Oxford Today editor Richard Lofthouse talks to the private equity legend about deal-making, dyslexia, and building a positive legacy.
By Richard Lofthouse
Mansfield College, under the leadership of Baroness Helena Kennedy QC, is on a roll these days. A highly sustainable new building, the Hands Building (informally, ‘Love Lane’), will open early in 2018. Situated in the south-east corner of the main quad, the outer structure is already built. A riot of high-viz yellow vests, hard hats and heavy machinery, plus banging and drilling, are all discernible from a beautiful bay window in the Principal’s lodgings, where I am sipping coffee with a private equity legend, and donor to Mansfield, Guy Hands (Mansfield, PPE, 1978).
Guy and his wife Julia, a successful hotelier on her own account, gave £2million towards the building. Kennedy has raised £23million, noting that the college needs just a further £200,000 to meet its goal.
Turning towards the drilling and banging, he notes how the basement and ground floor will host the Bonavero Institute of Human Rights, a joint venture with Oxford’s law faculty and the subject of a previous interview in Oxford Today with ex-Man Group CEO Yves Bonavero (Harris Manchester, 1996). The Hands Building is so sustainable that it will have low running costs covered by an endowment that was part of the fundraising. It will be a huge addition to the armoury of one of Oxford’s smaller colleges.
Responding to Lord Browne, Hands would press a slightly different and more optimistic interpretation on the lecture, citing his own core belief that disruption is good if the resulting change is good — perhaps to be seen here as a short-term loss but for a long-term gain. Browne had rather emphasised the risk of a short-term gain but a long-term loss, perhaps with the recent market fillip or so-called ‘Trump Bump’ in mind, but also regarding declines in global freedom for the past ten years in a row. Browne reminded his audience that human affairs can go backwards as well as forwards.
Hands has always been more optimistic, saying recently in another media interview about his private equity company Terra Firma: ‘Brexit has thrown all the balls up in the air. It doesn’t matter what your business is, it’s going to be affected by Brexit. But what our business does is it takes advantage of change. Most people are uncomfortable with change, they get scared by it. We have a business that is built on analysing change and dealing with it.’
Almost all of our discussion, to return to our morning cups of coffee in the Principal’s lodgings, revolves around the nature and value of disruptive change, not least concerning the renaissance of Mansfield over the past two decades.
Originally for Congregationalist Church theological training, Mansfield was only a full Oxford College from 1995, when Hands first donated money. He notes that it was in a jam. ‘It was headed for bankruptcy,’ he says bluntly. Instead of just giving money for buildings, he demanded that the college reinvent itself philosophically for the 21st century, even bringing in PR big gun agency Bell Pottinger to help lead a soul-searching exercise. ‘Some fellows thought that being part of Oxford and being “old” were enough. But age alone doesn’t justify your existence: I insisted that the college find its USP [unique selling point].’
At this point I was almost bursting to start talking about City deal-making and the colourful life of Guy Hands outside of Oxford. Indeed our conversation had begun with the dread subject of British music giant EMI — Hands volunteering that it was ‘one big deal that went very wrong’. But human rights and diversity matter dearly to Hands, so much so that they appear to have been at the heart of many of his deals. A lack of diversity, he notes, shaped his original view about what was wrong with EMI. He remembers turning up at EMI and being struck by the all-white, all-45+, all-male management. They all wore tight black jeans — a uniform despite trying not to be one — and represented ‘a lack of diversity you’d be criticised for even in the City!’
Going back to his childhood, Hands recalls his own education, via both a special-needs school and a grammar school in Kent (the Judd School), and the horrors of severe dyslexia. ‘I played chess and did maths, a source of self-esteem. I had a wonderful facility with patterns of numbers when I was eleven,’ he recalls. It was a facility that he turned to money-making as a teenager.
He was born in London to South African parents who moved to the UK (in 1962) from a state still ruled by apartheid. ‘I was constantly aware from the earliest stage about human rights, their absence and their value,’ he says. He even adds that his father regarded Communism as a more progressive philosophy than fascism. This personal background is typically forgotten in media profiles of Hands, which of course present him as a roaring capitalist. It might be more accurate to see him as a contrarian – something that anyone close to the man would agree with. Of course, this is also a noted Oxonian trait, and perhaps the hallmark of a first class education: the ability to defy consensus.
