Bloomberg News

Hands Says LBO Firms Risk Damaging Returns With Larger Funds

November 16, 2011

Nov. 16 (Bloomberg) -- British financier Guy Hands, the founder of Terra Firma Capital Partners Ltd., said private- equity managers’ efforts to amass assets risk generating lower returns for investors.

Many firms have been “fixated” on raising larger funds, offering new products and entering new geographies, Hands said in a speech at the Super Investor conference in Paris today. While fund managers benefit because they earn more management fees, they risk losing their entrepreneurial spirit and their focus on generating profit for investors, he said.

“General partners have to suffer if things go wrong,” Hands, 52, said. “If the asset base is so heavy that the general partner considerably gets rich on fees alone, the general partner will, as any human being would, lose its focus on driving returns.”

Private-equity firms including KKR & Co., the Carlyle Group LP and Blackstone Group LP have grown bigger and diversified away from traditional leveraged buyouts to ensure steadier revenue. Firms are struggling to invest $937 billion in unspent capital as economic uncertainty and a tight deal market lead them to delay some investing, according to London-based research firm Preqin Ltd. They announced $85 billion in transactions in the third quarter, down 40 percent from the previous three months, according to data compiled by Bloomberg.

EMI Sale

Hands is targeting clean energy and agricultural assets after betting and losing almost a third of his London-based firm’s latest 5.4 billion-euro ($7.3 billion) fund on British record label EMI Group Ltd., which Citigroup Inc., its lender, seized in February and partly sold last week. Vivendi SA’s Universal Music Group agreed last week to pay Citigroup 1.2 billion pounds ($1.9 billion) for EMI’s music assets, home to artists such as Katy Perry and Coldplay.

Hands, who is considering raising a new fund, said the industry is set to continue to experience “the wilderness years” until 2013 as banks reduce lending, making deals more difficult as the European sovereign debt crisis deepens. He pledged he wouldn’t pick up the industry’s bad habits again if the “Woodstock years” were to come back.

“I’ve suffered enough pain in the wilderness years that I am not going to forget very quickly,” he said.

--Editors: Steve Bailey, Edward Evans.

To contact the reporter on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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