Jon Moulton: why making money is my hobby as well as my profession
The City’s most outspoken private equity chief talks to Katie Hope about the credit crunch
At a time when most of the financial services sector is in despair over how bad the economic crisis is, Jon Moulton can barely contain his glee.
He estimates the credit crunch will go on for “at least two years” and possibly up to four, although suggests the key to sorting it out is “stable, trustworthy banks”. If he had his way, he’d be “brutal”, restricting banks’ activities to simple products that “everyone can understand even themselves.”
But where other people see disaster, he sees opportunities. The man who founded private equity firm Alchemy, named after the medieval chemistry that sought to turn base metal into gold, is a master at spotting underperforming companies and turning them into profit. In these trickier economic climes, bad managers and underperforming companies are easier to spot.
Good Deals Aplenty
“A poorly run company survives in good economic times, but at the moment it’s easier to get control of such companies and get quite a good deal as there’s more availability,” he says.
Distressed debt, alongside the most bombed out sectors such as construction, house building, retail and the pub industry, offer the most opportunities, sectors which he considers “oversold if you sit back and calmly analyse.” Something you sense he does quite easily as he leans back in his chair.
We’re sitting above Tesco in his sparsely furnished Covent Garden offices with Ikea-like furniture. For a man worth tens of millions of pounds, the 58 year old northerner, one of the best-known venture capitalists in Britain thanks to his abortive bid for Rover, spends his days in plain surroundings.
Ascetic-looking, with a pinched face and shaved head, and a penchant for running half marathons, he’s not your typically reclusive private equity king. Dubbed “Moulton the Mouth” he’s keen to air his views on anything from the government to the “unethical” approaches of his peers. “Free PR”, he explains with a twinkle in his eye.
And he’s certainly not averse to creating a stir, critical of both government and his peers. Tax and regulations have not been favourable for financial services companies for a very long time, he believes. “Half a dozen of our companies have transferred activities outside the UK and that number will increase,” he points out.
A Pandora’s Box
He also warns the fallout from the credit crunch, which has left banks holding over £100bn of leveraged loans underwritten on generous terms during the debt boom, but now essentially unsellable, has thrown up a Pandora’s box of “unacceptable and “abusive” behaviour.
He reckons the situation, for which he blames “most banks, most politicians and most regulators”, has created an opportunity for private equity to switch from equity investments to buying debt, often in the same companies. In an extreme situation, where other creditors are pressing for a debt renegotiation, private equity groups with large credit positions could influence the talks to protect their equity, potentially preventing a debt-for-equity swap, according to Moulton.
“A firm can buy an unpleasant looking layer of debt in a company which doesn’t pay out unless the company fails. Buy a blocking stake of 26 per cent in the most junior layer of debt and refuse to agree to a restructure, the company fails and you collect,” he says. The situation, which he concedes is “slightly fanciful”, hasn’t happened yet, but with a slightly mischievous glint he suggests this “unacceptable” practice soon could.
So is private equity all about “asset stripping” – as its detractors like to claim? Not for Moulton. He likens exiting a company to selling a car or even dumping a lover with “greed, pride, disappointment” all emotions he deals with in the process.
In the hey day of private equity, a 35 per cent return was considered “pretty poor”. On his very first portfolio he returned 118 per cent. Now his average is around 25 per cent. Turnaround, he concedes, is also taking somewhat longer. Long gone are the days when you could buy a company and sell it three years later for four times the price. He estimates a typical turnaround now takes five to seven years. The climate has also slowed down his acquisition rate to just four or five this year.
The one of which he is most proud is Parker Pen, which he bought when it was losing £20m a year and sold seven years later by which time it was making £40m per year.
Not Always Successful
But not all of his investments go right, of course. He estimates he’s worked on around 100 deals, of which he’s “buried” around a fifth. A recent one was Floors-togo, a wood and laminates flooring retailer which he bought just 18 months ago, but last month called in administrators. He blames the torrid climate. “If your house is a declining asset then you stop painting it,” he says matter of factly.
This diversity, with different industries, is what keeps him interested. And even in his spare time, alongside the wife and two kids, Porsche, a house in Kent and a place in the French Alps, his hobby is investing. When he’s not doing it for Alchemy, he’s doing it for himself, investing between £1m to £2m a time. He reckons he’s made more money doing this than through working in financial services. He estimates he loses around a third of his money but the return on the other two thirds makes up for it. Retirement? “Never. If I wasn’t doing this I’d be sitting at home managing my own portfolio and doing more or less the same thing.”
And if you didn’t do that? “I’d die.”