What does a private equity firm do in simple terms?
In simple terms, we manage money on behalf of investors. They invest in one of our private equity funds and we advise that fund. Terra Firma, like other private equity firms, differs from other fund managers because we concentrate on companies. We buy businesses, hold on to them for a period of time while we implement strategic initiatives, and then sell them at a profit, generating a return for the fund, and so our investors.
*How does Terra Firma decide which companies to purchase? *
Given that we're trying to increase the value of the company during the time that we hold it, we want to make sure that we can purchase it at a good price. Then we want to know that we can work with the company to make it attractive to a buyer at a higher price later on. We look, for example, for companies that can expand their revenue base, become more efficient or which have certain divisions that need more time or energy put into them.
What sectors is Terra Firma interested in at the moment?
At the moment, we have a large base in renewable energy and media - for instance, we own the second largest renewable energy company in the UK (Infinis), EMI and the Odeon cinema chain. We also have assets in the agricultural space, an aircraft leasing business and companies involved in real estate in Germany and the UK. It's quite an eclectic mix!
Terra Firma has built up detailed knowledge of a number of sectors over the years, so we can identify when companies are undervalued in these sectors, can undergo strategic change and therefore find suitable acquisitions.
Can you explain why Terra Firma's funds use leveraged finance - that is, choose to take loans from banks to make their investments?
Using leverage means that the sum the fund contributes to purchase the company - its equity investment - is smaller than it would be without using debt finance. When you sell the company at a profit in a few years time, you have to pay back the loan (plus some interest) but any rise in the value of the company during the hold period won't go to the debt providers, but to the fund, because it owns the share capital in the company. So by using this strategy, the fund has invested less money, but still gets most of the premium from the rise in value.
The Gateway hears that you did an internship at an investment bank - what made you decide to start your career in private equity rather than banking?
My main interest has always been in business. And from that perspective, private equity is more attractive to me than banking, even though if you work in an M&A department, as I did on my internship, you're dealing with businesses all the time as well. But M&A work in a bank is different - it's all about buying and selling companies. In private equity, you also need to look at corporate strategy and have ideas about where you can create value, which takes business skills as well as financial analysis. We have a sense of accountability; when you make the investment, you have to make sure that you can implement all of the strategic ideas that you came up with when acquiring it. And I like that, rather than not being involved once the deal is done.
*How is Terra Firma structured? *
Different private equity firms do things very differently, but at Terra Firma we have transaction teams which analyse deals financially. We also have operational teams which work with the businesses on a day-to-day basis. The operational teams essentially work with the business's management and aid in reviewing and implementing any strategic initiatives the business may put in place.
There is a lot of crossover, however, because transaction teams will be involved in operations, and the operations teams will check any investments made by transaction teams, especially during the latter stages of due diligence.
On the graduate programme, we've all had experience of both transactional and operational work - I'm on a transaction team at the moment, but I still work with the operational team on the portfolio companies that my managing director is involved with.
What might your working day involve?
Today I'm looking at a new business that might be up for sale, and that my managing director thinks is interesting. And there's a sector that someone else on the team quite likes that we are going to investigate. We're also thinking about some potential new acquisitions to complement one of our existing companies.
What advice do you have for students interested in a career in private equity?
If you're interested in private equity, you'll be following what's going on in the business and corporate worlds, which is important. Learn as much as you can about accounting and financial analysis, which you'll have help with if you go to a private equity firm that has a graduate scheme, like Terra Firma.