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The private equity boss who says credit is about to flow once again

THE economic downturn has meant that private equity business Duke Street, like the rest of the industry, has spent the last 12 months treading water &ndash; and its managing partner Peter Taylor is keen the firm gets on with things over the coming year.<br /><br />Cutting deals is meat and drink to London&rsquo;s private equity industry. All of the players, large and small, buy other firms, build them up over an average of five to seven years, then sell them on at (hopefully) higher prices.<br /><br />The fact that Duke Street only bought one company in 2008, a French medical testing business called Biomnis for &euro;217m (&pound;198m), highlights how the credit markets since the collapse of Lehman Brothers last September have virtually been declared a no-go zone for private equity businesses, some of whom have become used to buying targets with up to 90 per cent of the capital borrowed from banks.<br /><br />In a more usual year Taylor, 45, says Duke Street, a medium-sized private equity business which operates in the UK and France, would hope to cut at least six deals of up to &pound;300m each.<br /><br />Despite this lack of activity Duke Street managed a solid year. Eleven of the 13 firms it holds &ndash; which range from Jammie Dodgers-maker Burton&rsquo;s Foods to UK beauty brand Simple &shy;&shy;&ndash; boosted earnings.<br /><br />The firm has invested 60 per cent of the &euro;963m it raised from its latest fund in various firms, none of which have as yet been sold on for cash.<br /><br />The firms it has bought from its current fund, raised from institutional investors, are rated at a 20 per cent discount to what Duke Street paid for them, though it compares favourably with the current industry average of a 40 per cent discount.<br /><br />However, Taylor, who joined the group in 1996 and became managing partner in 2002, says the capital markets are showing signs of loosening up over the next 12 months.<br /><br />He says: &ldquo;September in business is like the start of the school year,&rdquo; says a confident, tall, lean, totally bald, Taylor, who is sitting in the ultra-modern cream and red boardroom of the firm&rsquo;s ninth-floor London headquarters in the West End&rsquo;s Wigmore Street.<br /><br />He explains: &ldquo;All of the plans you make are about next year. And there is a little more optimism among the banks and businesses I talk to about deal activity.&rdquo;<br /><br />Taylor says Duke Street has always taken a conservative approach to leverage, usually looking to cut deals with around 30 per cent of its own cash, with the rest coming from banks. But he says the last year has changed all that, and he says currently the few deals being completed &ldquo;for very good firms&rdquo; in the market are at the 50/50 mark.<br /><br />He adds: &ldquo;These are fresh trends I have seen from recent transactions. The market is still attempting to settle at a new benchmark to fund these kinds of deals.&rdquo;<br /><br />This is all a huge contrast compared with the period of high leverage deals, which Taylor says only ran from 2004 to 2007, when private equity hit the headlines for buying huge public companies with relatively little amounts of their own cash.<br /><br />In the UK, car breakdown service AA was bought by Permira and CVC for &pound;1.7bn in 2004, and chemist Alliance Boots was snapped up by Kohlberg Kravis Roberts for &pound;11.1bn in 2007.<br /><br />Taylor says: &ldquo;Private equity could raise a lot of debt and could raise it quickly. Banks would fully underwrite deals. That is out of the window now.&rdquo; But Taylor says prices are beginning to normalise. He says: &ldquo;There are now signs of reality coming back into the market. Deals we are seeing for medium-sized firms are at the prices I last saw seven or eight years ago.&rdquo;<br /><br />Taylor adds: &ldquo;Over the next 12 months I would be disappointed if we have not made two or three acquisitions, and made about the same amount of disposals.&rdquo;<br /><br />Taylor is all too well aware of what a contrast this is to last year.<br /><br />He says: &ldquo;We didn&rsquo;t even think about selling a company in 2008. The collapse of Lehman Brothers led to a lot of inertia in the market. Sellers were, and to some degree still are, holding onto companies because they knew they were worth a lot more before 2007. Banks who have taken control of firms do not want to sell because they do not want to realise losses.&rdquo;<br /><br />Taylor adds: &ldquo;Interest rates are low and this means that institutions can hold onto firms with high levels of debt because they can afford to pay the interest on them.