Saturday, 25 August 2007

Jon Moulton warns of 'grim times'

Most readers will know Jon Moulton of Alchemy. Indeed, I've had a long association with him through such companies as Civica, Sanderson, Cedar (now COA) and even Phoenix IT. I've also had the pleasure of having some robust debates with Jon - both public and over a private lunch. (BTW - I think we are both booked for an appearance (again) on the panel at the end of the 2008 Regent conference on 5th Feb 08)

My respect for him is huge.

If Mr Moulton says buy out firms are in for a grim time...TAKE NOTE! But don't think you will be immune just because you don't have any involvement with buy outs. Jon warns of a 'mortgage famine' with knock on effects on house prices which will dent consumer confidence and affect economic growth. If that happens, we ALL suffer.

Alchemy head warns of grim times
By Martin Arnold in London
Published: August 25 2007

Jon Moulton, the British private equity veteran, has warned that the buy-out industry is heading for a dramatic drop in the returns it generates for investors as the credit crunch hits the value of companies acquired at the top of the market.

The boss of Alchemy Partners, a mid-market buy-out and distressed debt investor, predicted that large private equity firms would need to write down the value of the companies they own and consider selling subsidiaries to raise cash.

The outspoken buy-out boss also forecast an increase in debt-for-equity swaps by companies acquired with high levels of debt that are unable to refinance their loans, forcing them to hand over ownership to creditors.

“There are companies out there that I would be personally willing to take 10-to-one odds on them needing debt-for-equity swaps, because they are over-levered to any reasonable base and cannot possibly be refinanced,” he told the Financial Times.

He said that “in many cases” this trend would be “precipitated if a company needs more cash”.
“The large private equity funds have been booking very large stated rates of return for a long time and they are now going to have unrealised write-downs.”

Predicting a long grim period for buy-out firms, Mr Moulton said the UK seemed on the brink of a “mortgage famine” that could erode house prices, eat into consumer confidence and hurt economic growth.

“A mortgage famine is, I think, one of the most likely events. It will have an impact on the economy. It will hit house prices, and they are such an important factor in consumer psychology that it will feed through into the economy.”

Mr Moulton owns stakes in several mortgage and loan companies, including mortgage broker John Charcol, Swift Advances, the consumer loan and mortgage business, and Everyday Loans, the subprime lender.

Mr Moulton said his distressed debt team was “working long, hard hours”.
He said about €4bn ($5.5bn) of leveraged loans had been refinanced in the second quarter that would not have been completed in current market conditions.

“This gives you some idea of the magnitude. It doesn’t mean there is a €4bn write-off, it means that €4bn could probably be replaced with €3bn, not €4bn,” he said.

“That number will go up now every quarter, because of the growth that occurred years back in those highly leveraged loans. So it is a big market coming.”

The Financial Times Limited 2007


Richard Holway said...

In response to my posting, Paul Gaunt (I sit on the board of RCM Technology plc with him) pointed out that he had had a letter printed on this very subject in the FT on Wednesday.

It read as follws

Perhaps these buy-out investors are super-intelligent
By Paul Gaunt

FINANCIAL TIMES Published: August 22 2007 03:00

From Mr Paul Gaunt.

Sir, Lina Saigol ("How private equity groups are adding insult to injury", August 20) is absolutely right to highlight private equity "mission creep". Perhaps she could follow this up with an explanation of why institutions continue to pour mountains of money into private equity? Buy-out funds have reputedly already raised $139bn this year and are expected to exceed the $212bn raised in 2006. Only a few years ago $25bn would have been regarded with some satisfaction.

History offers many examples of an asset class that was producing acceptable returns only to be overwhelmed with a wave of money that eventually led to much lower returns. I can still recall my introduction to the City in 1972 when institutions were pouring into agricultural land on yields of 1 per cent or so. A more recent example is the 2000 bubble when venture capital inflows spiked upwards - that sector is still dealing with the fall-out from that debacle.

What is doubly worrying is that equity prices are not exactly at bargain basement levels - recent falls being no more than a blip - which means the price of target company assets has been rising. Buy-out predators are hardly buying at distressed levels. One wonders how many buy-out models work with interest rates of 10 per cent (or more) and falling returns on equity? Very few, I would contend.

Looking ahead I suggest that around 2010-11 we will see the result of this frenzy in the form of emerging poor returns and excuses. There is one alternative scenario. Perhaps these buy-out investors are super-intelligent - they can see a big downward adjustment ahead and will be ready to pick up the pieces. Pardon me if I pass on that one.

Paul Gaunt,

Norwich, Norfolk NR2 2HG

Nordic Walkrite said...


It is with interest that I watched Jon's Dispatches programme on Channel 4 last night (18th February) and his explanation of 'CLOs'. Towards the end of the programme he did refer to the 'next big product' that is doomed for failure too. I believe this was a SCL? Is this correct and if so where could I go to research more about this?

Thanks for the help on this occasion.