Terra Firma
This beautiful sculpture greets visitors first thing at the V&A if entering from the Westward side. Shocking perhaps? I have seen her before.
We all know the recession has taken its toll on private equity but none have been hit harder, perhaps, then Big Wave investor Guy Hands whose buyout firm, Terra Firma, bought EMI Music in 2008 for €2.2 billion of equity or 30% of the €7.6 billion Terra Firma raised for its two most recent funds (Nb: I spent my MBA internship working for then CEO Jim Fiefield and there are many funny stories of incompetency - like the physical baton handed from office to office indicating the "critical path" of required steps during the monthly financial reporting).
When Hands made the bet, he put in over €100 million of his personal account, a figure today surpassing €300 million. In poker, this is called "all in." Unfortunately for investors in Terra Firma, Hands personal conflict - considered favorably at first for aligning interests - has brought ever desperate actions. Exposure to EMI should have remained in Terra Firma IV but, when that partnership surpassed its limitations, Hands went into Fund III (this practice generally frowned upon if not banned by limited partners). Investors in III and IV got two sips of the poisoned chalice.
And worse, EMI requires yet another equity injection to avoid a catastrophic breach of covenants. Without cash, the company will fall to the banks and Hands's investment toast. Hands's investors have a tough call to make. So how did one of the industry's luminaries find himself here? Hubris, for one. Hands believed he could cost-cut his way to improved cashflows all the while not understanding the talent, who balked. Secondly, he missed, even at 2008, the Internet's destructive powers on the music industry. New sales plummet and the catalogue, while still valuable, is now valuable by half. Finally, Hands ignored the Golden Rule of diversification. Were these things not enough, his professional objectivity shattered by his own, personal exposure. This is one party I am happy to have missed.
"Doing a diversified portfolio with fewer people to support it is more risky than doing a concentrated portfolio but having enough people to look after every individual deal."
--Guy Hands, 2005
