Terra Firma's Hands Sees `Very Scary' Year as 'Brexit' LoomsBy and
Deal making to take hit amid volatility, buyout executive says
Hands calls for private equity firms to end short-term bonuses
Investors hoping for less volatility in 2016 will be disappointed as the U.K.’s potential exit from the European Union and uncertainty around the U.S. presidential election increase market volatility and make deals more difficult, private equity executive Guy Hands said.
“It’s a very, very scary year,” Hands, the founder of Terra Firma Capital Partners, said Wednesday in a Bloomberg Television interview from Berlin. The potential U.K. exit from the EU, known as “Brexit,” will affect deal making “more and more as we get closer, in the same way as the U.S. election will affect people more and more as it gets closer.”
Financing for all but the most high-quality assets is drying up, and “if you’ve got something which is poor, nobody wants it at the moment,” Hands, 56, said at the SuperReturn International conference. Investors are suffering from low returns and fear of a volatile market that isn’t underpinned by fundamentals, he said.
Political uncertainty in Europe and the U.S., Islamic extremism and Russian aggression is contributing to investors’ insecurity, he said. The U.S. no longer leads the world politically and financially following the wars in Afghanistan and Iraq and the subprime mortgage crisis, he said.
“The only winners from Britain leaving the EU will be Britain’s and the EU’s enemies,” Hands said in a speech earlier Wednesday at the conference. “Britain staying in the EU is the right thing for Britain and the right thing for Europe.”
Hands was joined by a number of private equity and investment executives who expressed concern about Britain’s exit from the EU and how the uncertainty over the U.K.’s future role in Europe is affecting the market.
“We would welcome it a lot if the U.K. would decide to stay a member of the European Union,” said Dorte Hoppner, chief executive officer of Invest Europe, which represents the continent’s private equity and venture capital firms in their dealings with regulators and lawmakers. “It is important to have access to the single market and therefore we think that a united European Union would also be much, much stronger. It makes business sense.”
Investors are concerned that an exit would cut trade opportunities and diminish London’s role as an international hub for global business and finance. The U.K. will vote on leaving the EU in a referendum on June 23.
“The uncertainty and potential negative consequences of Brexit for the U.K.’s economy should not be underestimated,” Man Group Plc CEO Manny Roman said in an e-mail.
Man Group, the world’s largest publicly traded hedge fund, reported a 17 percent decline in 2015 profit Wednesday after performance-fee revenues and margins dropped. The company said volatile markets were hurting clients’ risk appetite.
First Reserve, the energy-focused private equity firm, would consider moving dealmakers out of London if a Brexit were to happen, said Vice Chairman John Hill.
“It makes it an uninteresting place for us to invest,” Hill said at the SuperReturn conference on Tuesday. “I probably wouldn’t be looking for investments in the British North Sea or looking for investments in a British windmill farm.”
Still, the minority of business leaders who support a Brexit have won a strong endorsement in London Mayor Boris Johnson, who endorsed the “leave” campaign on Sunday.
“Boris is an incredibly charismatic human being,” Terra Firma’s Hands said. The risk is that “he acts as a figurehead, and you end up with the population voting almost like an ‘X-Factor,’ voting for the exciting Boris, not thinking about the tragedy that it would be for Europe and the U.K.”
Those who favor an exit have said that the U.K. would be better off free of the EU’s power to regulate British businesses and requirements to accept European immigrants. Quidnet Capital Partners CEO Richard Tice said last year that the EU is “flat-lining and not helping its citizens.”
Al Gore, the co-founder of Generation Investment Management and the former U.S. vice president, weighed in at the SuperReturn conference on Tuesday.
“I really hope that the U.K. stays in the European Union,” Gore said. “As a citizen of the United States I know that a strong and fully integrated European Union is incredibly important for the stability of the global community, the commitment of the global community to democratic values and standards for human rights.”
Amid increasing uncertainty, Hands called for private equity firms to shift their pay structures toward longer-term incentive plans based on investment performance. Terra Firma, based in Guernsey, Channel Islands, abolished short-term bonuses for its dealmakers after moving last year to charging fees only on invested capital rather than committed capital.
The firm also lowered salaries “to make them more in line with what we think is a reasonable amount,” Hands said. He opted against paying himself a dividend in the year ended March 2015, according to filings with Companies House, and wage, pensions and social security costs for all employees fell 21 percent to 20.3 million pounds ($28.4 million) from 25.7 million pounds the previous year.
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