Chris Blackhurst: Foxtons float? Investors must be cunning when it comes to private equity

Midweek View: Investors are wary of clever financial jiggery-pokery that may see a business look brilliant on paper, but in reality it's a dud
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The Independent Online

A friend rang me on Saturday night, seeking some advice. His wife had been approached for a job with a company wholly owned by a private equity group. What did I think? Should she pursue it or knock it on the head?

I won't go into detail – that would not be fair (not least because private equity firms are still ultra-cautious about their public relations and my friend's wife might find the phone call and my reporting of it had ended her chances). But suffice to say, the group was one of the major private equity players and the investment she was being lined up for was also well known.

As he was talking, I Googled their website. This was a big outfit with a raft of assets, some of them household names. But what struck me was the sheer hotchpotch nature of the buying, in sectors that seemed to offer nothing by way of cross-fertilisation or synergies. Finding an exit route for some of this lot, I reasoned, would be difficult – nay impossible, in the current, recovering but still determinedly cautious, market.

Looking at the portfolio started to bring back memories. I had seen this set-up somewhere before, many years ago. That was when I was covering the likes of Hanson, BTR and Williams Holdings. They were, of course, conglomerates. Just as dramatic as their rise, was their fall. Suddenly the c-word was banned, regarded as anachronistic, from a bygone age when their masters were constantly on the lookout for acquisitions to which they could apply their apparently superior financial engineering and management know-how.

Of disposals and offloading there was scarcely ever a mention – apart, perhaps, from the immediate aftermath of a purchase when they would get rid of bits that clearly did not belong. Otherwise, it was all about size and breadth, and not being exposed to one industry, but having a presence in several, so if one went down, the others would come good.

Then, investors wised up and realised the parts were worth more than the whole, that the group was carrying a central management overhead that could easily be dispensed with.

Isn't this where we've reached with private equity? The absence of exit routes means that, increasingly, firms are coming to resemble the c-words of old.

Once, there was an almost automatic private equity path to withdrawal: ownership for three to five years, possibly seven, after which there would be an IPO or trade sale. However, those escape hatches have all but vanished. And when one comes along, such as the flotation of Foxtons, examination of the small print shows the lengths that BC Partners, the private equity owner, had to go to in order to encourage the managers to pull out all the stops and make the estate agency chain a publicly saleable proposition.

The Foxtons bosses will be sitting on shares valued at up to £100m – 20 per cent of a company worth £400m to £500m. That's not a bad carrot. In fact, it's so enticing as to invite a question that would once have been unthinkable in super-slick private equity land: who is making the bigger bucks, the private equity partners or the down-the-line managers?

It feels as if the tables have turned, that those managers are able to say: "Pay us, incentivise us properly, or else you'll be stuck with us for ever."

The worry for BC Partners and the like is that the markets may have recovered but investors are still fighting shy. They're wary of clever financial jiggery-pokery that may see a business look brilliant on paper, with promise of riches to come, but in reality it's a dud. They're not as keen as they once were to stump up the cash so the private equity owners can make their departure.

Disposals are being made – but many are to other, larger private equity groups. These "pass-the-parcel" acquisitions are hardly glamour stuff, not why people came into the industry in the first place – in effect, they're an admission by one private equity owner that it can't do any more with a business (one it's probably loaded up with debt) and please, would someone else take the thing on.

Private equity has enjoyed three boom periods. Two were the explosion of credit in the 2000s and stock markets powering ahead in the 1990s. What was the third? Only the demolition of the conglomerates in the 1980s. But far from vanish, that oh-so-unfashionable model has resurfaced. The ultra-cool, sophisticated private equity operators won't like it – probably cannot even bring themselves to acknowledge it – but, for those conglomerates of yester-year, look at many of the private equity groups of today.