Hands Up For EMI

Terra Firma chief Guy Hands is faced with EMI now being worth about half of the £3.2 billion his private investment house purchased it for, but there are signs the bold entrepreneur hasn’t lost faith in the British music company.

The headlines have been about EMI being largely responsible for Terra Firma having to write down the value of its entire investment portfolio by about £1.23 billion, but elsewhere Hands has been increasing his own risk in the company and sending out a positive message to investors.

Obviously aware that the current financial climate may be hitting his cash-strapped investors to the point they’ll struggle to meet the future commitments they’ve made to Terra Firma buyout funds, he approached all 170 investors and simply asked if they had any liquidity problems that could prevent them from meeting future uncalled commitments.

When a private equity group raises a fund, investors make binding commitments, promising to provide the money when the group finds deal opportunities. However, because the flow of returns from private equity has slowed to a trickle and investors are nursing big losses across their portfolios, it is becoming harder for some to honour commitments.

Hands found at least three who said they were struggling and prepared to discuss selling the commitments back to Terra Firma’s management company. The management company is tightly controlled by Hands and buying back the commitments will mean him significantly increasing the estimated £1.78 million he’s already invested.

Terra Firma’s not saying what the exercise has cost but the three investors were estimated to have about £44.5 million in the company.

The three investors are believed to have been struggling to cover about £22.2 million worth of commitments and Hands has also taken on the responsibility of meeting that.

One advantage for him is that he’s kept those investors from selling to any party not prepared to contribute to future fund-raisings or to someone who may oppose future deals.

The remaining Terra Firma investors, who are presumably cash rich enough to honour their future commitments, may feel reassured by what Hands has done.

Terra Firma said the directors were prudent to reappraise the value of EMI and blamed the drop in the pound against the euro for chopping the value of its portfolio.

The company reported the portfolio’s earnings before interest, tax, depreciation and amortisation grew by 11 percent, largely because EMI doubled its earnings to £198 million in the last nine months of 2008.