Moulton predicts 10x increase in dealflow

You have opted for less traditional fund structures, which are domiciled in Guernsey. What is the rationale behind these choices?

When I left Alchemy, which was not a perfectly planned affair, I was anxious to get back into business quickly. While raising a private fund would have been feasible, realistically I would have been lucky to get that done in 18 months. So, I looked at the public option and came to the conclusion that it could be done very quickly. And it was. Essentially the raising of the capital was done in a six-week time frame and we were fully operational within three months.

The trouble was that public funds weren't doing well at the time; we had had the Candover and SVG disasters, and so it was necessary to change the model. Virtually all public private equity vehicles are permanent capital vehicles, which is good for the manager but judging from the discounts that prevail in virtually all markets, not good for the investor. We couldn't go out there and get people to give us a pound on the basis that it would be trading at 80 pence the following day. So what we did was go out and sell essentially a distributing fund in a public guise.

Better Capital's Moulton predicts a dramatic increase in turnaround dealflow within the next five years

The quoted vehicle is the sole limited partner in two funds, and we have done that in two separate classes of share. Guernsey has a very convenient structure called a cell company, where those two shares enable you to segregate the assets and liabilities very effectively. So now we have two companies, one board, two listings.

It worked very well, because we had the distributing structure. The sales pitch to investors was to start the meeting off by saying: "in four years time, if we are very successful this share price will be falling rapidly." That caught their ears, because then they worked out that we meant to distribute the money.

When we came to the second fundraising 18 months ago, the capital markets were so bad that you saw the downside to the public market; raising the money turned out to require a great deal of effort and was only just narrowly achieved by getting some non-standard investors in. The market has swung again now and I think raising today would be a relatively easy thing for us to do again. But our investors have liquidity, distributions, the shares trade relatively well so you can move a few million pounds quite easily and people have done on numerous occasions.

It's a good structure. We have traded consistently at a stated premium – investors like it. So I think it is likely to be taken up by others.

Is there a downside to trading at a premium? Particularly with regards to investors coming into the fund.

Only if we decide to start raising new money at a very high price. The problem is the word "premium". One of the things we're at pains to avoid was to have any fees or remuneration linked to net asset value or share price. The inherent conflicts are real: do you value it up or do you value it down? So, although we have to provide a net asset value, it is less important to our investors than to people investing in a permanent capital vehicle. Also, given the fact that we do nothing but turnarounds, no amount of work gives you great precision in estimating the net asset value of a portfolio of turnarounds in their first year or two.

The flow of turnaround investments was not as steady as anticipated in the wake of the financial crisis. Do you think it is still an attractive area for investment?

It is attractive, but there isn't enough volume. The world that has come out of this financial crisis does not bear much resemblance to the usual recession or post-recession corporate failure rate. Corporate failures in the UK, which are by no means an extreme case, are about half the run rate of the 1990s, when the economy grew an average of about 3%. But to find ourselves with half the failure rate, after five years of going nowhere and dipping in and out of recession at fairly regular intervals, is quite remarkable.

That's because of low interest rates and banks not willing to recognise losses. But there is no shortage of badly run, poor and outdated business models. What we need is a rise in interest rates or a determination of the banks to deal with these issues. It will come one of these days, and when it does there is a big backlog. So I don't know when but I am confident that sometime in the next five years we will be talking about a five or tenfold increase in the volume of our business. When the interest rates rise, rest assured people like me will be waiting!

Are there opportunities to be had on the UK high street?

Opportunities are a bit thin. but activity is quite high in terms of failure. Basically it is undergoing a large structural readjustment. The high street is losing first of all to shopping centres, which actually have a much bigger impact than the internet, which is more often quoted. I see the high street dropping to convenience stores, Icelands, and not a great deal else. There is going to be a requirement over time for the high street to be substantially replanned into residential or office space.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• UK / Ireland
• United Kingdom
• Better Capital LLP