The Crown Prince of Buyouts

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CROWNPRINCE

Bloomberg Markets36 J u n e 2006

In July 2004, U.K. private equity giant Permira Holdings Ltd. teamed

up with CVC Capital Partners Ltd. to buy the Automobile Association

Ltd., a for-profit company that 15 million British motorists rely on for

roadside help when their cars break down. The price was 1.75 billion

pounds ($3 billion), 1.3 billion of which was borrowed and secured

against the AAs revenues. Permira and CVC installed new management

and, within two years, had slashed a third of the AAs 10,500-strong

workforce, including at least 500 of its roadside mechanics, whose yel-

low vans and jackets are instantly recognizable to British drivers.Buyouts like the AA sale are booming from New York to London, to

Madrid. In 2005, private equity firms racked up an unprecedented $255

billion of announced takeovers worldwide, 34 percent more than in

2004, according to data compiled by Bloomberg. The center of the pri-

vate equity universe these days is Europe, and Permira, which is seeking

to raise as much as 10 billion euros ($12.3 billion) for Europes biggest

buyout fund, is in the thick of it. Its partners are getting rich buying and

selling companies, and its deals are attracting controversy. The AA take-

over is a prime example. The U.K.s GMB union, which represents

596,000 workers, including 2,000 AA employees, reacted to the job cuts

The U.K.s Permira

is raking in profits

as LBOs boom.

Managing Partner

Damon Buffinis bigchallenges are fending

off political attacks

and an invasion of

Europe by U.S. firms.

PHOTOGRAPH BY ALAN WELLER/BLOOMBERG NEWS

COVER STORY

By Simon Clark and Edward Evans

TheCROWNPRINCE

ofBUYOUTS


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Bl oom b e rg M arke t sM on t h 2006 TK

Buffini out on the townin London. Permirasmanaging director shuns

most publicity.


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COURTESYAA

C O V ER ST O RY: PERM IRA S PRI N C E O F L BO s

with an unusually intense public campaign. In March, the

union picketed AA offices in five cities. Its asset stripping of

the worst kind, says Gwyn Prosser, a Labour member of Parlia-

ment who also belongs to the GMB. You could describe it as

theft masquerading as financial engineering, he says, referring

to the traditional buyout method of paying for takeover loans

with the targets revenue. Prosser says he will sponsor a petition

in Parliament slamming Permira and CVCs cost cutting at the

AA. He expects about 65 of the 646 MPs to support him. What

Prosser, 63, and others want is a parliamentary review of how

buyout firms operate, with more disclosure of their plans for

the businesses they buy, a review of tax rules that benefit them

and more reporting on their investors and profits.

The political storm may only increase as buyout firms

raise record funds to target bigger and better-known com-

panies. A dozen buyout partnerships are raising new,

multibillion-dollar funds and may go toe-to-toe with Permira

when it attempts an acquisition. Among Permiras fiercest

competitors are U.S. firms trying to widen their European

footprint, including Blackstone Group LP, Carlyle Group and

Kohlberg Kravis Roberts & Co.

Meanwhile, the aging founders of the private equity in-

dustry are giving way to a younger generation of leaders. The

biggest names from the first buyout boom in the 1980s are

now in their 60smen like Ted Forstmann, Thomas Hicks,

Henry Kravis and Thomas Lee. Theyre being supplanted by

people in their 40s who

have moved up the lad-

der and are hungry to

take charge.

In Europe, the leader

of that new generation is

Permira Managing Partner Damon Buffini. He shuns most

publicity, and he declined to be interviewed for this article. Yet

greater scrutiny is an inevitable consequence of Buffinis own

success and the new prominence of buyout firms.

Buffini, 44, is the Cambridge- and Harvard-educated son

of an American soldier and a British gas company clerk. Busi-

ness partners say he rose to the top through a combination of

charm, grit and financial savvy. Damon Buffini and his part-

ners are taking Permira from being a leading European pri-

vate equity firm to a world leader, says Peter Bacon, the

former head of Credit Suisse Groups private equity advisory

team in Europe. Bacon, 44, this year became head of Euro-

pean operations for New Yorkbased investment firm GSO

Capital Partners LP.

