As one of the most high-profile figures in the private equity industry, Jon Moulton’s unexpected resignation from the firm he founded 12 years ago sent shockwaves through an industry which has already seen a wave of senior players leave the scene.
An often controversial figure, his resignation letter – which was leaked to the press within 11 minutes of Moulton sending it to investors – confirmed the perception of a man unwilling to compromise his principles and unafraid to speak his mind, no matter who he upsets.
In his first interview since the resignation, EVCJ was invited to his country house in Kent – complete with a vineyard that produces award-winning wine – to speak about his reasons for leaving Alchemy, his opinions on the state of the economy, and whether his outspoken nature had made him any friends.
How do you feel about your departure from Alchemy?
It was the right thing to do. I had made my mind up and I knew the likely outcome. I would have preferred to have left the firm on an upswing when the company was making a fortune, you bet your life I would.
We had reached the stage that the only way I could have possibly taken Alchemy forward to the greener plains would have been to take enormous pain on the personnel front and go forward for another five years. That wasn’t a runnable route. For the past two years Alchemy has been cash negative for me. I’ve been investing more in it than I have been taking out and I’ll do far better looking after my own goodies. I did not wish to be engaged with a continuously struggling company going forward nor did I wish to adopt the vicious tackling of the issues that is now required.
In your resignation letter you said you would have done it again but you would have done it better. What did you mean by that?
With the benefit of hindsight and through clenched grinding teeth I would have to say that I think Jeremy Coller’s management structure was a better one than mine. He has always taken a position that he is in charge and he rewards his staff economically and one of the things I did was never to take a controlling stake.
It was a belief that it would be better than what I had just come from at Apax, which was a sort of feudal structure which I did not enjoy being part of. But on the other hand, what happens in private equity is you end up not being able to deal with your people because investors put enormous pressure on you, particularly in a small firm.
You said in your letter that Alchemy should be focusing on turnarounds not financial services. Why is that?
To turn away from the turnaround area was something I really think was just silly. We had been selling turnarounds hard to our investors as recently as our AGM in May. It’s an area where our image is fantastic and our track record is superb. We had 13 turnarounds since we started the company and every one of them was turned into profit within the first year and the realised record was well into the 40s for IRR.
Financial services is not a bad area to invest in but it is the thick end of three years since we’ve done a deal in the space and if you look at the stats it’s a small market place. So you need to have an appropriate size fund. If you look at what we’ve got at Alchemy, we’ve got one investment that is for £200m. Now you need a billion-pound fund at least to do that. On the other hand, most years it is difficult to find even one deal conceivable to actually deploy it. So it’s quite a conundrum about having a big fund or a small fund in financial services where the deal flow is erratic and variable in size. It’s easier to do financial services out of a big generalist fund, where you can have two or three years and not do a deal. But if you have only a £200m fund, virtually all of the record that Alchemy has gained would not have been feasible.
What do you think is the future for Alchemy?
My concerns are actually much less than you would think. The only thing that really concerns me is what will happen to the existing portfolio. There is very little carried interest left with the remaining team so the temptation to move stuff on very quickly will be very high. That would cost me a lot of money and cost the investors a lot of money. I truly do not care whether the firm gets through a key man vote or not.
Would you consider starting another firm?
At my age, a 10-year fund type structure as chief executive would result in my wife attacking me with a bread knife. It would be an extremely expensive decision but I have thought about it. I’ll be doing something and I have been approached to do things that range from the ludicrous to the intriguing and they’re about absolutely everything, from family offices to politics to charities.
In the industry, how do you think you are perceived?
I think am perceived variably. There are some people in the industry that take the view that saying anything negative about the industry is definitely not right and I’ve learned to live with that. There are other people who appreciate my views. I generally generate quite polarized views from general partners from other firms. There have been two reactions from people in the industry since I left – silence, or friendly letters. I’ve had 20 friendly letters, some of which have been quite lengthy and thoughtful.
