As two fund managers see proposed management buyouts collapse, what does the future hold for the protagonists? Julia Cahill and Bridget O’Connell report
Management buyouts have a history of being fraught affairs.
Living up to this reputation, MBO talks involving fund managers Invista REIM and the European arm of Valad both collapsed in the past fortnight – news that has left the sector feverishly speculating about what will happen next.
Duncan Owen’s advanced talks to buy out Invista’s fund management subsidiary were first to unravel.
Owen, who had stepped down as chief executive to spearhead the MBO, had by this point picked a core team of 35 from around 90 staff to stay with him to run mandates for two of Invista’s biggest clients – the listed Invista Foundation Property Trust and Invista European Real Estate Trust – and for St James’s Place and the remains of the Equitable Life portfolio. With the financial backing of IFPT and IERET, both of which Owen set up, the MBO looked a dead certainty.
But on 10 March, Invista’s board said: “Agreement could not be reached on terms which the board considers to be in the interests of the company’s shareholders.” The news left some speculating that Owen simply pushed too hard on terms, but he could not be reached for comment.
Alternative options
Invista said it is now looking at alternative options “to maximise value for shareholders”, including continued ownership of the business.
But rivals say that cancelling the sale plan now is an untenable position. Invista’s majority shareholder, Lloyds Banking Group, had left it with no choice but to liquidate the business when it confirmed last year that it planned to transfer £2.4bn of mandates, accounting for 39% of Invista REIM’s asset management revenue, to Scottish Widows Investment Partnership.
“Lloyds has shot itself in both feet,” says one rival fund manager. “They would not look credible if they now say ‘we have decided not to liquidate’”.
Owen’s position at Invista also looks untenable. “I don’t see how Duncan can stay there, given the decision,” says one source close to the situation.
Unless the MBO talks are revived, the key to what will happen next is whether Owen will drag the two listed property trusts he set up away from Invista. He may also look to take the mandate for St James’s Place.
“If he can do so, then I can’t see what’s left of Invista being worth very much, and that won’t be good for the shareholders,” says the source.
So the Invista board will need to move quickly if it wants to try to sell the business or specific contracts to the third parties which ran a rule over it during the past year – among them, Internos Real Investors, Henderson Global Investors and Schroders.
Uncertainty at Valad
Meanwhile, uncertainty also hangs over the European division of Valad.
The Australian group announced on Monday that the MBO offer for Valad Europe, which comprises the bulk of Valad’s fund management business, had been withdrawn.
The £52m bid spearheaded by managing director Peter Hurley and European head Marty McCarthy was deeply unpopular with shareholders in Valad, which reported a A$50.7m half-year loss for the six months to December.
Opportunistic grab
Simon Marais managing director of Orbis, which owns an 18% stake, described the indicative bid as “a highly opportunistic grab” by management, according to a report in newspaper The Australian. Marais complained that the European business, which manages 15 funds and mandates, would be worth far more if Valad addressed its “excessive cost base”.
As with Invista, Lloyds is also one of the main protagonists in this tale – a position that dates back to 2007, when Valad bought Bank of Scotland client Kevin McCabe’s highly leveraged Scarborough Property Group.
Two years and a property crash later, Valad was forced to restructure its European division, which resulted in the creation of a £1.1bn (€1.28bn), three-year European property joint venture with the bank, called DUKE.
Valad’s European fund management platform remained a separate group, owned by Valad, and provides management to the 50:50 jv.
This historic position is pointed to as the impetus behind Lloyds providing backing for the MBO because any proceeds from the disposal of Valad Europe before June 2012 must go to DUKE to pay down its debt.
Against this backdrop, a sale to a third party looks unlikely. “I don’t think Valad will find a buyer for the European business and may end up just retaining it,” speculates one rival fund manager.
The company says it will continue to explore approaches from third parties and will “retain the business should none of these proposals be in the best interest of security holders”.
Hurley’s continuing involvement is just as uncertain, with Valad’s comment that it is discussing “his future arrangements” with the company only fuelling market speculation he will leave the group.
Hurley and Owen may wish to compare notes.
INVISTA REIM
MBO protagonists Former Invista chief executive Duncan Owen and senior team members Nick Montgomery, Tony Smedley, Chris Ludlam and Melinda Knatchbull
Mooted bid Up to £20m
Backers Invista Foundation Property Trust and Invista European Real Estate Trust
Assets The MBO team wanted to take control of mandates representing assets under management of around £2.8bn. St James’s Place, Equitable Life and two listed property trusts that it floated in 2006 – the £318m Invista Foundation Property Trust and €515m Invista European Real Estate Trust – would be its biggest clients.
Latest results Invista Real Estate Investment Management posted a £5.3m pretax profit for the six months to 30 June 2010
VALAD
MBO protagonists Managing director Peter Hurley and Marty McCarthy, who heads Valad Europe
Mooted bid £52m – £4.5m below the carrying value
Backer Lloyds Banking Group
Assets Europe has £4.2bn of assets under management. This comprises five value-add funds, two of which are in the UK, two in the Nordics and one in Germany; five industrial funds in the UK, France, central Europe and pan-Europe; mandates for DUKE, European Commercial Real Estate and Kefren Properties in the Nordics; and a student accommodation mandate from University Capital Trust.
Latest results Valad last month reported a group A$50.7m loss (£31.2m) for the six months to December 2010. The DUKE jv was carried at nil.