After proving his mettle in dozens of deals, Buffini has at-

tracted a long chain of admirers. Hes your original self-

made man, says Leon Allen, 67, a friend who was chairman

of Tetley Group Plc, the U.K.s leading tea bag maker, when it

was owned by Permira in the 1990s. Damon is the prime

minister at Permira.

Permira Holdings is registered in Guernsey, one of the

Channel Islands. The firms headquarters is in London, one of

a total of eight Permira offices, including one each in New York

and Tokyo. Permira has been a leader in European private equi-

ty from the time it was founded in 1985 as a group of European

venture capital funds by U.K. money manager Schroders Plc.

It has arranged 280 deals worth more than 60 billion. Per-

mira says it backed 14 European takeovers worth 1 billion or

more from 2000 to 05, making it the top firm by that mea-

sure. Its closest rivals were Apax Partners Worldwide LLP and

Cinven Ltd., with a dozen deals apiece, and KKR, with nine,

according to a March report prepared for Permiras investors.

The 5.1 billion fund Permira

raised in 2003 set a European

record at the time and was

among the biggest in the world.

Theres no sign the European

deal well is about to run dry. By

value, half of last years an-

nounced $255 billion in acqui-

sitions were in Europe, where

companies in industries from

telecommunications to health

care are undergoing an intense

period of restructuring and

where many family-owned

The AA at work: The GMB union says service has declined.

You could describe it as theft masquerading as financialengineering, a U.K. MP says of private equity.


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Bl oom b e rg M arke t sJ u n e 2006 39

TOM

WAGNER

companies are selling out as founders retire. In the first quar-

ter of 2006, $28 billion of European buyouts were an-

nounced, up slightly from the same period a year earlier. The

biggest was a 7.5 billion bid for Dutch media company VNU

NV by a group of five U.S. buyout firms including KKR, and

Amsterdam-based AlpInvest Partners NV.

In November, Permira and four other firms offered $15.3

billion for TDC A/S, Denmarks former telephone monopoly.

When the deal closed in January, it was the largest leveraged

buyout since KKR led the $31.4 billion takeover of RJR

Nabisco Inc. in 1989. In Europe, national businesses are be-

coming European businesses, says Joseph Bower, a professor

at Harvard Business School who served as an adviser to Per-

mira in the 1990s. To help that happen, you need a lot of

capital. Private equity firms can play a very constructive role

in doing this.

Permira partner Charles Sherwood says the process of re-

making a company shouldnt be judged by whether jobs are

lost. I just cant accept that, he says. The correct question is,

When they come out of the period of ownership by Permira,

are they stronger, more-efficient businesses? Parliaments

Prosser and the U.K.s Consumers Association argue that in

the case of the AA, the answer is no. In the 12 months ended

on Feb. 28, it dropped to third place from first among road ser-

vice organizations in terms of how promptly it responded to

customers calls, according to Which?, the Consumers

Associations magazine. Sherwood, whos an AA board

member, says Permira and CVC have made the road

service company stronger and more efficient.

The dust-up in Britain is just one example of the

suspicion that many Europeans have of loosely regu-

lated buyout firms and their cousins, hedge funds,

which are investment pools designed for investors

with at least $1 million to bet on falling as well as ris-

ing securities. In early April, Werner Seifert, former

CEO of Frankfurt-based stock exchange Deutsche

Brse AG, published a book, Invasion of the Locusts

(Econ Verlag), whose title makes clear his view of Eu-

ropes new financial elite. Seifert mostly targets hedge

fund firms, one of which, London-based TCI Fund

Management, helped force his ouster from Deutsche

Brse. The epithet locustwas used last year by Ger-

man Labor Minister Franz Mntefering to describe

the buyout firms that bought $27 billion worth of

German companies in 2004 and 05.

Nigel Doughty, co-founder of U.K. buyout firm

Doughty Hanson & Co., considers the attacks on pri-

vate equity misguided. We can help them, but they

dont realize it, he says. They think were locusts. We

can promote economic growth, and we do create jobs.

