Moulton: Industry mergers to create fewer, larger players

Kimberly Romaine
17 August 2011

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A tumultuous few years as well as increased legislation will lead to the consolidation of the industry into a smaller number of larger buyout houses via mergers. Unquoteтs Kimberly Romaine talks to Jon Moulton, Chairman of Better Capital.

The heyday of 2005-2008 has left in its wake a prolonged hangover, with refinancings required to stave off defaults, longer holding periods and, ultimately, lower IRRs as a result.

But it may ultimately mean fewer GPs, according to Jon Moulton, who echoes the myriad academic and consulting reports that point to the need for a more efficient landscape of GPs.

"There is a slow trend towards fewer, larger funds," he says. "There are too many mid-markets firms with mediocre returns, the same sales pitch and an undifferentiated strategy. It is very different to when I started out in private equity, when you sniffed around for inefficiencies to exploit. The number of opportunities hasn't changed much, but the amount of money seeking them has grown tremendously. An industry with so many competitors is unlikely to generate superior returns."

The changing face of the LP world will mean that larger players will have a competitive advantage over their mid-market counterparts. LPs, especially relatively wealthy newcomers to the game, such as sovereign funds, will prioritise the administrative ease of fewer, larger fund manager relationships instead of taking a chance on smaller, more niche mid-market funds. "There are economies of scale with large players. Sovereign wealth funds want to put large cheques to work," he explains.

There will also be legislative pressure on firms. The AIFMD - which Moulton counts as one of the three worst things to have happened to the industry in recent years (along with "excess enthusiasm of 2005-2008" and "the arrogant behaviour of large buyout houses") - is likely to mean most buyout houses will have to employ people to ensure compliance. Whether in-house or outsourced, it is a cost. "Large firms should be a fan of increasing regulation," Moulton says. "Three people in the back office at a cost of around £10m is less of a burden on a mega buyout house than it is to a £150m fund - for which it will be an utter disaster."

Rather than see a load of firms disappear, as some studies suggest, Moulton indicates we may witness mergers of mid-market firms. "You don't see it much as yet, but it will happen," he says, resulting in funds with 40 underlying investments, rather than 10 - similar to how 3i once was. This is already happening in the venture and VCT community, and there have been a couple of funds of funds mergers, however pure mid-market GP mergers have so far been elusive.