
VIDEO: Terra Firma's Guy Hands
European businesses are selling for higher multiples because financing has come back, but they are still quite reasonably priced compared to pre-global financial crisis levels, says Guy Hands, chairman and CIO of Terra Firma. The question for buyers is can they deliver the growth to justify these valuations
"For firms like us, which focus on transforming businesses, it's a good time," Hands says. "For firms that are really focused on financial leverage it's a very risky time because the risk they have is that interest rates go up some time in the future and at the sort of multiples they are playing, to buy, they could be in serious trouble."
Certainly, more private equity firms are focusing on operational improvements than when Terra Firma set up shop in 1994. For each one of its initial investments new management teams were introduced - in one case the team was changed four times in the first two years, although once the appropriate leadership group was identified it stayed in place for the next 15 years.
In recent years Terra Firma's focus has moved from recruiting the best managers to ensuring the qualities that underpin good governance permeate an entire organization. "What we find is you sometimes get very good management teams but they are not necessarily good at ingraining culture within the organization," Hands says. "They are very centrally led and while that can be very effective over a short period of time, over a longer period of time it is less sustainable."
Hands sees Asia as an attractive market for Terra Firma, but not one in which the firm can call upon significant investment expertise. To this end, the Beijing office that opened in 2011 primarily serves as a platform for interacting with investors and investees that want exposure to Europe as well as means of supporting existing portfolio companies as they look to expand into new markets.
"Culture is incredibly important in everything one does and we would be very vain and conceited to say we have an understanding of the cultures across Asia," Hands says. "On the other hand, we would be insane not to focus on the fact that the Asian market is going to be the biggest in the world and it's producing all the growth in the world."
One consequence of this phenomenon is already visible: an increasing number of Asian buyers are looking to acquire European businesses, creating another exit option for private equity investors. Hands notes that these buyers often make the same mistakes made by European investors when they first entered Asia - focusing more on getting a good valuation than the quality of the assets they are chasing.
"By working with Asian buyers in advance we can get them up to speed on what the quality of what we are selling rather than having them focus on price," Hands says. "If they just focus on price they find they are outbid by Western buyers."
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