From 2000 to 04, companies backed by buyout firms

have added a net 420,000 jobs in Britain and on the

Continent, according to the Brussels-based European

Private Equity and Venture Capital Association

(EVCA). Permiras Sherwood says private equity

boosts long-term employment and economic growth by mak-

ing businesses stronger.

Money is pouring into buyout funds even though stock

markets in the U.S., the U.K. and France are hitting five-year

highs. One reason is that top private equity outfits like Per-

mira have consistently beaten the markets, even after they

deduct high management and performance fees from the

profits. In 2005, European private equity firms returned an

average 24 percent, according to EVCA, beating the 20 per-

cent rise in Europes benchmark Dow Jones Euro Stoxx 50

Index. Private equity and hedge funds have performed well

over the past 10 years when compared with public markets,

which still bear the scars of the downturn after 2000, says

Bill Barnard, an analyst at Dresdner Kleinwort Wasserstein

in London.

Managers looking to restructure companies often

choose private equity to avoid answering to public

shareholders. A decision taken in a day in a pri-

vate equity context can easily take many, many months in a

publicly traded company, Sherwood, 46, says. Hes worked

at Permira and its predecessor firm, Schroder Ventures, since

1985. Like Buffini, he was educated at Cambridge and Har-

vard. Both started out as management consultants.

The deals are getting bigger and bigger, as buyout firms

Permira partner Sherwood says the era of big deals is here to stay.


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team up to buy giant companies like Denmarks

TDC. This dynamic of larger transactions is here to

stay, says Sherwood, speaking in Permiras London

office, located above an open-air market in the Cov-

ent Garden district, just down the street from the

Royal Opera House. Theres no sign of it abating.

You have public companies seeking to benefit from a

period in private ownership, conglomerates selling

marginal businesses to focus on their strengths and

family-owned businesses selling control to manage

succession issues or to help expand outside their

national market.

In addition, European interest rates, which are

near a 50-year low, have made it easier for firms to

leverage huge amounts in takeover loans. Permira

and its partners arranged more than $12 billion in

loans to buy TDC, helping push European, Middle

Eastern and African takeover loans to $97 billion for

the first three months of 2006, up 60 percent from

the previous year, according to Bloomberg data. In

April, TDC declared a $7 billion dividend, $6.3 bil-

lion of which will go to Nordic Telephone Co., the

holding company that took control when Permira

and its partners bought TDC.

Permira is taking advantage of the clamor by in-

vestors for more private

equity to raise its new

fund, which may rank sec-

ond in the world to a $13.5

billion pool that New Yorkbased

Blackstone Group is raising.

Wanching Ang, co-head of private

equity at Munich-based Allianz

AG, Europes largest insurer, ex-

pects firms like Permira to easily

reach their fund-raising targets.

Theres more demand than there

is supply, Ang says. These days,

she adds, its hard work to get the

private equity managers to take her

money. I have to flatter, beg, get

drunk with them, Ang jokes.

A glance at Permiras returns

explains why the firm is popular

among investors. Permira and

Schroder Ventures, which was the

firms name until 2001, earned an

average of 31 percent annually

from 1990 through 2005 com-

pared with 7 percent for a basket of

European stock indexes, according to the March report pre-

pared for Permiras investors. The firm has given back 6 bil-

lion in cash to investors since 2000. Permira currently owns

30 companies with more than 200,000 employees and com-

bined annual sales of45 billion, ranging from U.K. budget

motel chain Travelodge Hotels Ltd. to Luxembourg-based

SBS Broadcasting Sarl, Europes second-largest television

company, to Grandi Navi Veloci SpA, an Italian high-speed

ferry company.

Under Buffini, Permira has run up one of the best track

records in European private equity. Permiras last three funds

all rank in the top 10 percent in Europe in terms of returns.

Its 1997 fund had returned 84 percent as of Dec. 31, 2005; its

2000 fund, 15 percent; and its 2003 fund, 40 percent. It has

revamped companies such as Tetley and turned around Ger-

man pay-television broadcaster Premiere AG. And it has

backed expanding businesses like U.K. casino operator Gala

Group Ltd.

