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It is ironic that Permira, the private-equity house, should be having such a rough time with its latest fund, Permira lV, because the investments that are now blowing up in the managers' faces with multi-million pound losses must have been made just about the time that the firm emerged from the shadows to take centre stage in the political row over private equity.
It was then, also almost three years ago, that Permira boss Damon Buffini was adopted by Gordon Brown as a role model of how people with talent and drive could succeed whatever the odds at the same time as some trade unions decided to target that same Damon Buffini as a heartless capitalist making quick profits by destroying jobs. Clearly, all this stuff going on in Whitehall distracted the attention of the people doing the day job back at the office.
The fund is not yet fully invested and late last week Permira said it would not force investors who had promised money to pay their commitment in full if they no longer wanted to - though they would still pay management charges on the notional amount and would see their share of any profits diluted.
Investors given the opportunity to withdraw include some of the most high-profile investors in the sector, the Californian pension funds, Harvard, the investment trust SVG and several others.
The move was widely interpreted as a reflection of the lack of opportunities available to private equity, but this does not really stack up. Private-equity houses have made their money in the past by buying when values are depressed and good assets can be bought cheaply. Indeed, it emerged over the weekend that Charterhouse is planning to launch a new £5 billion fund shortly to target just these opportunities. It is odd, then, for Permira to imply it does not want the money.
But it's not so odd if you know what is really going on. The problem is with the suppliers of the capital to Permira, not with how Permira might or might not invest it. Not to put too fine a point on it, Permira's investors got carried away in the good times and have so overstretched themselves that some would have difficulty putting up the money. Last week's announcement is an elaborate way to let them off the hook without losing too much face.
The problem is that when people thought private equity was a sure-fire way to make massive profits, investors began to appear to over-commit by promising more than they could actually afford. They would, for example, pledge £150 million when they only actually had £100 million to spare.
They thought the profits from the first £100 million would flow through quickly enough to be back in their pocket before they were called upon to find the last £50 million, so they would be able to pay the balance out of those returns. They have been caught swimming naked, in Warren Buffett's graphic phrase, because the collapse in private equity performance means those profits have not come through.
The emergence of this kind of problem speaks volumes about what was going on under the surface in recent years. By over-committing, the investors in effect geared up their funds by getting £150 million of investment performance from just £100 million of underlying funds. In the good times this made their own performance to their own investors appear much better than it would otherwise have been, and no doubt led to them being well rewarded for it.
No doubt, once again, the bonuses were paid on profits that appeared real enough but where the extra risk taken on through this gearing was not readily visible. It is now, though.
Insurers' ray of sunshine
Because of the problems in banking and fund management there is a tendency to think the entire City is on the skids. But some parts of it continue to make a comfortable living and in others — insurance being a case in point — there is genuine excitement.
I have written before about the way that the hurricane losses of this autumn coupled with the near-collapse of AIG have turned the market, so that rates in the renewal season from
1 January are expected to be much harder — in spite of AIG cutting rates to hold on to its big-ticket clients. Sensing the opportunity, the money is now beginning to flow in.
This morning comes news that the AIM-listed Omega, a business with a market capitalisation of £220 million, has raised £150 million of new money to take advantage of the firmer conditions — an astonishing amount of capital for a business of that size and a huge vote of confidence in its management.
This comes after Hiscox last week said it was increasing significantly its efforts in the United States. It is also widely rumoured that Amlin plans to raise £50 million for a sidecar — a pool of capital available of one year — to provide more firepower for its syndicate 2001.
It is a timely reminder that the strength of the City is at least in part in its variety and diversity.