After I left, I did something quite odd but was quite deliberate, I didn’t read the press. The letter was not intended to be leaked because it was marked private and confidential. I was quite startled by it. It only took eleven minutes to get on the web. I think it was leaked by as many as four investors. I thought that maybe one out of four investors might leak it but I was desperately wrong. The phone rang 30 seconds after it went out and just kept on ringing.
I think investors’ opinion of me is probably quite mixed. I have spoken to quite a few of them and I haven’t had any criticism from any of them but that’s not to say it’s not happening. Quite a few of them genuinely seem to really appreciate the serious effort I have made to be honest about where we are at and what’s there. I’ve received quite a number of very personal notes saying whether they agree, disagree or whatever, but it’s nice to have something nice and straightforward.
What I said in that note is something I had been thinking about for a while but I came to the decision a few weeks ago. I have this habit of decide then act, which saves time. So it really wasn’t about long-term planning and plotting.
Speaking of long-term, how long do you think it will take for the economy to pick up?
I think we will have a short recovery in the UK and if we are lucky we will have a period of extremely low growth. It requires only a bit of stupidity on the part of politicians and some adverse international events and we’ll be down again. There are immense problems with countries’ debt levels, which could easily reach 100% of GDP in interest-bearing debt by 2014. And almost no country that reaches that level avoids the IMF or default. It sounds dramatic but it’s just historical fact. I would guess that things will get really tough because the amount of cuts in public spending it will take is literally the equivalent of taking three million jobs out of the economy, which is impossible.
What is your opinion of the current buyout market?
It’s rough. The leverage loan market has done something quite extraordinary. I think it’s down by a factor of nearly 40 in the past two years. There are not many markets that go down by a factor of 40.The buyout market is at 1996 levels and it’s relatively easy to remember every deal that has been done since January the first. There is very little leverage around and there is a lot of money in the funds. Whilst the economy is certainly better than it was, it is still not strong. Output is down from what it was.
Most of the big factors are really quite adverse. The industry will most probably improve from where it was because quite frankly it can’t fall much more. I think at some stage there is going to be a complete tidal wave of deals that will come out of the banks.
Do you think lessons have been learned by the buyout houses?
It might take 15 years before anyone’s daft enough to think that 9x EBIDA for a cyclical business is a good idea, but it’ll happen again. The buyout firms allowed themselves to get sucked along that wall of cheap debt and cheap ammunition. On the back of that, they failed to see it was a self-generating bubble. Things became more like secondary buyouts, more and more dividend recaps and we just wound ourselves up to a state that the only ones who looked stupid were the ones that hadn’t been involved since the beginning.
I was a critic of the immense levels of debt people were using too early. I first had a go at the debt market at a British bankers’ guild in September 2005 and I made a PowerPoint presentation that had a picture of a falling-down wedding cake as the image on every page. I knew we had a problem because no one disagreed with me, and that was a room full of bankers. They were all making so much money and enjoying themselves that they were happy to go along with it. They didn’t care if there was a big bust.
At the end of that conference my cynicism was reinforced. Two blokes came up from major banks and they were both from credit, and they said: “We don’t do a job in credit anymore, all we do now is see if we can distribute.” The market had already moved. Fundamentally, the bankers involved didn’t care whether they were good deals or not because they weren’t going to be sitting on the assets. So we had this loss of integrity after that. We saw a rapid and increasing arrival of pro forma EBIDAs, adjusted EBIDA, and almost the elimination of due diligence.
What would it take to get the industry back doing deals?
There’s an enormous amount of money out there that lacks the ammunition of cheap debt to get the private equity guys the edge in doing corporate M&A work. So it’s going to be very slow to spend the heap. People are going to have to find ways to be more creative.
We still have as much money in the funds as we did in 2007, fundraising actually outpaced investment for that period. You see that CVC have made quite a speech about being creative. They have been doing things like chasing large public companies like the bus companies. People are going to have to try to do different types of deals. It would not be at all surprising to see some minority stakes taken in public companies.