One of Permiras most successful investments was U.K.

home improvement retailer Homebase Ltd. Permira

reaped 858 million, or six times its original invest-

ment, when it sold Homebase to U.K. retailer GUS Plc in

2002, according to a report that was sent to investors in Per-

miras last fund and obtained by Bloomberg News. Another

winner was Italian luxury yacht maker Ferretti SpA, which

earned Permira 222 million, or more than 50 times its 1998

investment of4.3 million. Permira sold its stake after Ferretti

was listed on the Milan stock exchange in 2000. Two years

later, it made the unusual decision to buy Ferretti back, invest-

ing a sum equal to the amount it earned from the first sale.

Ferguson was a founder of the business that would become Permira.


TOM

WAGNER


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Its easier to expand as a private company, says Gabriele

Del Torchio, 55, Ferrettis chief executive officer. Permira has

given us guidance, scrutinized our acquisitions and helped

supply financing sources. Ferrettis payroll has grown to 2,500

from 200 in 1998, thanks to 10 acquisitions. Sales at the yacht

builder, which plans to sell shares in Milan again at some

point, rose 14 percent to 636 million in the 12 months ended

on Aug. 31.

Buffinis determination to make his mark on global private

equity pits him against some of the industrys icons. At KKR,

cousins George Roberts, 62, and Henry Kravis, 62, remain in

charge of the 30-year-old buyout firm. Yet for the most part,

Buffini, who was elected to succeed Peter Smitham, 64, as Per-

miras managing partner in 2000, will be competing with a

new generation of deal makers. In March, billionaire Thomas

Lee, 62, who founded buyout firm Thomas H. Lee Partners LP

32 years ago, stepped down and left his firm in the control of

its younger partners, including Anthony DiNovi, 43.

Like other Europe-based buyout firms, Permira faces a

growing army of U.S. competitors, led by KKR, that are en-

croaching on its turf. In 2005, U.S. private equity partnerships

backed more than $48 billion of European takeovers, up from

about $9 billion in 2001, according to Bloomberg data. In

November 2004, Permira lost out to New Yorkbased Clayton,

Dubilier & Rice Inc. in a 2.6 billion auction for Rexel SA, a

French electrical equipment supplier. The following year, Per-

mira retreated from Paris after failing to buy a single French

company in six years. It now does French deals from London.

It just wasnt working, Sherwood says of the French effort.

The only Permira fund that ever lost investors money was a

98 million French fund raised in 1989, according to the re-

port sent to prospective investors in Permiras last fund.

In the U.K., Permira hasnt had everything its way either.

In March, the firm walked away from an 845 million bid for

retailer HMV Group Plc, after the publicly traded owner of

HMV music stores and Waterstones bookshops rejected the

buyout firms second approach. In 2004, Permira halted its

pursuit of W.H. Smith Plc, the U.K.s biggest seller of statio-

nery and magazines, after it reviewed the companys books

and decided its pension fund deficit was too large. In 2003,

Permira lost U.K. department store chain Debenhams Plc to

U.S. rival Texas Pacific Group and CVC. Sherwood declined

to comment on the unsuccessful deals.

As American firms push further into Permiras European

sphere, Permira is looking east. The company opened a Tokyo

office in 2005, with plans to invest as much as $1.3 billion in

Japan by the end of 2008. Sherwood, whose

business card has his contact information

in Japanese on the back, says Japan may

now offer the same kind of opportunities

Germany and Italy did in the past 10 years.

Theres a crying need for industrial re-

structuring, he says. At the large-deal end,

there are very few competitors.

Permira is also expanding in the U.S.

Last year, it hired Thomas Lister, 42, a for-

mer lieutenant of U.S. buyout pioneer

Forstmann, to run its New York office,

which opened in 2002. It faces intense

competition in the worlds most-established

buyout market. Sherwood says the New

York office looks for companies whose busi-

nesses span Europe and North America.

