Jon Moulton is a veteran of the private equity industry and the chairman of Better Capital. To his peers in the world of finance he needs no introduction. Through this interview, our readers can benefit from his unique insight into economy and industry related topics.
B.B. How is Better Capital different from other private equity firms? How is it better than other companies that you’ve previously been associated with, both in what it does and how it does it?
J.M. It’s clearly better because of its name! What it does is turnarounds – it only does turnarounds, so in that respect, it’s quite different from most private equity firms. We don’t buy companies typically at auctions and win by paying the most – we win deals by being very flexible, by moving very quickly and by taking aggressive action. The firm is set up in the form of a Quoted Limited Partnership which is a unique structure. It is the highest rated private equity company on earth at the moment in terms of its premium-to-net assets.
B.B. Your stated views about the economic future of this country have not changed since the elections last May and the outlook is still bleak, you say.
J.M. Probably. I fear things are looking a little grimmer today than they were last year. I think there is a great deal of uncertainty – we’ve got an economy awash with debt and we’re still running up a big deficit despite all the cuts that are being talked about but not yet implemented. That’s the same for the rest of the developed Western world. Interest rates are at ludicrously low levels. If they were to rise we would see an amazing amount of recession-related problems again. It all seems very unstable to me. I think interest rates will break up at some point and when they do, it will hurt.
B.B. Even if the cuts are implemented, you don’t see any way out?
J.M. The cuts are not enough. As the government gets through all the cuts that it is talking about in the UK, we will still not start to see any quality of government income and spending until 2015, so that’s a long period of adding to an already massive deficit. And that’s on the assumption of steady growth, low interest rates and no international financial crises on the way through. That seems very unlikely to me, so I think the debt will continue to rise. Which is actually something I feel quite strongly about: it’s wrong to be leaving debt for either our kids to pay or default on our creditors or inflate our debt away so that we don’t pay the same value that we took. I would welcome what would probably mean a much tighter and more difficult early period by actually taking through much bigger cuts now. The government might take out £80 billion over the next five years in pieces, in terms of annual savings – to get the budget balance right at once you need to take about £150 billion out.
B.B. What type of turnaround companies do you consider? Is there a general criteria, such as the size of the company, or do you go for specific industries because you feel certain industries perform better in a recession? I am referring to an old saying, ‘publishing is recession-proof ’, in relation to your acquisition of Reader’s Digest.
J.M. Better Capital finds and invests in all kinds of industries. Now some industries are not very interesting, basically they are not turnaround industries -they’re just doomed, declining industries on the way out. But other than that we’d look at anything. So far the portfolio consists of two aeronautical engineers, a media company and Reader’s Digest, and as of a couple of weeks ago a group of IT service businesses, so quite a mixture already. I expect that mixture to continue to build. Turnarounds that we’re after are ones where we can see a way to move from loss to profit with a few simple actions. Some deals look like that, some don’t. Some turnarounds require new products, new markets, new management, new pricing pages, new distribution -we don’t do this, they’re too complicated. We do things that are simple, where we can cut something out, where we can introduce a simple action within our own control to turn it from loss to profit. We dedicate our time to seeking out those opportunities.
B.B. We ask all our interviewees what they think of the future of publishing, specifically of print publishing versus digital publishing. What are your views on that, do you think that printed matter will survive, or does publishing needs to redefine itself as an intellectual property product rather than just say, a book?
J.M. I think it’s actually quite simple -the only thing nobody knows is how fast things will change. Clearly digital is slowly taking over from print- print will never vanish, at least not in my fairly limited remaining lifetime. Print is so convenient, print is durable, print is cheap – but digital has so much more functionality, it’s easier to store, cheaper to produce, it’s more ecological. So everything moves slowly away from the printed media and towards the digital. The pace I know not accurately, nor does anyone else. But I think that’s just an irresistible steady trend from here on forward.
B.B. So you think that the beautifully bound leather books will disappear from our bookshelves?
J.M. They won’t disappear, but I’m afraid they will be more used as ornaments. It’s a shame, I think- but we’ll still have women!
B.B. Better Capital invests in UK businesses only. Could you nevertheless speculate on the global markets versus the UK market. If power and money are shifting toward the East, is there one economy you would invest in over another?
J.M. We operate in the UK and Ireland. Of course Ireland is very troubled so there’s lots and lots for us to look at there. Our last deal was basically Irish. Where would I really like to be investing? Well if it’s turnaround investing, the UK, America -places where change is easy and where employees aren’t dramatically protected, are the most attractive jurisdictions. If you’re asking me the broader question where I’d like to invest, I think I’d like to invest in a market that has growth and long term potential with good demographics, which really describes about half of the so called emerging markets. I wouldn’t necessarily go for just one of them though, because they’re all a bit risky. However, a nice little mixed packet of the emerging market nations, I’d like to invest in that.
B.B. A Wall Street legend quipped in private conversation with me that the so called emerging markets could be equally defined as submerging markets. How do you define emerging markets? Would Eastern Europe be perceived as an emerging market, or a peaked or a distressed one?
J.M. I think Eastern Europe’s quite interesting because it’s got a mixture of distress and a bit of growth, because the new middle class is driving it forward through consumption. But really compared to India or China, East-European countries are not emerging markets -they are relatively mature, slower growing markets. The definition can be interpreted however you like, I suppose – emerging markets are pretty much anywhere apart from the UK, as far as the Brits are concerned.
B.B. With everyone predicting a double- dip recession, do you see investors in private equity losing their appetite for risk in terms of lending for distressed companies that might be in trouble because of the recession?
J.M. Of course people will be frightened by a double-dip recession if it happens. Sitting here today it looks like an even shot that it will happen. If it does, then some investors will lose their nerve and quit the field; others will see the opportunity in buying things at historically very low values with the opportunity to finance them through the bottom of the recession.
B.B. Even if these companies are in trouble because of the recession?
J.M. Even if they are … Everything is a question of price and cash-flow. Take a really lousy industry in a recession, house building. If you are able to buy the company very cheaply and you are able to stand the current debt load on it, at some stage you will probably harvest an enormous amount of money from watching that company recover. So there are opportunities in a down-turn, they take nerves and estimation. And because they are risky, lots of people can’t do it. … there are opportunities in a downturn, they take nerves and estimation. And because they are risky, lots of people can’t do it.
B.B. Do you believe London will hold its place as global financial centre, or has it already lost that status?
J.M. London IS a global centre and it’s pretty unlikely to lose its status as a global centre. I think it will get proportionately less important as many of the other markets actually get more important. Singapore, Hong Kong -these places clearly have an enormous scope to grow in the financial markets and they will. The UK is probably as good as it gets in terms of its market share -it’s very strong in lots of financial services, and it’s far more likely to go down than up. I fear that’s just the way of the world.
B.B. Finally, what is the single most significant change in society in your lifetime?
J.M. That’s a very difficult question. In the UK … I think it’s simply the growth in wealth. I grew up in an industrial northern town, and it was poor. I had TB as a kid. My dad had a car! That was the only car that was owned by any of the dads in my class. So I was middle class because we had a car, albeit a wreck of an old car. I’d say the growth in wealth is the biggest change -standards of living have risen sharply and people don’t realise how lucky they truly are-they just moan about how bad it is now.