How difficult is it to raise a fund in the current market?
People will be out raising funds but you will have to have a compelling sales pitch. There is so much money in the market. The institutions always respond to the latest experience. First-class team, first-class track record and right market spot are the things you need to raise a fund in the current market. Investors still say today that they want turnaround and distress as their main target.
The turnaround market has been very slow, why has it been quiet? What would it take to get it moving?
The turnaround market is extremely slow. There have only been a couple of deals that have got into the private equity world. Most banks are holding debt unless there is payment default. Because some companies have twice as much debt as they are worth, nobody wants to invest in them. The banks won’t take the write-offs because they are huge so what the banks are doing is “internalising” their problems.
Following your resignation it seems that a lot of the leading faces are gone from the private equity industry. They have either resigned or are taking a step back through chairman roles, what do you think that will mean for the future of the industry?
They’re getting older and they’re drifting out. You can honestly say that if you are in your 50s, you have seen the best years the industry is going to have. It might be five or 10 years before you see it go through a ‘golden time’ again.
The industry needs new people now. If you are running a large firm, there are a lot of components around now that weren’t there a few years ago. Many have PR fronts, have far more concerns over regulation and have to engage with the rest of the industry. So the job has changed so that an institutional sale is no longer about half a million here and there, it’s about hundreds of millions here there and everywhere.
Moulton on venture
Do you think there is sufficient backing for venture companies in Europe?
There is actually too much backing for venture companies at the moment in Europe, which is a really odd statement. People are forever talking about equity gaps and the truth is the vast majority of people who invest in small and medium-sized companies lose more than they win.
The venture data from EVCA and BVCA and all the angel networks rarely show double digit returns and most individuals who play lose money. Why is that? Is that because there is a shortage of money? No, it’s because there is an excess. The shortage is on the good ideas and the places to put the money. The amount of money that goes into venture is actually quite small. If there was demand for it, that money would be readily available.
I was looking at some stats a little while back and the Irish and Scottish Enterprise associations are the biggest venture capitalists in Europe. Now they are not commercially minded organisations so it’s a very unhealthy market and it’s one that I wish was a lot better. If it was, the economy would be better, we’d be in a knowledge economy. But in reality there isn’t much to pick from. I don’t find myself saying, I have three opportunities, which one will I choose.
To fix it you would have to go way back to education, reward system, the regulatory environment in the UK. The US is killing European venture. Large domestic market, high mobility of labour, skilled individuals and there is also a large pool of skilled investors. But even in the US, if you randomly picked a company to invest in, you have a 50% chance of losing your money.
As an investor in start-up early stage companies, what do you think of that market? Do you think there are many opportunities for investors?
I am absolutely intent on keeping up my work with small companies. It must be said I’ve made more money out of that than I have had working. At the moment I have about 40 significant unquoted investments and actually if you add in tail-end and participation in funds it actually adds up to 140, so I have a huge diversity.
The small market is a bit of a hobby for me but I don’t do it ‘properly’ because I don’t have the time. I’ve become increasingly picky over the years but I still lose over a third of my money in this area. But I’ve made a very large amount of money from backing companies as well.
Moulton on the trade associations
Do you think the BVCA and EVCA have done enough to lobby the Government on behalf of the industry?
The job they have had has been horrible and while I’ve been critical in the past, they are doing their best at the moment. It’s quite easy to say you don’t like the outcome but they’ve tried quite hard. They had to move from being an industry body that was not heavily associated with lobbying to a lobbying organisation, which is never easy.
The rules they are coming up with are a bleeding nightmare and it all depends on how it is drafted when it is finished. EVCA are capable of putting an argument forward but the problem is there isn’t a great desire to listen to it.
We are a small industry on the scale, so a bit of adverse PR is all it takes to make us look like a bunch of horrible people. I would guess that we will end up with a set of silly regulations, which, by the time they’re translated from the French to German and back to English, could mean virtually anything. I think it’s a mess and I have to say I’m not sad to be missing that little activity.