There is a significant opportunity to bridge

the Atlantic, he says. Were not interested

in the Alabama supermarket. In February,

Permira bought Indianapolis-based safety-

goggle maker Aearo Technologies Inc. for

$765 million. The company made about

C O V ER ST O RY: PERM IRA S PRIN C E O F L BO sBl oom b e rg M arke t sJ u n e 2006 41

In Europe, Permira faces a growing army of U.S.competitors, led by Blackstone, Carlyle and KKR.


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C O V ER ST O RY: PERM IRA S PRIN C E O F L BO s Bloomberg Markets42 J u n e 2006

one-fifth of its fiscal 2005 sales in five

European countries.

Buffini, the man in charge of Permi-

ras strategy, was born in the central Eng-

lish city of Leicester in 1962 and raised

by his mother, Maureen Buffini, who

worked for the state gas board. His fa-

ther, a U.K.-based American military

man named Jonathan Taylor, was never

part of the family, acquaintances of Buf-

fini say. At Gateway College, a local pub-

lic secondary school, Buffini thrived on

the soccer pitch and in economics class,

says Steve Martin, his teacher and for-

mer coach. He was always the one pre-

pared to challenge conventional ideas,

Martin, 52, says. We were just moving into the era of

Thatcher, and Damon was challenging traditional Keynesian

ideas. Margaret Thatcher, U.K. prime minister from 1979 to

90, clashed with Britains labor unions as she sold off state

assets. In the process, Maureen Buffinis former employer be-

came publicly traded British Gas Plc in 1986.

In 1981, Buffini entered Cambridge Universitys 495-year-

old St. Johns College to study law. He was a passionate foot-

baller, part of the soccer crowd, recalls Toby Wyles, a fellow

Cambridge student who went on to become head of U.K. buy-

outs at Apax Partners. Buffini graduated and moved to Lon-

don, where he took a job at LEK Consulting LLP, a management

consulting firm run out of a basement office on Londons St.

Jamess Square that had been co-founded a year earlier by Iain

Evans, a former partner at Boston-based Bain & Co. We were

looking for intellectual horsepower, energy and ambition

people who wanted to make a mark on the world, Evans, 55,

says. Damon had all those qualities. We taught them that the

world is driven by marketsby demand and consumers and

competitors. At LEK, Buffini got an early lesson in hostile

takeovers, helping defend U.K. conglomerate Imperial Group

Plc from British corporate raider James Hanson. We lost by a

small margin, Evans says. Hanson Trust Plc bought Imperial

Group for 2.5 billion in 1986.

That same year, Buffini enrolled in Harvard Business Schools

MBA program; LEK helped pay his tuition. In October 1987,

Nick Ferguson came calling. Then a manager for Schroders,

he was in the process of building up a chain of private equity

funds around the world, and he was looking for talent at

Harvard. Ferguson landed in New York on Oct. 19Black

Monday, when the Dow Jones Industrial

Average fell more than 20 percent. Its

the only time in my life I heard the pilot

announce the wind speed, the tempera-

ture and the level of the Dow as we land-

ed, he says. Ferguson had hired a house

in Cambridge, Massachusetts, to inter-

view candidates. When he arrived,

Damon was standing in front of the

door, Ferguson, 57, recalls. He said,

You cant come in until you hire me.

Buffini joined Schroder Ventures U.K.

team the following year.

Buffini seldom talks one-on-one to

the press. He designated Sherwood, a se-

nior partner, as the firms spokesman for

this article. Unlike some of the firms in this industry, we

really do want to avoid a personality cult, Sherwood says.

That hasnt prevented Buffini from basking in the admiration

of his peers. On April 4, he attended a lunch with 250 rivals

at Londons Merchant Taylors Hall, where Financial News

gave him its personality of the year award.Financial News is

a weekly newspaper for Londons banking industry, with a

circulation of 19,000.

Damons first boss, Evans, has an explanation for Buffinis

allergy to media coverage: Hes a black guy whos done incred-

ibly well from a working-class background, and hes very wary

of the press. You see people built up by the press and then

pulled down. He is possibly more vulnerable than others.

