In what seems a surprise to the media, British buyout maven Guy Hands proposes in an
open letter to limited partners that private equity firms ought to consider scaling back funds in the face of troubled markets.
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The idea -- one of three proposals the Terra Firma founder offers -- isn't novel, and Hands admits his inspiration for the idea is his venture capital brethren who after the '90s dot-com boom scaled back funds. However, it would be unprecedented for private equity firms. Additionally, PE dealmakers are usually not known to be as pragmatic as their venture capital counterparts -- as peHUB colorfully points out in a post on the same subject -- so Hands' suggestion may not ring true amongst his peers.
Nonetheless, Hands' argument to support the effort is compelling. In short, he warns that the lure to put the money to work could lead firms to drift away from their principal mission, which historically has proved to produce mixed results. Nonetheless, changing investment strategy is the second option Hands suggests, but with a caveat: offer limited partners the option to opt out of their commitments -- in other words, a variation on option one.
Hands continued: "There is a third option, and this is the one that is central to our philosophy at Terra Firma: to invest in areas which are less likely to be affected by a downturn." Oh really? And what about the firm's troubled investment in U.K. recorded music giant EMI Group plc? Hands goes on to update investors of Terra Firma's portfolio, and to show how the firm is executing on the third option. He doesn't ignore EMI, but he does try to apply lipstick to it. Based on how well the music business is doing right now, maybe he should consider the first option after all. - Matthew Wurtzel
See Hands' letter