Sometimes it goes wrong. Hands’ £4.2billion purchase of EMI, in 2007, is just such a case. His regret is that the plans he had for the business were sound, as he sees it even now. What went wrong wasn’t the management plan but the debt-funding of the purchase, which lay with Citibank and which became a victim of the great crash of 2008-9. That led Hands to sue Citibank in a lawsuit that he abandoned last summer, wiping out £1.5billion of Terra Firma’s equity and reducing Hands’ personal fortune by at least £150million.
Yet you can tell that Hands’ enthusiasm for the company and the music business remains strong. He notes how they had a very clear strategic plan, that even included an aggressive date by which EMI would have stopped making CDs. At the centre of it, he recalls, ‘I realised that the music business wasn’t a consumer business but a business-to-business (B2B) business.’ Tiger Woods, to use an adjacent sporting example, ‘appealed to business as a brand ambassador,’ but ‘it was consumers who paid for this through their fandom.’
Using an academic comparison, Hands says that the trouble with really big deals like EMI is that ‘the due diligence process is much different – you can’t weight the assets. Primary sources give way to secondary sources, which are ultimately opinions, some good and others bad.’ He compares doing a big deal to trying to complete a doctorate in six weeks. Since EMI, ‘we have reverted [at Terra Firma] to the equivalent of primary source due diligence. We’ll study the bits we know. If we don’t understand them we won’t buy them.’
As if by way of follow up, he notes that Terra Firma’s largest recent deal, buying the Nordic Region’s 400-odd McDonald’s franchises, involved a very lengthy process of meetings on just about every continent, while the sector itself lent itself to the company’s previous experience with other brands such as German motorway services brand Tank und Rast. If the perception on the outside is that private equity companies raise a war chest, barge into an acquisition and barge out just as soon as they have made a killing, that is often an incomplete view. There is a lot of risk, which tends to be discounted completely in hindsight.
Nonetheless, having recently interviewed economist, City name and fellow of St John’s College John Kay [see forthcoming Oxford Today article], I feel it’s not unreasonable to question the underlying purpose of private equity. As Kay puts it in his book Other People’s Money, ‘When private equity funds are good they can be very, very good, but when they are bad they are horrid.’ At one end of the spectrum there is strategic insight, patience and investment, to unlock legitimate value. At the other end there is asset stripping, financial engineering of the worst sort, and the unlocking of sham value.
Hands notes that the sector is extremely diverse; that different companies pursue very different strategies; and that his goal is improvement, not short-term gain at the expense of longevity. ‘Out philosophy always involves a change strategy. Next, we improve or change management — in 27 out of 33 deals so far — and we make capital investments and we do mergers and acquisitions, typically adding one major business to every one we’ve bought.’
At Terra Firma, he continues, ‘We do not do arbitrage’ — the exploiting of a difference between the price of one thing and another. Hands cites the case of a chap who wanted Terra Firma to buy a gold mine on the basis that gold would go up in value. ‘He was totally, 100% right. Gold went up 300%. But it was a wager, a bet if you like — and we don’t do that.’
Hands promoting his Macdonald’s venture
When asked about his reputation as an early pioneer of complex debt instruments when he was a trader at Goldman Sachs, he says only that as early as 2004 he noted in a speech that the products were risking becoming the ‘crack cocaine of the financial services industry’. It was an insight made a full four years before the world economy blew up partly as a result of those products. What has succeeded all that is a (slightly) soberer world, at least for Hands. Now that EMI and the withdrawn lawsuit are in the past, Hands is focused on building a good legacy as a private equity leader, quite apart from his philanthropic activities. He notes that he’ll travel around the Nordic region meeting McDonald’s franchisees this September — ordinary business conducted at the ground level. ‘Breakfast, lunch and dinner at McDonald’s for two weeks!’ he adds with a grin.
‘My business philosophy is to strip everything down to basics. It’s incredibly painful and incredibly emotional. I buy businesses that need a radical new approach or strategy — it’s a skill-set I have.’ Of Mansfield’s new Human Rights Institute, he says: ‘Helena [Kennedy] had a huge intention for a Human Rights Institute … politically we could not be more against the wind than now…’ Another contrarian comment from a born contrarian, one feels.
Guy Hands is a British financier and investor. He is most notable as the founder and chairman of Terra Firma Capital Partners, one of the largest private equity firms in Europe. Hands also previously served as Chairman of UK music company EMI.
Interview photograph by Richard Lofthouse; Mansfield College picture by Oxford University Images / Greg Smolonski; other Guy Hands images courtesy of The Outside Organisation; Katy Perry picture by Eva Rinaldi.