On The Record – Peter Taylor

In June, London-based Duke Street Capital hit the headlines over pending job losses at portfolio company Burton's Foods and creditor losses at former portfolio company Focus DIY. Following Duke Street's investment in Burton's in March, UK MP Angela Eagle has been campaigning against the firm's plans for a Burton's biscuit factory in her Wallasey constituency, which may cost 660 jobs. Meanwhile the investment in Focus has been branded an example of lenders and bondholders being at risk in LBOs after sponsors cash out through recapitalisations. Duke Street recapitalised what was then Focus Wickes in 2002 and, having sold the Wickes business to a trade buyer, refinanced Focus once more in 2005 on a stand-alone basis. In January, Focus was put up for sale after it became obvious that the company was no longer able to service the £280 million of debt on its balance sheet. In June, US distressed debt specialist Cerberus bought the company for £1. The new owner will pay back £185 million of bank debt while the holders of £100 million worth of bonds will receive 40p in the pound. PEI caught up with Duke Street's managing partner Peter Taylor, who has been asked to appear before the Treasury Select Committee in the House of Commons in the coming weeks (at press time, a date had not yet been agreed), to quiz him about the recent events.

How do you feel about appearing before the Treasury Select Committee?
I’m looking forward to it. I’m excited to have the opportunity to defend the industry – particularly as a midmarket player. I think that mid-market firms have been wrongly tarred with the same brush as the mega buyout firms when we have a very different approach to private equity from these firms. The UK mid-market needs more people to represent it to the critics and to differentiate it from the mega funds.

What was your reaction to the criticism of job losses at Burton’s?
There has been a degree of misreporting of the Burton’s incident. There is no proposal to completely close down the Wallasey factory: yes, 660 jobs may be lost after the consultation process but 300 jobs are staying and the chocolate refinery stays in operation. We have been very transparent about the proposals. Burton’s is also actually a growth story despite these 660 potential job losses. There are fantastic job creation opportunities in this business that may in the future well compensate for these losses.

What was your reaction to the criticism Of creditor losses at Focus?
The DIY sector in the UK began to seriously struggle from early 2005 soon after the recapitalisation which followed the sale of Wickes. We are very happy to have steered the business to a safe harbour, with no job losses and the pension fund in great shape. So we achieved a great result – not just for the sponsors but for the creditors too. Ten years ago, with a less sophisticated debt market the banks could easily have done the nasty, but we have protected the bondholders here – 40p in the pound is not a bad result. We fight hard to save businesses and that’s precisely what we did with Focus.

How do you think the industry has been responding to the Debate over taxing carried interest?
The BVCA has obviously had a difficult job. One of its biggest problems is that it does not have representation from the mega funds and this is a fundamental structural weakness. However, I think there’s only so much that the BVCA can do – the industry as a whole has not responded well to the criticism. We must engage much more as an industry and become more transparent – to LPs, to journalists and to the general public.

where do you think the debate will go from here?
I don’t think that capital gains tax needs to be as low as 10 percent. I think it ought to be somewhere between 15 and 20 percent, and I expect this is where it will end up.

what has gone well for duke street recently?
The exit of Esporta in November was a highlight. We originally bought the health club operator in 2002 for £230 million and we made one of our biggest exits yet when we sold the business to the Halabi family for £460 million. We also sold Equity Insurance Group having turned a complicated business around over a short time frame. This year to date we have made a series of attractive acquisitions at market beating multiples so we’re very happy.