Private Equity Markets
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Private Equity - Part 1 of 2
Guy Hands has put up his err...hands and admitted that turning round the entrenched philosophy at EMI was proving rather harder than he expected. Terra Firma forgot about the complete selfishness of ‘Artistes’ in their management equations. Acts such as Coldplay have, for many years, been happy to have their palms well and truly laden with gold but then bleated about bloated capitalism when asked to actually deliver on their promises. The A&R troops have grown fat on the flow of largesse from the company (shareholder) coffers.
The problem with such people is that all they can see is men in suits sitting in offices demanding results, they cannot comprehend the millions of pension holders whose savings, after long working lives, rely on everyone abiding by their contracts. It is seldom senior management that gets burned when businesses go down the pan. Their ‘talents’ somehow get snapped up elsewhere, usually after the receipt of a massive golden goodbye as they leave the sinking ship. Nobody cries for the shareholder, most of whom are not massively wealthy private equity players, but are long suffering pension and insurance fund holders who always seem to be the last man standing in the game of musical chairs.
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Mr Hands will, no doubt, turn the vessel around as he has done with many seemingly 'Titanic' like situations in the past but it might take rather more of his time than forecast. Which is the point of this feature. When a major private equity house gets involved too heavily in a project of dubious return (even if he gets this one right in the end) especially one as high profile as EMI, investors may begin to get concerned about returns. Too many kudos are getting attached to a project whose high profile refuses to die down. Most of the deals in which Terra Firma have been involved have been headline news whilst the takeover is going on but then slip off, even the back page, after the deal is done. Leaving the company clear to make the changes required to turn it into a saleable article.
But for EMI it is difficult to see a major sea change in the way music sales are being eroded (due to the well publicised problems of downloads and piracy) no matter how slim line the company becomes. And in the meantime, the negative news flow continues to make the front of the business and media pages. Who is going to pay top dollar for the final package? It must also be remembered that the credit crunch has arrived since the deal was done. Private Equity companies rely on huge fund flows from banks, pensions, funds of funds, insurance companies etc to make their deals but the quid pro quo is that these people want a reasonably quick return on the money. In the current liquidity crises, there are a great number of other areas crying out for scarce cash resources. If Terra Firma are unable to sell on the project by the time initial lending gets rolled over the margins may be increased drastically
To read part 2 go to: Private Equity Trading.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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'Private Equity Markets' edited by SD, updated 28-Feb-08
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