As ailing firms face legal woes, cash buyers and private equity will pounce

Joshua Rozenberg
18 Nov 2008

Sir Philip Green's purchase of a 28.5% stake in Moss Bros from the beleaguered Icelandic company Baugur shows that this is a good time for anyone with cash to invest, says Andrew Roberts, a partner in the private equity group at Travers Smith. Will Canary Wharf be worse affected by the recession than the City of London?

Roberts has a long string of buyouts and disposals to his credit. These days, though, City law firms have to try a little harder to keep the work coming in. Travers Smith has just sent its clients a series of A4 cards on "Financial Turmoil Management". One side is headed "risks". But the other is marked "opportunities".

Now that borrowing has dried up, anyone with ready access to liquid assets is at a huge advantage. But, retail billionaires apart, are there such people left? "Private-equity funds have commitments from their funders to supply them with cash," Roberts points out. "As far as I'm aware, nobody has reneged on any of those commitments."

These funders are pension funds and insurance companies that have allocated part of their portfolios to the private-equity sector. Private-equity funds typically draw down this cash, as required, over a seven-year period. And how will fund managers be spending it? In the good old days, they would have simply bought out a private company, spending a little of its own money and leveraging this up with lashings of debt. Now, though, they must find most of the cash from their own resources.

Sir Philip Green is a good example of someone who has made trading profits without owing huge sums of money. As we saw last week, someone who is cash-rich will be in a good position to snap up a rival that can no longer service its debts.

Roberts regards these trade purchasers as "manna from heaven" because they can take advantage of opportunities to consolidate in their own industry. "We are running an auction process at the moment - not a big sale, £30 to 40 million - and we have three purchasers interested, all of them trade purchasers," he adds. "What people are looking for are steady businesses with the wrong funding structure."

These companies, he explains, risk breaching the covenants they signed with their lenders - which specify a level of profitability. Any breach would allow the lender to appoint an administrator, rendering the company's shares worthless. Meanwhile, banks want to reduce their lending.

"One of the ways a cunning purchaser could take advantage of this is to buy some of the debt from the bank, for as little as 65p in the pound," Roberts explains. This, in turn, would give the purchaser control over its rival after it has breached its original covenant with its lender. "But it's more likely that debt would be sold to a financially savvy purchaser like a private-equity house or a distressed debt fund."

And that brings us to the other side of the card. The main risk, of course, is that an investment target may not bring in the profits. Fashion retailing may not be the best business to run in a recession. Even so, Roberts says there are plenty of people willing and able to fund deals. But they tend to be personal investors. There are said to be around 100 family offices in London, each of which has at least £100 million of family money under management.

"If you are a well-capitalised business, if trading is OK, if you have money on your balance sheet and the correct funding structure or supportive shareholders, there are opportunities to make acquisitions that were not available a few months ago," he concludes.