Colleagues say that from the start of his career in private

equity, Buffini showed a strong aptitude for the process of eval-

uating and remaking companies thats crucial to the success of

any buyout firm. Colleagues point, for instance, to his perfor-

mance in helping manage the 1992 acquisition of Linton &

Hirst Ltd., a maker of components for transformers for home

appliances that Schroder Ventures bought for 1.2 million.

Veteran corporate manager Jim Ryan was hired as CEO to

turn the business around, and he worked with Buffini. Hes

inhumanly intelligent, Ryan, 59, says. In meetings, he lets

people have their say and tries to get to a point where people

feel the decisions reached were their own ideas. Ryan and

Buffini agreed to focus on boosting Linton & Hirsts margins.

Once the business was acquired, Ryan says, he got sidelined

into controlling costs by selling off land. Hed gently but con-

stantly remind you about the business plan, developing very

subtle boundary limits within which you can work, he says.

We were looking for intellectual horsepower, energyand ambition, Evans says. Damon had all those qualities.


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Buffini was a risk taker at Schroder Ventures. By 1994, Lin-

ton & Hirst had reached Schroders targeted value of 12 mil-

lionat which point it normally would have been sold, Ryan

says. Ryan saw potential in the business of making transform-

ers for computer modems, so he asked Buffini for more time.

A lot of venture capitalists would have pulled out then, Ryan

says. Damon rolled the dice again. The business was sold in

1995 for about 23 million, including debt. Schroder Ventures

made 12.9 million, or 10 times its investment.

In 1996, Schroder Ventures teams in the U.K., France,

Italy and Germany decided to unite as Schroder

Ventures Europe. The U.S. and Japanese units con-

tinued as separate funds. In 1997, the European partners

launched a pan-European fund for the first time. The bet

paid off: The 890 million pool raised in 1997 earned in-

vestors 2.2 times their money, according to one of the inves-

tors, the California Public Employees Retirement System,

or Calpers.

As late as 2000, Schroder Ventures European national

teams were still semiautonomous, even though they invested

from one fund. Volatile talks started to form a unified com-

pany. The crucial point turned out to be compensation, says

Armin Timmerman, a former partner at McKinsey & Co. who

advised on the negotiations. Partners had to be convinced to

give up their existing compensation contracts and take a

smaller share of a larger pie. This was the most difficult issue:

Whos got to give? he says.

Timmerman says the tension was eased when the firm

raised a 3.5 billion fund in October 2000. There was three

times as much money to be distributed, he says. That same

year, the principals elected Buffini managing partner.

Given Permira/Schroder Ventures 31 percent average re-

turns, its no surprise that investors today have great faith in

Buffini & Co. Theyre darn good, says Ferguson, now chair-

man of London-based SVG Capital Plc, a publicly traded in-

vestment trust that was spun off from Schroders. SVG has

pledged 2.8 billion to Permiras new fund. Shares of SVG,

which has 75 percent of its assets in Permiras funds and is

considered a proxy for the private equity firm, rose 34 per-

cent in the 12 months ended on April 7, while the U.K.s FTSE

All-Share Index rose 23 percent. Permiras management

owns 5 percent of SVG Capital.

Other big investors in Permiras funds include Calpers, the

biggest U.S. pension fund, and AlpInvest, which invests on

behalf of 4.3 million Dutch workers. Calpers has sunk at least

$270 million into Permiras funds

since 1991, according to its Web

site. Permira has a strong per-

formance track record of invest-

ing in Europe and has a good

business sense of the local econo-

mies, says Brad Pacheco, a

spokesman for Calpers. We are

in four of their funds, and each

has performed well for us.

Buffini and his partners are

well paid for taking care of their

clients investments. While the

partners individual compensa-

tion has never been made public,

documents at Companies House,

the Cardiff, Walesbased regis-

trar for U.K. companies, reveal

that the top, unnamed earner at

Permira Partners LLP in 2004

made 4.74 million. Permira

takes an annual fee amounting to

1.5 percent of each fund. On that

Permira and other top buyout firms have beaten themarkets even after deducting high management fees.

PAO

LOSACCHI/GETTYIMAGES

Permira helped Ferretti expand through acquisitions, CEO Gabriele DelTorchio says.


