Deutsche Bank has appointed Graham Hutton, previously global head of leveraged finance at Deutsche Morgan Grenfell, as head of its Morgan Grenfell Development Capital (MGDC) private equity operation worldwide. Graham Hutton, who has recently structured debt fundings for deals including Welcome Break, SEAT and Geberit, is now charged with creating a framework for further expansion of MGDC’s business, particularly in Germany and other German speaking markets, as well as with managing the existing UK, French and Italian operations. Responsibility for the direct day-to-day management of the UK business passes to Hutton from Norman Murray, who in 1996 took over from Robert Smith, now chief executive of Morgan Grenfell Asset Management. Norman Murray becomes chairman of MGDC and succeeds Robert Smith as chairman of its investment committee. MGDC forms part of Deutsche Bank’s new asset management division, with Graham Hutton reporting to Robert Smith.
A shake-up of some kind at MGDC was on the cards. In view of its relationship with Deutsche Bank, the group has been conspicuously absent from the German market at a time when other UK-based buyout houses have piled in. Now that Deutsche Bank has restructured its asset management operations, the time looks more than ripe for a move into Germany, and the establishment of a substantial German operation will be one of Graham Hutton’s priorities. “We want a strong team in this key market, where we expect a large percentage of our business to be in two years’ time, if not before”, he said.
The need to build a credible German operation for MGDC – and rapidly – may well have been a significant factor in the appointment of a candidate with a strong debt background to head the private equity business. Doughty Hanson, which has had notable success in the German market, is headed by individuals from a debt background, as are a number of other highly regarded buyout houses, such as CVC Capital Partners and Charterhouse Development Capital.
There is certainly no contradiction inherent in such a move. Graham Hutton pointed out that “bankers and equity investors focus on the same risk issues, and only rarely does a transaction appear which is a good banking deal but not a good equity proposition”.
In a market where full prices are being paid, the success of larger deals is increasingly driven by their financing structures. Hutton suggested that, as a former debt player, he can “provide a perspective which is valuable to cracking the issue of paying high prices, yet still providing good equity returns”.
MGDC will wish to emphasise the good returns it has achieved to date as it gears up for a further fund-raising exercise, likely to be launched later this year. Its GBP350 million (ecu 537 million) Morgan Grenfell Equity Partners fund, raised in 1995, should reach 60% investment during the coming weeks. Graham Hutton confirmed that while no target has yet been set for its successor, the next MGDC fund would be a pan-European vehicle and its size “a multiple of the existing fund”.
Sources among MGDC’s rivals have suggested that the group may find its next fund-raising effort a struggle in view of a number of failed investments. The GBP150 million 1995 Sweater Shop buy-in has undergone a number of refinancings, while the group’s investment in the GBP100 million Beni Food deal from 1994 is now virtually valueless, and CGA Group, a GBP20 million acquisition, has been written off. On the face of it, this is not a promising story for the market. However, the numbers tell a different, rather more encouraging story.
Director Susan Deacon points to the “net-net” 39% merged IRR achieved by MGDC’s first two funds over seven years. These figures include the bulk of MGDC’s investment in Sweater Shop made from the second fund (though a small proportion came from the current vehicle) and the Beni Foods deal. While it is early to look at numbers for Morgan Grenfell Equity Partners, Susan Deacon reports that apart from CGA and a small share of Sweater Shop, its portfolio – including investments such as the British Aluminium buyout, Strip Naxos, AB Cerbo, Deloro Stellite, Grampian Pharmaceuticals and Donside Paper – is performing well.
Discussing the projected fourth fund, Graham Hutton said MGDC would discuss with existing investors what form its relationship with MGDC’s country-specific French and Italian funds should be before firming up plans for the vehicle. These funds, of around GBP60 million and GBP80 million, respectively, still have substantial amounts available for investment. However, the existence of satellite country-funds focusing on smaller deals is no bar to forming a mega-league pan-European vehicle, as groups such as Charterhouse Development Capital have demonstrated.
As well as the returns achieved to date by MGDC’s existing team through funds one and two, strong selling points for the next MGDC offering will be the additional debt and mezzanine skills Graham Hutton contributes to the operation and MGDC’s ability to leverage off the contacts and skills of other Deutsche Bank divisions in both existing and new markets.