Daily briefing: Monday - A different world

You bought at the peak of the buyout boom in 2007, valuations have now tumbled and your assets are still saddled with large debts. What do you do?

Welcome to the world of private equity. Private equity firm Charterhouse owns a 35.8% stake in Acromas, AA Insurance’s parent, which has just revealed a £458m loss after paying out nearly £700m on debt interest. Acromas’s group net debts rose from £6.3bn to £6.6bn.

Charterhouse, to remind you, is the private equity firm that splashed out £200m and £250m respectively for majority stakes in Giles and credit hire firm Drive Assist between 2007 and 2008.

Both Giles and Drive Assist are also in a situation where interest on debt exceeds earnings, according to the last accounts posted with Companies House.

So what does this all mean?

New name of the game

Private equity firms are financers who keep themselves to themselves, and do not divulge where they source their capital from and what the conditions are regarding paying it back.

However, the big idea of private equity, generally, is to buy a company and invest in it so that when it sells, usually by flotation, they can pay back the capital providers with a nice return while also earning themselves a mint.

That was the name of the game in 2007, but today’s world is very different. Stock markets across the globe are convulsing, which is why group discount firm Groupon scrapped its $22bn listing last month.

Those that have floated, such as Betfair, have struggled on the stock market. Meanwhile, valuations are way off their peak in the boom years.

Painful exit

In today’s conditions, what kind of return would Charterhouse get for these investments, bearing in mind that most private equity firms sell their assets after five years?

By that yardstick, it doesn’t look pretty.

Perhaps Charterhouse is playing the long game, and it’s all part of a cleverly thought-out strategy. If that’s the case, I look forward to hearing all about its sucess.

But I’m not holding my breath.