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basis, the new, 10 billion fund would contribute 150 mil-

lion a year in fees for Permiras 92-member staff. The firm

also keeps 20 percent of profits from any sale or stock market

listing. And it charges fees to the companies it buys and sells;

the AA agreed to pay Permira and CVC 25 million when it

was acquired. By contrast, managers of stock investments

for pension funds charge an average fee of 0.3 percent, ac-

cording to Arlington, Virginiabased pension consulting firm

Watson Wyatt Worldwide Inc. And stock fund managers

dont get to keep any of their gains.

Permira executives defend their lucrative compensation

program. Private equity is undoubtedly an expensive way of

financing a business, Sherwood says. Its typically only a

logical way of financing for a transitionary period and only

for a period when there is tremendous upside to be achieved

through radical change.

Under Buffini, Permira sometimes seeks to work with the

sellers of companies it takes over. When Permira bought

Homebase from J Sainsbury Plc in 2001, Sainsbury kept an

18 percent stake. At a Bloomberg-sponsored private equity

seminar in London in February 2004, Buffini told his audi-

ence of fellow takeover artists: I think we have to think about

different ways in which we can work together with the exist-

ing shareholders. We could both be winners.

For now, critics are keeping the private equity community

in a defensive mode. In November 2005, 131 members of

Parliament signed a resolution calling for stronger labor

rights after Gate Gourmet, a caterer for British Airways Plc

owned by Texas Pacific Group, fired 670 workers. The firings

sparked a strike that shut down Europes third-largest airline

at its Heathrow Airport hub for two days.

At the AA, Permira and CVC aggravated the situation in

February, when they arranged additional loans to fund a

500 million dividend from the company to themselves. Per-

mira and CVC declined to comment on the payment.

The political battle presents a new challenge for Permira

and its rivals. The limits to the growth of the industry now

include politics, says John Barber, a managing director at

London-based Helix Associates Ltd., which advises buyout

firms on fund raising. Permira and other high-profile play-

ers have a choice. They can lead or be led in dealing with the

wider public. The consequences of doing nothing could be re-

strictive legislation.

One area in which Permira and other private equity firms

are vulnerable is in their tax accounting. You could destroy

the economics of this industry in one day by denying all the

tax deductions on loans used for acquisitions, says John

Moulton, founder of U.K. buyout firm Alchemy Partners LLP

and a former head of U.K. buyouts at Schroder Ventures.

Under British law, companies can deduct interest costs on

loans from their tax bills.

Critics of private equity single out its penchant for se-

crecy. Every day, the public is dealing indirectly with

private equity firms that they know very little about,

says Prem Sikka, a professor of accounting at the University

of Essex and an expert on tax havens. People have a right to

know why a factory is being closed or jobs are being cut, Sikka

says. Who is behind the takeover of the store where they buy

their clothes? Who owns their electricity provider? And where

and how is their pension being invested? Permiras privacy

is assured because its registered in the offshore tax haven of

Guernsey, Sikka says.

In March, Arthur Levitt, former chairman of the U.S.

Securities and Exchange Commission, urged an audience of

private equity investors in Geneva to open up. While private

equity will remain technically private, its actions will become

the publics concern, Levitt said in his speech. Levitt noted

that he had met with a group of U.K. lawmakers three weeks

earlier. The areas they were most concerned about were pri-

vate equity firms and hedge funds, he said. (Levitt is a board

member of Bloomberg LP, the parent of Bloomberg News,

and a senior adviser to Washington-based Carlyle Group.)

Jonny Maxwell, head of private equity at Edinburgh-based

Standard Life Investments Ltd., doesnt expect much to

People have a right to know why a factory is being

closed or jobs are being cut, Prem Sikka says.


10/10

Bloomberg Markets48 J u n e 2006 C O V ER ST O RY: PERM IRA S PRIN C E O F L BO s

Tracking Permiras Deals

You can use the Bloomberg M&A Analysis (MA) function to

track Permiras acquisitions and sales of companies. Type

MA , and click on Mergers and Acquisitions Search.

