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AA: did private equity cause a breakdown?

A charge often levelled against private equity groups goes as follows: they buy companies, leverage them up, pay themselves juicy dividends and leave their targets over-indebted and far too vulnerable to the slightest shock, with little room for error. 

Look at Debenhams, proponents of that line will say. Look at Hertz. Look at J Crew and Neiman Marcus, which have filed for bankruptcy. Private equity wasn’t the only factor behind those companies’ troubles, but — depending who you ask — it either didn’t help matters, or was the root cause. 

Those critics now have another big name to add to their list: the AA, a 115-year-old British institution that has rescued many thousands of stranded motorists when their cars have broken down. 

The company has been listed since 2014, but is still saddled with debts as a legacy of its previous ownership by private equity groups CVC and Permira

It said this week that its debts, totalling £2.65bn, of which £913m is due for repayment in the next two years, are causing problems even though it only expects coronavirus to have a small impact on its performance. 

Its desperate need for cash has led it to hold talks with private equity groups to inject equity, including turnround groups Centerbridge Partners Europe and TowerBrook Capital, the latter fresh from snapping up the troubled Ask and Zizzi restaurant chains out of a prepack administration last month. 

The AA is being advised by Evercore and JPMorgan and is also considering raising new equity. Catch up on the details with DD’s Kaye Wiggins here

Of course, the private equity industry will say it can’t be blamed for all of the company’s difficulties when it hasn’t been in control for six years. 

The AA has made mis-steps in that time, including a drop in operating profits since listing, bad decisions to cut costs and to pay out dividends when financing costs hit £289m, and a late-night physical altercation involving its former chairman Bob Mackenzie, below, over a plan to separate its insurance business. Yes, really. 

And successive managers have kicked the can down the road on debt. 

But as the FT’s Cat Rutter Pooley points out in her column, AA’s problems today are pretty similar to its problems when it listed shares in 2014. It had too much debt then, and still does now. 

That’s down to private equity. In 2006, the buyout groups piled new debt on to the company so they could take back most of the equity they’d put in when they bought it a couple of years earlier.

And then, a year before the IPO, they loaded its balance sheet with £3bn in new debt, of which £2.6bn flowed straight back out of the company in dividends to its then owners.

It’s the kind of thing that enrages the industry’s critics — and will make them balk at the idea that the solution is yet another take-private. 

KKR, life insurance and immortality

The asset management industry founded by George Roberts and Henry Kravis in the 1970s, pictured below, is only forty years young. 

But it has an ageing problem. That is, the baby boomers who make up an outsize share of the beneficiaries of pension funds that are private equity’s biggest customers.

Those chronically underfunded pension schemes are fast going out of fashion, leaving workers to sort out their retirement savings on their own. For private equity groups, which rely on institutional pension funds to contribute roughly half the money in their buyout vehicles, that is a big problem.

Regulators see buyouts as too risky and complex for non-experts, and although that is slowly changing, it will be a long time before private equity makes a dent in the index trackers and mutual funds that soak up most retail money. 

So the biggest groups — including Roberts and Kravis’ KKR, which reported bumper results on Tuesday — are moving into insurance.

That playbook was pioneered by Apollo Global Management, which was also among the first private equity groups to build a lending arm capable of originating the kinds of debt securities that allow highly regulated insurance companies to invest their capital efficiently.

Apollo struck a big reinsurance deal with Prudential in June, helping add $100bn to its assets in the second quarter. 

Last month, KKR got on board, agreeing to buy the former life insurance unit of Goldman Sachs for about $4.4bn. 

“[Global Atlantic] sells annuities . . . largely to individuals in their fifties and sixties managing their own retirement wealth,” KKR co-president Scott Nuttall, below, explained on Tuesday. 

© Bloomberg

Those are just the kind of savers whose retirement savings never find their way into KKR’s institutional funds. No matter: now it will sell them insurance instead, and use the premium base as “permanent capital” for its growing credit business.

