Every cloud

A captive private equity arm considering a move to independence would be well advised to give Neil MacDougall a call. The managing partner of Silverfleet Capital (formerly PPM Capital) oversaw the protracted buyout of the business from M&G, the fund management arm of Prudential, in a process which took nearly two years to complete, and at one point looked like it might not happen at all. From valuation, to tax issues, carried interest and pension fund deficits, it is something of a tutorial on managing a spin-out.

With the Aviva bid for Prudential the external catalyst which got the ball rolling, the principle of a buyout was soon agreed. ‘The next step was bridging the gap between buyer and seller’s value expectations,’ says MacDougall. ‘M&G’s view was that the business was worth a lot; our view was that the privilege of turning up to work wasn’t something we should pay for.’ MacDougall says that M&G took soundings from corporate finance houses to ascertain a realistic price for the business, with terms agreed by the end of August of 2006. After this, MacDougall says, things slowed down on the seller’s side. ‘The attention was there for the exciting bits at the beginning, such as price and key terms, but once we got to the minutiae of the deal it became more of a struggle.’

The media coverage of the process remains a source of frustration for MacDougall who reveals that ‘the parent company had an edict out which meant we were not allowed to talk to the press but there was a suspicion that they (M&G) leaked when it suited them.’ As progress on the buyout slowed down competitors were quick to take advantage of the uncertainty, a fact ignored by the former parent company. ‘It can be open season on the team,’ MacDougall cautions. ‘Some of the more junior members of the team were tempted and did go,’ he says. The slow pace of progress was in large part due to tax and pension issues which MacDougall describes as ‘horrendously complicated.’ The biggest tax issue ‘hinged around a tax case from the 1950s on which a QC’s opinion was required.’ The impact of the buyout on the huge Prudential staff pension scheme was also a sticking point, with the trustees advisers ‘difficult to get moving and a law unto themselves.’

The complex and protracted nature of the process had the potential to encroach on the day-to-day running of Silverfleet and MacDougall believes the fact that ‘we stayed open for business and our largest investor agreed to underwrite new deals,’ was one of the successes. Another of the achievements of the process says MacDougall was that ‘the entire senior team remained on board, which is not something you can take for granted. An established team with a strong track record of good returns from over 100 investments that has worked together for nearly 20 years gives new investors great confidence.’

MacDougall also singles out the advisory support his team received as integral to the successful completion of the buyout and says that ‘it is important to find someone you can work with who is flexible and supportive. Chris Hale at Travers Smith and Nigel van Zyl at SJ Berwin were just that. They had many thousands of pounds in fees on the clock at one stage but agreed to postpone asking for payment until after the buyout closed.’ His final piece of advice to any would-be teams mulling independence is ‘try not to fall out with the seller and get them to keep paying the salaries until you have done the deal.’ This was a lesson perhaps learnt from Guy Hands, who is reputed to have bankrolled his entire team during the Terra Firma buyout from the Japanese bank Nomura. For all the difficulties faced by the Silverfleet team the success of the deal can be measured in simple terms says MacDougall; ‘It actually happened.’

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