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Hands: Portfolio companies to live on 'as zombies’

The founder of Terra Firma predicted more pain for the buyout industry as neither banks nor financial sponsors are willing to ‘come clean about their mistakes’ made during the credit boom era.

Terra Firma Capital Partners boss Guy Hands delivered a gruesome prognosis for the private equity industry in a recent interview, describing how both lenders to businesses and their private equity owners will force portfolio companies to “live as zombies, unable to grow their businesses or make long-term commitments.”

Guy Hands

Highly levered businesses, such as Terra Firma’s music group EMI, are forced to cut investment and direct cash towards servicing their debt. “Neither banks nor PE wants to come clean about their mistakes,” he told the New York Times, adding that “banks will try to suck out as much money as they can in fees and postpone recognising the full extent of the losses of their underwriting decisions.”

Hands also said that while firms sitting on significant piles of dry powder have a “tower of fees” that should see them through at least a decade, “the tower starts to collapse over time”.

Hands’ buyout firm Terra Firma is currently involved in negotiations with Citigroup over the $5.5 billion in debt owed by EMI. Terra Firma acquired the group in 2007 in what has become one of the UK’s highest profile buyouts of the credit boom era.

In recent weeks Hands has publicly lamented the timing of the deal. “If the EMI auction started two weeks later, it wouldn’t have occurred,” he said in this morning’s newspaper interview, “We wouldn’t have bought it. We’d have 90 percent of our funds still to invest and we’d look like geniuses.”

The EMI investment now accounts for around 30 percent of Terra Firma’s two latest buyout vehicles.