Bank is the fourth largest following its recent acquisition of Whitbread's chain. Third in the pub ownership rankings is another German bank, Westdeutsche Landesbank Girozentrale.
That is testimony not to hit erto unsuspected synergies between banking and brewing but to the rise of private equity funds. In both Europe and the US, the funds have been one of the great financial success stories of the past five years, raising billions from investors, and providing consistently handsome returns.
Now the bubble looks to be bursting. Venture Economics, a unit of Thomson Financial, reported recently that the private equity business has tumbled from a cliff. The overall level of business dropped by 59% in the first quarter of this year.
From January to March, it said, $5.5bn was invested by Europe's private equity funds, compared with $13.2bn in the first quarter of 2,000. The money coming in was down as well as the money going out funds raised totaled $5.1bn in the first quarter of 2001, compared with $7.5bn in the same period last year.
There are other worrying signs of trouble ahead. JP Morgan Chase & Co reported recently that its Chase Capital Partners private equity unit lost $22m in the first quarter of this year
There should be no great surprises there. There was always a whiff of bull market speculation about the private equity business. In an economic slowdown, and in the grip of a bear market, it is hard to believe there won't be a reckoning some time soon.
The basic economics of the private equity business are simple. The funds raise money from investors, borrow some more, then go out and buy companies. They hold them for a couple of years, then either sell them back to the market through an IPO or to a trade buyer.
The defining feature of a private equity acquisition is this: They don't buy because they think the companies are good, or because they think they can improve management, or capture synergies by merging with another business. They buy because they think they can sell them for even more money in a couple of years time. Constantly rising prices for corporate assets aren't an incidental extra. That is one of the basic assumptions that made the mathematics of a private equity fund work out.
So, what happens now that prices for corporate assets are not rising anymore? And when the downturn in the market means that an IPO is no more than a remote possibility?
The example of pubs might appear flippant, but, in truth, the private equity funds, and more importantly the banks that own them, have ended up the owners of some very odd collections of businesses.
Take a look at a few of the big funds. CVC Capital Partners, for example, owns the William Hill, Rhiag, an Italian auto parts distributor, and Nordic Beverage Groups, a Swedish beer distributor (beer again those private equity boys love their beer).
What binds together British bookies, Swedish beer and Italian auto parts, apart from the fact most of your customers are men?
Nothing, in truth, except for some smart financial engineering. You might have thought the big financially driven conglomerates went out of fashion with the decline of companies such as ITT in the US and Hanson and BTR.
But, like phoenixes, they just rose from the ashes this time as private equity funds.
The conglomerates vanished because although they were good at trading companies, they didn't know how to run them. It is hard to resist the conclusion the same fate is about to befall the private equity funds: if they can't sell those companies anymore, they will have to try running them.
Many private equity funds now seem to spend a lot of time dealing mainly with one another.
Grown-ups in Boss suits call it corporate finance. Kids in romper suits call it pass-the-parcel. It's a fun game while it last. But you don't want to be stuck holding the parcel or the pub chain, or the frozen food retailer when the music stops.
Matthew Lynn via the Bloomberg London newsroom
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