The veteran private equity investor Guy Hands is, at the age of 61, slowly beginning to wind down the funds of Terra Firma Capital Partners, the firm that he founded almost 20 years ago.
It now holds just eight portfolio companies, down from a peak of 17 a decade ago. Hands insists this does not mean that he is about to retire but admits he would be glad to reduce his working week to 40 hours – from the 80 to 90 a week that he has been working since the pandemic got underway.
“A blind pool fund normally has at least a 10-year life,” he told Private Equity News over a Zoom call from his office in Guernsey. “It takes two to three years to raise a fund and then 10 years to harvest it, and I feel it’s something I don’t now really want to fully commit to.”
But the fact that Hands is still sniffing around for buyouts – last week he snapped up Kier Group’s loss-making house-building arm, Kier Living, for £110m – suggests he is not going to vanish from the private equity industry any time soon.
The Covid-19 pandemic has made the last year challenging for Hands’ varied portfolio, which spans Australian beef production, military housing and, until recently, modular school buildings in Scandinavia.
Knocked by lockdowns
Terra Firma’s two hotel groups have been particularly knocked by lockdowns.
Those are the German hotel chain Welcome and the upmarket UK country house hotel chain Hand Picked – which Hands says he would have had no option but to close without government support, though he claimed £50,000 in furlough payments to retain 700 staff. Hand Picked has lost over £20m since the pandemic and Hands points out that the Hands Family Office injected £28m into the business to keep it afloat.
But Terra Firma’s franchise in the Nordic countries for 428 McDonalds’ Restaurants stayed open for take-away, drive-through and delivery meals and ended up doing better than originally expected.
“We did some analysis of our cash flow last March and we reckoned we had no more than three months to survive. It looked absolutely nightmarish,” the mop-haired financier recalls.
“It looked like we were financially going to be completely wiped out at the end of March . For me it was the second time I’ve looked complete disaster in the face since the global financial crisis of 2008.”
“The reality is that some of our competitors reacted to the pandemic by closing while we kept McDonald’s open. We gained market share and ended the year flat.
“The hotels have been a big cash flow drain but, while Covid has been a very scary experience it has also been an interesting one.”
The UK’s best known dealmaker says that, over the past decade, institutional investors have dropped out of Terra Firma to be replaced, largely, by family offices. The main factor for the switch, Hands says, is that “returns from large private equity funds these days just aren’t what they used to be.”
Recently-published accounts show that turnover at Terra Firma dropped 31% to £15.9m in the year to March 2020 compared to the year before, while profits dropped from £2.3m to £1.5m.
On Brexit, the ardent Remainer says that most of his portfolio companies have not been impacted as they are not manufacturing firms reliant on EU imports or exports.
The dream of Leavers that Brexit would allow the UK to get rid of red tape holding back entrepreneurialism has turned out to be an illusion, he says. “There’s no country which has ever produced more bureaucracy in the world than the UK,” he says. “If the UK can stop producing red tape that would be great, but there is no sign of that happening.”
The father of four warns that the City’s professional services companies which service the private equity industry will be hit hard by Brexit.
When it comes to cross-border European business, Terra Firma used to hire UK-based lawyers and accountants. Now the firm uses lawyers and accountants based in EU jurisdictions. “I think the biggest effects are actually going to be on the law firms and accounting firms,” he says.
“The big fear I have is that the French or some other European country pushes the nuclear button and simply says they will no longer recognise UK contracts and that all contracts in the EU have to be done under European law.
“That would be devastating for the private equity industry based in the UK as firms would be forced to move to Europe.”
Give people a voice
Brexit led the multi-millionaire to set up a charity called Engage Britain, which Hands hopes will bring people with opposite political views together to discuss how the country can be improved.
“The objective is really to give people a say and a voice, but to also provide them with the information they need to be able to come to a view about the solutions needed to make Britain better,” he says.
Hands believes that the Brexit Remain campaign ultimately failed because of the complacency and arrogance of the Cameron government. “The campaign seemed to be very dismissive and campaigners didn’t seem to listen,” he says. “The reality is that Cameron believed that it would be just an easy win. But he needed to go and actually meet some real people outside of his own circle.
“If he had done that, he would have seen there was a real issue of anger among the British population. A lot of people voted for Brexit, not because they actually wanted to leave the European Union, but because they wanted to give a finger to the man.
“It is a bizarre thing, but people were voting against the EU to tell the UK government what they thought of it.”
Hands’ interest in social issues is also reflected in his views on diversity, which led him to campaign for Oxford University to increase the number of students coming from state schools.
Hands battled severe dyslexia while at a state school in Tonbridge, Kent, before studying Politics, Philosophy and Economics at Mansfield College, Oxford.
In the 1990s he provided financial support to Mansfield on condition that the college agreed to recruit at least three-quarters of its students from the state sector. “At the time, the general view was that it would be a complete disaster. Well, 20 years on, 94% of students at Mansfield now come from state schools and the college is in the top five of Oxford colleges as measured by exam results.
“So diversity really works: it actually gives Britain a better chance to be successful.”
After Oxford, Hands began his career as a bond trader at Goldman Sachs, before moving to the Japanese bank Nomura where he headed up its Principal Finance Group, which eventually morphed into Terra Firma.
One of Hands’ most controversial investments was into care homes. Terra Firma bought the UK’s largest care home operator Four Seasons in 2012, but Hands took a €417m loss on the business as it struggled to service debt.
Hands lost control of Four Seasons’ core business, which filed for administration in 2019. He now thinks that care homes which accommodate local authority residents should be run by the NHS as private firms can’t make sufficient profit to make it a worthwhile investment.
“Where you’re taking local authority residents, you are a price taker, not a price maker,” he says. “So effectively, the local authority determines how much they can pay you.
“That means you’re in a situation where, in my view, you can’t make money unless you compromise on care. We weren’t willing to compromise on care, and we lost hundreds of millions.”
“My view is you either nationalise them, which means that the government has a responsibility. Instead of us getting screamed at, the government would get screamed at, in which case, they will pay more money, because the amount paid is ludicrously low.”
The alternative to nationalisation, he believes, would be to make the care sector a regulated industry, with set standards and set financial returns.
His largest and also least successful deal was his disastrous £4.2bn takeover of the now defunct record label EMI in 2007, shortly before the financial crash.
The takeover, he admits, was over-leveraged and led to a long-running legal battle with Citigroup, the US bank that had advised on the mega deal. “It is a sad thing, but if we had EMI today we would probably have made seven to 10 times the money we invested,” he says. “But, you know, timing is everything and we got our timing on that one completely wrong.”
His most successful investment, he says, was his £690m purchase in 1995 of the train-leasing company Angel Trains which generated an internal rate of return of 528%.
“It was a lovely deal, because we had an absolutely clear idea of what we were going to do. And we just did it.”
Born: 27 August 1959
1982: MA in Politics, Philosophy and Economics, Mansfield College, University of Oxford
1971-1977: The Judd School, a voluntary-aided grammar school in Tonbridge, Kent
2002-present: Founder, chairman and chief investment officer, Terra Firma
1994-2002: Founder and managing director, Nomura International’s Principal Finance Group
1982-94: Goldman Sachs, bond trader rising to become head of global asset structuring
Hobbies and interests:
Travel, photography, music (particularly jazz and punk), gardening and landscape design, wine.