It’s an indication of the creative moves that private equity groups are devising to move beyond institutional capital and into retail. 

If it works, the pandemic will leave the biggest names on Wall Street in rude health — and staking a claim to immortality.

PJT bets on ex-ValueAct exec in rare activist crossover

DD readers know that corporate raiders rarely venture towards Wall Street investment banks, unless they’re getting ready to shake things up in the boardroom. 

We don’t often see an activist hedge fund manager putting on an adviser’s hat. After all, banks have created an entire business model around shareholder activism defence, serving as a proverbial wall between their clients and boardroom raiders such as Paul Singer and Carl Icahn.

So naturally, news that Allison Bennington, pictured below, who has built a 17-year career at one of the best-known activist funds, is switching teams from poacher to gamekeeper came as a surprise. Though, it does make a lot of sense.

Bennington, an executive at the activist hedge fund ValueAct, which has targeted blue-chip names such as Microsoft, Rolls-Royce and Citigroup, is headed to advisory firm PJT Partners to help corporations defend themselves against, well, investors such as the one she used to work with.

“Having had the unique perch on the other side I think she’s extraordinarily well-suited to lead our activism effort,” PJT’s founder and chief executive Paul Taubman told DD. “I think that gives us another arrow or two in the quiver.”

The demilitarised zone between shareholder advisers and activist funds has been breached before — Steven Barg, the co-head of shareholder defence at Goldman Sachs, resigned to join Singer’s Elliott Management last year. 

Job moves

  • Ford is replacing chief executive Jim Hackett after three years of lacklustre performance with chief operating officer Jim Farley. Get the full story here.

  • Keith Skeoch, the departing chief executive of Standard Life Aberdeen, the UK’s largest asset manager, is set to be named interim chairman of Britain’s audit watchdog.

  • Société Générale announced the departure of two deputy CEOs Séverin Cabannes and Philippe Heim after disappointing results.

  • Italian bank UBI announced chief executive Victor Massiah has resigned after he failed to prevent a takeover by Intesa Sanpaolo.

  • George Robson joined Sequoia Capital as a partner in the venture capital firm’s new European office. He previously worked in product at Revolut.

  • Christine Feng has left her role as director of corporate development for Amazon Web Services to join Blackstone as senior managing director of its tactical opportunities and credit units.

  • Jeffrey Kindler, former chairman and CEO of Pfizer, has joined Blackstone as a senior adviser.

  • EQT Partners named Olof Svensson as its new head of shareholder relations. He will join the private equity group at its headquarters in Stockholm following more than 15 years on JPMorgan’s equity capital markets team in London.

Smart reads

Blank-cheque A new generation of promoters of special purpose acquisition companies, or Spacs, are tinkering with elements of the capital markets tool that has historically been seen as an expensive route for companies to become public. But the lack of scrutiny on the product continues to raise red flags, our deputy editor Patrick Jenkins argues. (FT

Tech’s new frontier Political tensions between India and China have reached a boiling point, but the temperature is just right for American technology giants to sink their teeth into the silicon subcontinent’s ripe start-up scene. (FT)

Triple dipping The UK tax authority has accused General Electric of a $1bn fraud, deceiving HM Revenue & Customs into a “triple dip” tax advantage. Here’s the back-story. (FT)

News round-up

TikTok defends sale of US arm as investors move behind Microsoft (FT)

Alphabet locks in record-low borrowing costs in $10bn deal (FT)

Amazon’s Deliveroo investment approved by UK regulator (FT)

France suspends Morgan Stanley from its government debt sales (FT) 

Google’s $2.1bn Fitbit deal hits roadblock as EU opens probe (Reuters)

Intesa Sanpaolo beats expectations as insurance revenue grows (FT)

PizzaExpress to cut 1,100 jobs and sell UK business (FT)

Rackspace to list at bottom of its share price range (FT)

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt and Mark Vandevelde in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com


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