Anyone who follows corporate action in housebuilding will have noticed some mysterious strangers riding into town. Sarah Richardson finds out who they are – and where they might strike next
Merger mania is nothing new in construction: such a large and fragmented industry is bound to experience continuous pressure to consolidate and conglomerate. In the past, however, the firms that were buying and selling generally belonged to the industry. But over the past year, that pattern has been broken by a new force in finance: the private equity predator.
These companies tend to move into high-margin sectors that are in the upswing of their growth cycle. In construction, this has meant housebuilding, and the firm leading the charge to buy into it has been Sir Tom Hunter’s West Coast Capital. This has snapped up Crest Nicholson and McCarthy & Stone in the past year. Further down the line, however, traditional contractors may well find themselves hustled onto the auction block, especially if they have regeneration arms.
This sudden interest in construction has come at a time when the private equity sector is itself under scrutiny. The heads of eight of the UK’s largest firms have just appeared before a parliamentary select committee investigating profiteering, and this week an industry report said the firms needed to be less secretive.
Opponents of the movement point to the infamous three-to-five-year exit strategy of venture capitalists, which often leaves their clients struggling for life. But whereas venture capital helps to support companies at the start of their journey, private equity is usually geared to buying more established firms and maintaining their ownership over a longer period, while charging a fee for their financial backing. Advocates of private equity point to its ability to turn around underperforming businesses or give them time to reorganise without City interference.
Here, Building looks at five of the private equity firms that are sidling up to the industry, and tries to predict their intentions …
3i
Chief executive Philip Yea
Likely targets
Consulting engineers, architects and property consultants; repair, maintenance and facilities management providers, particularly those who work with local authorities.
Previous deals
Bought stake in Foster + Partners in May.
Current interests
3i has a growing interest in property and related companies. It is understood to be talking to social housing group Keepmoat over backing a management buyout that would value the company at about £800m.
It was also interested in property consultant Erinaceous. However, 3i is understood to have since got cold feet, and put in a low bid that it is unlikely to increase in the face of competition from HBOS and Bridgepoint.
Style
Has two main types of deal: stakebuilding and buyouts, although the former is more akin to fund investment than private equity. Its quoted private equity team will buy influential or controlling shares in small to mid-sized companies in the UK or continental Europe with an enterprise value (that is, its value taking into account market capitalisation and debt) of £68m-1.36bn. In terms of buyouts, 3i looks at major holdings in businesses with a value of up to about £670m.
3i says it works in partnership with management after deals. However, it also has “people programmes” through which it can install its own candidates to key posts.
Terra Firma
Chief executive and founder Guy Hands, formerly of Goldman Sachs and Nomura International.
Likely targets
Housebuilding and related consultancy services.
Previous deals
In the UK, it is understood to have looked at Berkeley and Fairclough Homes. Bought £5bn residential portfolio from utilities giant Eon in Germany in 2005, covering 150,000 flats and houses.
Style
Targets large, asset-rich businesses for buyouts. Hands has strong personal control over operations and is actively involved in all decisions related to acquisitions, exits and portfolio strategy.
Sandcliffe Investments
Directors Paul Atherton and Jeremy McKenzie, both formerly at Pricewaterhouse Coopers.
Likely targets
Smaller specialist businesses, including contractors.
Previous deals
Bought Wokingham-based commercial fit-out specialist Advanced Interiors for £6m last month. It bought another fit-out firm, AT Jones, for £4.3m in December 2005. Has also carried out a management buy-in at Bedford-based Kingston Windows.
Style
Sandcliffe undertakes both buy-ins and buyouts of small to mid-sized businesses. Its transactions typically range from £5m to £10m. It has a £40m investment fund and works in partnership with Cambridge-based property investor Howard Group.
Bridgepoint
Chairman David Shaw
Chief executive William Jackson
Likely targets
Linked to support services companies but may branch into housebuilding, particularly through the repair and maintenance sectors.
Previous deals
No large deals in the sector.
Current interests
Thought to be one of the two frontrunners to back a buyout of property services consultant Erinaceous. It has also been linked with Keepmoat.
Style
Bridgepoint will fund buyouts and buy-ins. It will provide funds for listed companies that want to go private, if it can identify a clear exit strategy. It tends to install representatives on company boards. It tends to invest in companies with a capitalisation of up to about £670m, with equity investments of up to £170m.
West Coast Capital
Directors Sir Tom Hunter, the Scottish entrepreneur and philanthropist, co-founder Jim McMahon, and Paul Davidson, a corporate lawyer.
Likely targets
Housebuilders and regeneration businesses. It switched its focus from retail and property to housebuilding last year.
Previous deals
Bought Crest Nicholson and McCarthy & Stone in partnership with HBOS. Crest cost £715m in May this year and McCarthy was bought for £1.1bn in October 2006. Earlier this month, it bought a 50% stake in Inpartnership, a Manchester regeneration specialist. Also made a failed bid for Wilson Bowden last year before its acquisition by Barratt.
Style
Typically works in partnership with HBOS. Tends to favour management buyouts although two senior figures at McCarthy & Stone, chairman Keith Lovelock and finance director Matthew Thorne, left the company after its acquisition.
The company says it is against quick sales of the businesses it becomes involved in. Hunter’s £1bn personal fortune means it is not under pressure from its backers to produce quick returns.
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