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Hands to bow out of Nomura

Guy Hands, head of Nomura’s Principal Finance Group, is leaving to set up an independent private equity fund for which he hopes to raise GBP2 billion over the coming months.

Negotiations between Hands and Nomura are still underway so it is of interest that the news leaked out now. There is conceivably an upside in effectively having one’s fund raising plans marketed by the national press, especially in light of the fact that the private equity fund raising market is universally being described as difficult at present.

With the difficult climate in mind, irrespective of the profile of Hands’ reputation, the GBP2 billion fund raising is unlikely to be straightforward.

Suggestion from close to the Hands camp is that the story may have been leaked by one of the bankers approached to become a limited partner in the new fund raising. If true, this suggests negotiations with Nomura are some way down the road and that Nomura will become a cornerstone investor in the independent fund.

Difficult market conditions aside, the fund raising may also be complicated by the fact that the private equity investment model that Hands is currently mooting is not dissimilar from the structure he has in place at Nomura’s Principal Finance Group: in short not a typical private equity investment. Sources close to Hands suggest that the team of 60 at Nomura Principal Finance Group will go with him and it is likely that the management of all the assets bought by the Principal Finance Group off Nomura’s balance sheet will go too.

Hands isn’t to be drawn on details at present but even if, as expected, he secures a management contract from Nomura he will have a sizeable cost base for a team that still intends to complete just two or three transactions per year.

Hands is understood to have been in negotiations with Nomura along these lines for much of this year following the bank’s wish to cap its private equity exposure at the same time as Hands wished to increase it.

The private equity community, which has lost out to Hands notably in his bids for pubs, which have made Nomura the UK’s biggest single landlord, has decried Hands’ securitisation technique as financial arbitrage but not private equity investing. The latter, many note, is about improving management and earnings. Hands has been able to demonstrate the latter in the pubs sector, although as owner of some 10 per cent of the UK’s pubs, how far beyond economies of scale this reaches is more difficult to determine.

Others in the private equity industry take the view that the job of private equity investors is to make money for their LPs. And Hands is frequently quoted as having an IRR of over 60 per cent – some GBP1.5 billion returned to Nomura in profit out of GBP10 billion spent in the last six years.

Deals include the October 1997 acquisition of William Hill sold in March 1999, Phoenix Inns bought in August 1995 and partially sold in November 1997, Angel Train Contacts bought in 1997 and sold in December 1997 and AT&T Capital Corp bought in October 1996 and sold in January 1998. Other deals, from which Nomura’s Principal Finance Group has yet to exit, include Thorn bought in September 1998, Inn Partnership bought in December 1998, Annington Homes bought in November 1996, Unique Pub Co bought in September 1998 and this year the acquisition of the German railway workers flats, which was three years in the making, and the team has just been listed preferred bidder for the Meridien Hotel chain. It also bought the Principal Hotels this year. In addition, there was the hostile Hyder bid (last year) and the Millennium Dome, from both of which Nomura withdrew, but caused to raise Hands’ profile further.

Hands is often referred to as the GBP40 million man on account of that being his presumed earnings in 1997. It’s unlikely that he has reached those dizzy heights year on year since 1997 was the year in which he sold rolling stock company Angel Train Contacts to The Royal Bank of Scotland. Hands scored a huge return on this investment, which Nomura Principal Finance Group bought in early 1997 as part of the UK railway privatisation. (Hands is understood to have negotiated a sizeable bonus deal linked to the team’s profits.)

Hands took the view that the revenues of the rolling stock companies were quasi-government guaranteed. Firstly, the train companies that leased the rolling stock from Angel Train Contracts were in the early years to be heavily subsidised by the government and with privatisation being a politic as well as infrastructure issue the government could not let these companies go under. Having convinced the market he was able to securitise the revenue streams at a low interest rate and so provided cheap debt to fund acquisition and other costs. Securitisation was to feature in a number of Hands’ subsequent investments although his camp is these days keen to distance his image from securitisation.