Tab in to the ENTER COMPANY NAME field, enter PERMIRA and

press . Click on Permira Advisers Ltd. to select the pri-

vate equity firm. In the list of results, as shown below, click on

Aearo Technologies Inc. under the Target Name heading to

see details of Permiras acquisition of the Indianapolis-based

maker of earplugs and other safety equipment. Permira an-

nounced on Feb. 1 that it had agreed to pay $765 million to

acquire the company from Bear Stearns Merchant Banking,

the private equity arm of Bear Stearns Cos. The offer came

just over two months after

Aearo had filed to sell shares

in an initial public offering.

The largest private equity

deal in 2005, the $15.3 bil-

lion acquisition of Danish

phone company TDC A/S by

a consortium of five buyout

firms including Permira, is

listed on MA under the name

of the groups acquisition ve-

hicle, Nordic Telephone Co.

Press Menu twice to return

to the M&A Search screen, tab in to the ENTER COMPANY

NAME field and enter NORDIC TELEPHONE. Press and

click on Nordic Telephone Co ApS for details of the deal.

Permiras performance is reflected in that of SVG Capi-

tal Plc, a fund of funds that invests in private equity and

shares with Permira a heritage in Schroders Plc, a London

investment manager. SVG has about 75 percent of its as-

sets invested in funds run by Permira. To see the percent-

age gain in SVG shares during the previous 12 months,

type SVI LN < Equity> GPCT . For headlines of news

stories on buyouts and private equity, type NI LBO .

JON ASMUNDSSON

BLO O M BE RG T O O L S

For a list of the major holders of SVG Capital, type SVI LN PHDC .

change. Maxwell, 43, says the big challenge to Permira comes

from across the Atlantic. Just six years ago, there was a ques-

tion mark over whether U.S. firms like KKR could make it in

Europe, he says. Now, we know they are here to stay. In Oc-

tober, KKR raised 4.5 billion for its second European fund.

Blackstone plans to raise, and spend, billions in Europe, too.

Buyout firms are competing for talented managers as well

as for acquisitions. When Buffini lost the bidding war for

Debenhams to Texas Pacifics David Bonderman in 2003, the

U.S. firm hired British entrepreneurs John Lovering and Rob-

ert Templeman to manage its bid. They had previously led the

turnaround at Homebase for Permira. Every deal is treated on

its own merits, says Templeman, now Debenhamss CEO. Id

never rule out working with Permira again.

When Buffini sets out to recruit investors and managers

for Permiras acquisitions, he does it in style. In June 2005, to

celebrate the firms 20th anniversary, he sailed 400 guests

down the River Thames from the Houses of Parliament for

dinner at the Old Royal Naval College in Greenwich.

Jim Ryan recalls another memorable soiree in early 1996,

months after hed sold Linton & Hirst. Permira invited the

entrepreneur, who was looking for his next challenge, to an

overnight party at stately Brocket Hall north of London. I

was a bit puzzled why I was invited, he recalls. After dinner,

I returned to my room and found a brown envelope with my

name on it on the bed. Inside were the financials for Strand

Lighting Ltd., a U.K. maker of theatrical lighting equipment.

They got me at my weakest point, Ryan says of the offer to

take over the lighting company. I was hooked. Ryan took

and still holdsthe job of managing director of Strand Light-

ing, which remains owned by Permira.

SVGs Ferguson says that as the private equity industrys

size and power increase, buyout firms would do well to devote

some time to communicating better with the wider public. The

pension fund of the GMB, the union leading the protests over

the AA, has a deficit. Until last year, most of the unions assets

were in funds that track stock market indexes. Now almost

half of the fund is in bonds. Ferguson has some advice for the

union: Try investing in private equity. I would focus on the

best performers, Ferguson says. Permira is one of those. Such

an investment might teach the union to love private equity a

bit moreor at least hate it a bit less.

SIMON CLARK is a senior writer at Bloomberg News in London. EDWARD EVANScovers private equity in London. With additional reporting by LAURIE MEISLER inNew York and HUI-YONG YU in [email protected]@bloomberg.net

The Crown Prince of Buyouts

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