&rdquo;<br /><br />But, as the market has changed, Duke Street, which has &euro;400m left in its current fund, says the firm has been running the rule over two or three companies for the last three months, though he adds it will take at least that long again before the firm decides whether to make a purchase or walk away.<br /><br />He says: &ldquo;Over the last year we have been looking at companies that already have debt facilities. Life has been too short to try and raise fresh debt from banks. But that is beginning to change now.&rdquo;<br /><br />Taylor says Duke Street&rsquo;s investment approach is always to look at buying a controlling interest in a firm and then &ldquo;we either back the existing management team, or bring in a new team&rdquo;.<br /><br />Duke Street runs its companies through the chief executives based at the individual companies. The private equity firm&rsquo;s operating partners act as chairmen to the chief executives. And lastly, Duke Street&rsquo;s investment partners, who represent the firm&rsquo;s institutional shareholders, also have a say in how the company is run.<br /><br />Taylor says: &ldquo;Investment partners have a banking or accountancy background. They work on deals and other major financial issues to do with the company.&rdquo; All three types of executives have a financial stake in the business. The investment partners, for instance, have invested 2.5 per cent, or &euro;25m, in the firm&rsquo;s current fund.<br /><br />Over the 21 years the firm has operated, it has passed on profits of &euro;2.9bn to its investors, and Taylor adds the firm has lost money on only two out of around 40 deals &ndash; a remarkable achievement.<br /><br />However, things did go wrong at its DIY chain Focus, which it was forced to sell for &pound;1 to rival private equity house Cerberus in 2007 after it was unable to service the retailer&rsquo;s &pound;174m debt when the market began to turn.<br /><br />But Taylor points out Duke Street was part of a private consortium that had earlier sold the other half of its DIY interest Wickes to builders&rsquo; merchants Travis Perkins for &pound;950m in 2004, and overall the private equity firm made a profit on its home improvement retail business. And Taylor adds: &ldquo;We still managed to save Focus from bankruptcy. People kept their jobs. I am proud of that.&rdquo;<br /><br />Private equity has long come under fire for asset-stripping companies, sacking workers and selling these companies back to the public markets. The charge is essentially that private equity excels at financial engineering &ndash; and making tax-free money by gearing up to the hilt and matching operating profits with tax-deductible interest payments &ndash; rather than building for the long term.<br /><br />But Taylor says the firm operates a &ldquo;buy and build strategy&rdquo; rather than &ldquo;just financial engineering&rdquo;. He points out that, in the UK, Duke Street runs a 100-strong &ldquo;mini-department store&rdquo; The Original Factory Shop, which opened 17 new outlets last year. And that its French private hospital business Groupe Proclif has expanded from two units to ten since Duke Street bought it in 2005 and has plans for further growth.<br /><br />Taylor has no argument with Sir David Walker&rsquo;s 2007 review of private equity and his recommendation for more transparent reporting in the industry. But he has little time for current European Union proposals to more closely regulate the hedge fund and private equity industries. For instance, he holds little truck with its plans to make both types of firms to hold more cash in the business in the event of failure.<br /><br />He says: &ldquo;Only 40 people work here. We are not a bank and don&rsquo;t need to hold a lot of cash. We pay wages once a month. A lot of this kind of talk is misguided.&rdquo;<br /><br />It is clear that Taylor does not want to spend too much of his time talking about European regulation &ndash; particularly when he thinks credit markets are freeing up, which will allow Duke Street to get back to cutting deals. Everybody else in London&rsquo;s business community will be hoping that Taylor is right &ndash; and that the crunch is over.<br /><br /><strong>CV </strong>PETER TAYLOR<br /><br /><strong>Age: </strong>45<br /><br /><strong>Work: </strong>Joined Deloitte as a graduate accountant from 1985 to 1989. Private equity business Bridgepoint Capital from 1989 to 1992. Left to join a firm he worked with in private equity, Sea Life Centres, as finance director from 1992 to 1996. Duke Street 1996 to present<br /><br /><strong>Education: </strong>Watford Grammar School for Boys, Loughborough University<br /><br /><strong>Family: </strong>Married, three children. Lives in Wimborne, near Bournemouth<br /><br /><strong>Hobbies:</strong> A regular at the Forum and Brixton Academy: &ldquo;I went to Glastonbury for the first time this year. It was great. Franz Ferdinand were top dogs.&rdquo;