Written for The Independent on Sunday, Oct 29, 2006 by Maggie Lee.

Making money isn’t enough for Britain’s top private-equity investor. What really excites him is the challenge of taking on failing companies.

Jon Moulton, founder and managing partner of the private-equity firm Alchemy, has never shied from speaking his mind. “We’re looking at an overheated market right now,” he says, “and we’ll see some spectacular falls in the next year or two. It’s just a matter of time.”

If his prediction holds true, then the European private-equity industry, which has enjoyed stellar returns over the past five years, is about to experience a downturn.

With 30 years’ experience of buying and selling companies, Moulton shot into public prominence in 2000 as the potential saviour of the car maker Rover. The veteran investor is one of a tiny band in the UK to have successfully launched two private-equity firms (Permira and Alchemy) over the past 20 years. The plain-speaking deal-maker, originally from Stoke-on-Trent, has a reputation for backing his words with robust research and evidence.

According to Moulton, a number of companies could be in danger of collapse because of the availability and liquidity of debt finance.

“Over the last six years it’s been easy to raise debt. This flood of fresh capital into the market has enabled buyers to pay more for companies. While you can make a lot of money in the buyout market just by watching the debt multiple ascend, there’ll come a point when portfolio companies will find it tough to repay the interest on their loans; and at that point we’ll see liquidations and distressed companies.”

Servicing distressed debt spells opportunity for Moulton, who is renowned for aligning his money with his views. Alchemy recently launched a £300m fund dedicated to targeting the debt of companies that are close to collapse.

“While the technical content of this fund is complicated because the bankruptcy systems vary across Europe, the idea is simple,” he explains. “We’ll take on an organisation’s debt so that in the event of liquidation, we’re able to recoup our investment, and in cases of recovery make a healthy return in exchange for equity.”

It could be a shrewd diversification for Alchemy if Moulton’s second prediction plays out. “It’s perfectly reasonable,” he maintains, “to expect there to be €30bn [£20bn] of defaulted leveraged loans in a couple of years, every year. That creates a huge market, comparable in size to the total funds raised by the UK industry last year.”

That last figure stands at €47bn, according to the European Venture Capital Association.

Pioneering new products and dealing with complexity are Moulton’s specialities. He admits that “it’s what keeps me going in this industry and led to me founding Alchemy”.

He studied chemistry at university, and still retains an interest in the subject through private investments and support for clinical trials. He also reads The Lancet every week to keep abreast of medical developments. Later, he trained as a chartered accountant.

In 1980, after working with Coopers & Lybrand in the US, he joined Citicorp Venture Capital to do leveraged buyouts. He left to set up the private-equity operation at Schroders (which evolved into Permira) and, after a brief stint at Apax, founded Alchemy in 1997.

“I wanted to enjoy myself more,” he says. “By 1997 I had made enough money to see me off this planet in comfort. I now want to do difficult transactions off the beaten track.”

The strategy seems to have paid off. In just under 10 years, Alchemy has made estimated profits of more than £750m from investing around £1.5bn in 70 companies. According to Moulton, the firm currently has a waiting list of investors. He concedes this was not always the case in the early years. Alchemy offers its investors a 12-month rolling notice period, in preference to the standard practice of locking in investors for periods of five to seven years.

Reflecting on the changes over the past two decades in the UK, he believes that the buyout market has delivered good returns and, until recently, been relatively impervious to cyclical change. In contrast, venture capital (early stage and expansion capital) has struggled.

“Returns in venture capital have been awful for a long time here in the UK,” he says. “It’s like going to the races. Only a few horses are winners.”

As the industry comes under the scrutiny of the regulator (the Financial Services Authority is currently reviewing private-equity’s impact on the market and bank debt), he is unequivocal that the British Venture Capital Association should act to counter critics. “The regulation has gone over the top in terms of cost-effectiveness. While the UK was the first country in the world to regulate venture capital, there isn’t a shred of evidence to suggest it’s actually worthwhile. There’s no evidence either to suggest there is a need to do anything about private equity yet.”

He believes the BVCA could provide consistent leadership if the chairman was elected by its members. “We need a voting structure in preference to a small clique deciding who should follow on. The industry needs clear leadership, especially if it’s to challenge the view we’re ruthless capitalists.”

Looking forward 10 years, how does he see the industry? “I think the big brand names like Permira and KKR will become more dominant. There’s also money to be made in the emerging markets and the industry will migrate East. And other than a temporary downturn, which means private equity has a smaller portion of the M&A cake, I’m not sure very much will change.”

As for Moulton himself, he shows no sign of slowing down. But after 30 years of running companies and investing privately as a business angel, does he see himself as an entrepreneur or professional investor? His mischievous humour gets the better of him: “While my personal self-image is of course that of a young stud, sadly it’s not reality!” he laughs. “I guess at the end of the day I’m a fairly experienced pro rather than an entrepreneur.”

BIOGRAPHY: Jon Moulton

BORN: 15 October 1950

EDUCATION: BA in chemistry, University of Lancaster; fellow, British Institute of Management

CAREER

1972: Coopers & Lybrand, Liverpool

1978: Coopers & Lybrand, New York

1980: Citicorp Venture Capital, New York

1981: managing director, Citicorp Venture Capital, London

1985: managing partner, Schroder Ventures

1994: Apax Partners

1997: Alchemy

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Copyright 2006 Independent Newspapers UK Limited