Planning for a long crunch

THE FRIDAY INTERVIEW/Jon Moulton, managing partner, Alchemy Partners:THERE'S A board hanging on a wall in the London office of leading private equity group Alchemy Partners, listing its various investments since 1997. The last entry is dated September 2008 when it acquired Noonan Services, an Irish contract cleaning business.

That’s when the clock stopped for this major player in the UK private equity industry, as the global recession and credit crunch took their toll on the sector. Its high-profile founder and managing partner Jon Moulton, an elder in the private equity industry, says he is happy to bide his time for now.

“The credit crunch will last a long time,” he says. “There’s a massive amount of deleverage to happen – personal, corporate, banking and national. That will take quite a long time. Determining an end point is quite arbitrary, but three to four years – maybe longer.”

At 58, and having survived a couple of recessions and set up two private equity businesses himself – Permira in 1985 and Alchemy in 1997 – Moulton knows what he’s talking about.

“The industry will get smaller, some of the firms will vanish,” he says. “That seems to be happening quicker than I had imagined. Quite a lot of the firms are of the opinion that they will not be able to raise another fund. Let’s all hope the economy recovers more quickly than I think and everybody gets fished out, but it doesn’t seem very likely.”

In 2006, Moulton began warning his peers of the dangers of loading deals with massive debt. They ignored his calls and the party continued. “Half of the private equity ever invested was done in 2006/7,” he says. “A very large amount of that money looks like it’s gone.”

Alchemy, he says, is in good shape. It has a portfolio of 23 businesses worth “well over” £1 billion (€1.15 billion). “Out of that, I’ve got about £40 million that is at some level of financial risk,” he says. “That’s quite low.”

Investors in his funds will also probably be cheered by the fact that eight of its top 12 investments “have actually got profits above last year at the moment and none of those have financial issues”.

“It’s not wonderful, but it’s not bad,” he says.

Moulton says Alchemy has the lowest fee structure of any European private equity group, and his investors see every item of expenditure in the business.

In spite of the timing and the reported €90 million-plus cost, Moulton says he is happy with the Noonan deal. “It’s a solid, you might say stodgy, sort of business. Unless you actually close down the public sector, and industry, in Ireland, it will continue to clean. Whilst it’s hardly a growth industry at the moment, it’s certainly not struggling.”

Likewise, he professes to be comfortable with the performance of fashion retailer A-Wear, which was bought with management from Brown Thomas for €70 million in 2007.

“It would be hard to describe it as operating in a buoyant market,” he says. “It’s fair to say that the economic environment is a little worse than we expected when we bought it.”

Alchemy, which specialises in turnarounds and companies with distressed debt, has done a handful of Irish deals down the years, with mixed results.

It supported the taking private of Riverdeep by Barry O’Callaghan in 2003, investing $88 million (€62 million). Alchemy exited within a year, doubling its money in the process.

On the flipside, Moulton says its backing of a buyout of IT group Calyx in 2007 ranks among his worst investments. Alchemy exited within jig time, nursing a loss of £40 million.

“In general terms, the company was massively less profitable than we believed and that became quite a serious problem,” he says.

Rumours around town that Alchemy is cooking another deal in Ireland are somewhat exaggerated, Moulton says. “We have a couple of small acquisition targets for Noonan, but we have nothing major under way in Ireland at the moment,” he says.

Moulton is in Dublin this morning, along with leading Irish media and telecoms executive Denis O’Brien, to address a breakfast briefing organised by Irish office of international law firm Maples and Calder on recovery and reform.

He has strong views on what the Irish Government needs to do to turn the economy around. “The only choices you have, being in the euro, are pretty unattractive ones,” he explains. “A knife into public sector expenditure. Inflation you can’t generate yourself very effectively because of the currency, so you lose the policy option that the UK politicians will eventually use, which is to let inflation wipe out the debt. “I think you are doomed to tax and cut and hope there’s enough people left there to make the ends tie together.”

He expects our treasured 12.5 per cent corporate tax rate to face pressure from France and Germany. “If that’s under pressure, some of your industries will run or will decline and you are left then with a relatively weak economy.”

Moulton is equally pessimistic about the UK economy, and has little time for Gordon Brown.

“I am not a great fan of the current management. It is just over a year ago that our chancellor was telling us there would be growth last year and this. It’s 10 years since Gordon said he wouldn’t let house prices get out of control. These guys have lost control.”

As a former Conservative Party donor, does he have any greater faith in Tory leader David Cameron? “I wish I did,” he says ruefully, adding that Cameron is like a one-legged man when the “rest of the lads have lost their wheelchairs”.

So what needs to be done to resuscitate the British economy? “We will have to cut public expenditure; we will have to address things like the public sector pensions. Only the timing of these issues in is doubt. Any sensible incoming government would deal with them early – otherwise they too would be staring down the barrel of IMF rescue.”

In total, he estimates the UK government needs to trim its spending by £60 to £70 billion – roughly twice the estimated tax take of the Irish exchequer this year. “That’s not easy to find.”

Moulton’s journey into private equity was somewhat circuitous. He studied chemistry before entering finance. “I could have pursued a career in chemistry, which would have been something just slightly better than going for advanced malnutrition,” he says with a grin. “So I packed that in and went off to become a chartered accountant.”

He began life as a bean counter in Liverpool, doing receiverships and insolvencies. Moulton was then sent to the US by Coopers Lybrand to work on mergers and acquisitions. “I found people doing things called leveraged buyouts. I worked on quite a few of those, left the profession and joined Citicorp Venture Capital in New York in 1980, and I’ve been in private equity ever since.”

He is listed in equal 535th spot on the latest Sunday Times UK Rich List, with a £102 million fortune. He gifted £13 million to charity last year.

“I’ve had the luxury of being able to only do what I enjoy for a very long time,” he says.

He owns roughly one-third of Alchemy and was paid £4.57 million from its profits last year. This year’s share will be down, he acknowledges. “It will be lower simply because the way our business works is around deal fees, and we’ve had no deals.”

Moulton says he will “back off” from his day-to-day executive responsibilities when he turns 60 in about 18 months’ time. “Quite how I will back off is a mystery to me, let alone to the others around me. This might well be my last recession, assuming it ever ends.”