Guy Hands tried to make money from the likes of Katy Perry and Coldplay when he bought the music giant EMI in 2007. But he has had much more success selling resin garden animals and bedroom slippers to retirees in garden centers across Britain.
Mr. Hands, who founded and runs Terra Firma, a British private equity firm, bought the Garden Centre Group in 2012 for 276 million pounds ($459 million). The purchase of the company â€" a collection of 129 stores of varying size and success scattered throughout England and Wales â€" has shown that Mr. Hands has a green thumb, at least for gardening investments. The Garden Centre’s earnings before taxes, depreciation and amortization were up 50 percent last year, to £42.7 million ($70.8 million).
“For men over 45 in England, gardening is the second-most popular pastime after television,†Mr. Hands said. “Even sex came after the garden, which the French would say sums up the British.â€
But Mr. Hands will need more than the sweet scent of roses to make up for the mess left over from EMI, the music company he bought at the top of the market for £4 billion ($6.3 billion) in the largest private equity deal ever done in Britain. The company, facing crushing amounts of debt, was seized by its lenders in 2011, erasing two-thirds of Mr. Hands’s wealth and his reputation as one of Britain’s savviest investors. (He has since moved to Guernsey, an island that is not part of Britain and, therefore, not subject to its taxes.)
With private equity booming again â€" in 2013, firms around the world raised $493 billion in new funds, the highest level since 2008, and had $311 billion in exits, according to the data provider Preqin â€" Mr. Hands is clearly aiming to get back in the game. Investors say he hopes to raise a fund of 2 billion euros in addition to finally closing on an initial round of capital for his renewable energy infrastructure fund, which has had a long and rocky start.
Mr. Hands said that the Garden Centre gets back to Terra Firma’s roots â€" buying asset-backed businesses in need of restructuring in essential industries. Gardening is a £5 billion business in Britain, and eight out of 10 people have gardens. The company was an amalgamation of garden centers built by gardening enthusiasts with no retailing experience. And yet the retailing opportunity was ripe. “It’s a business that grew up by small, family-owned businesses being taped together,†said Julie Williamson, financial managing director at Terra Firma. “It was not properly integrated.â€
Terra Firma’s research showed that people spent two to four hours at garden centers, with only 5 percent arriving to buy a specific gardening product. “They look at the flowers. They buy something. They have a cup of tea,†Mr. Hands said. Terra Firma set about transforming the local horticultural hubs into buzzing retail centers, with fish and chips made with regionally brewed beers to complement the begonia bulbs.
That meant reassessing the rather puzzling stock of goods. Out went masses of expensive Le Creuset cookware, the odd £7,000, three-piece living room set and the £18,000 bonsai. In came Comfy Feet slippers, fresh-brewed cappuccinos and a wide assortment of resin animals, which tallied more than £1 million in sales last year. (Bunnies were the top sellers, even beyond the popular Easter selling season. “This is the new gnome,†Ms. Williamson said.)
Since Terra Firma bought the company, it has also changed the management team, putting in a chief executive who worked at Avis and a head of retail operations with experience at Marks & Spencer and Pret a Manger. The supply chain has been centralized, and parking improved.
Restaurants at Garden Centre locations are being overhauled â€" the company owns 100, making it a significant restaurant chain in Britain â€" and farm stores introduced with butcher and fruit stands alongside specialty beer producers. Because customers like experts, and horticulturalists are not usually well versed in high-protein puppy food, concession licenses are now being sold to pet suppliers, high-end clothing brands and aquatics experts.
Still, £1 million in resin rabbits cannot erase the black mark left by EMI. Mr. Hands had to write down £1.75 billion on the investment after funding dried up in the financial crisis. (He also famously called the label’s artists lazy, and then later elaborated that he was misunderstood. The issue, he said at the time, was that they could not handle the truth.) He then sued Citibank and his banker, charging that they rigged an auction to get him to pay a higher price for EMI. The suit was recently moved to Manchester, where it will continue.
The debacle hurt Mr. Hands’s reputation, say private equity executives, who insisted on anonymity because they sometimes do business with Mr. Hands. “If you are a teachers’ pension fund and you have trustees looking at you, do you really want to be associated with the fund which was all over the press for its lawsuit?†said one London-based fund-raising executive. “Most people say, ‘No, there is too much political risk.’ â€
Mr. Hands believes the EMI troubles are behind him. “EMI was a long time ago,†he said. “I think investors are now focusing on what we have achieved since 2010.†Last year, he took public Infinis, a generator of renewable energy, and Deutsche Annington, a German property company, while acquiring Four Seasons Health Care, an older-adult care specialist firm. In 2012, he completed the acquisition of Annington Homes, the largest leveraged buyout since EMI, according to Preqin.
In 2013, Terra Firma Capital Partners III, the fund that bought EMI, showed a net return of 0.67 times its cash investment and posted a negative 9 percent rate of return, compared with a net return of 1.28 times cash investment for the average fund that was started in 2007 and an 8 percent rate of return, according to Preqin. Private equity investors generally look for 15 to 20 percent returns.
The firm faces other headwinds. Terra Firma has faced high turnover, most recently when it fired the head of its renewable energy team during fund-raising. That fund is aiming to raise €2 billion, down from an original goal of much more, say people familiar with the efforts. It has not closed its first round of fund-raising yet, and the broader sector is notable for its meager returns.
Market sources say that the fund-raising strategy had shifted from “large elephants†â€" or securing large investments â€" to smaller ones, as many of the sovereign wealth funds and large pension funds want to go it alone. Mr. Hands said that the fund’s focus on renewable energy generation assets tended to attract those who took the time to get to know it.
Mr. Hands said that turnover of management for his portfolio companies was good when necessary, but investors may not share the same sentiment when it comes to the management of hundreds of millions of their dollars in his funds.
“Institutions like stability in the team,†said one market expert, who would not speak on the record because he occasionally worked with Terra Firma. “I don’t know if it should be the end-all, be-all, but it is.†Mr. Hands set aside £35.6 million for wages and salaries for the year through March, compared with £17.6 million the year before, as a way to hold on to restless talent.
Mr. Hands seems to take the ups and downs in stride. A famous workaholic, he may not be able to overcome one formidable foe for his Garden Centre investment: the English weather. “It is a bit unpredictable,†he conceded.
