Private equity on the ropes: when assets turn sour

While achievements in the industry should be duly celebrated, the five investments below demonstrate that success doesn't come easy in the current environment. Deals gone wrong can, of course, draw the usual criticism from mainstream media, but the OW Bunker failure shows that even relationships with LPs can also take a hit.

Advent International: Towergate
Advent-backed Towergate this week agreed a restructuring deal that saw its £1.05bn mountain of debt reduced to £370m. Unfortunately, as part of the process, the GP wrote off its £200m investment in the company having taken no dividends since its initial investment in 2011.

Senior-secured lenders have now taken control by means of a £1 debt-for-equity deal. The urgency of the business's situation was laid bare by its full-year results for 2014, which showed EBITDA falling by 24% year-on-year – from £145m to £110m.

A source close to the situation told unquote" the company's problems lay in increased competition within the sector, continued weakness in the economy and limited rate increases. Not so, according the Financial Times, which instead highlighted Towergate's debt-funded buy-and-build strategy. Eamonn Flannagan, an analyst at Shore Capital, told the FT the business's acquisitions were integrated poorly and didn't deliver the synergies anticipated.

Better Capital: City Link
Turnaround player Better Capital acquired parcel delivery and courier company City Link for a symbolic £1 from Rentokil in April 2013. The price reflected five years of substantial losses by the business under its previous owner.

Nonetheless, when the company entered administration in December 2014 the GP – and private equity ownership model as a whole – came under intense criticism by the UK national media. Broadcasters and publications honed in on the timing of the announcement, leaked on Christmas eve and the 2,000-plus employees who lost their jobs.

Better Capital's Jon Moulton retorted by highlighting increased competition within the sector, the business's legal obligation to cease trading while insolvent and the risks associated with turnaround deals. Administrators EY have since found an acquirer for £1.125m's worth of the company's assets in the shape of trade buyer DX, which also promised to offer employment opportunities for former City Link employees.

Gores Group: Mexx
Having been under CVC's stewardship throughout the 1990s, Dutch fashion retailer Mexx came back into private equity hands in 2011 when US-based Gores acquired it in a deal reportedly worth €85m. Three years later, in December 2014, an Amsterdam court declared the business bankrupt.

Mexx, which had a headcount of 1,500, endured a turbulent time under Gores' ownership, with three different CEOs running the company during the GP's relatively brief tenure. Gores's senior managing director Mark Stone most recently held the reins but, despite a "slimming down" phase – which saw Mexx shedding staff and non-performing stores – the business ultimately fell into administrators' hands.

Gores blamed Mexx's demise on Europe's "long-running double-dip recession", adding it had made numerous operational improvements to the company.

Altor: OW Bunker
In October 2014, Denmark's second largest company – measured by turnover – shipping trader OW Bunker, went bankrupt. Altor acquired OW Bunker in 2007 in a deal valued at between €100 and €250m, and made a partial exit in March 2014 via an IPO on the NASDAQ OMX Copenhagen.

Following the business's bankruptcy filing, a group of investors that had bought shares during the flotation launched a DKK 803m claim against OW Bunker's management, board, several Altor employees and holding companies related to the group. The process focused on errors and flaws in the prospectus prepared with the company's flotation, and liability in connection with the offering and sale of shares in OW Bunker.

In the aftermath of the saga the two largest claimants, Danish pension funds ATP (DKK 166m) and PFA (DKK 164m), sold their stakes in Altor's fourth fund.

BC Partners: Phones4u
The collapse of BC Partners-backed Phones4u, a UK-based mobile phone retailer, in September last year was another episode that made the headlines of UK national papers. The business's failure to agree an extension to partnerships with mobile operators EE and Vodafone led to more than 5,500 jobs being put at risk as Phones4u shut up shop.

BC acquired the company in a 2011 secondary buyout reportedly worth between £600–700m from Providence Equity Partners. The business refinanced in 2013 by issuing bonds worth £200m, with all proceeds earmarked for paying BC a one-off dividend. Media publications focused on the profits made by BC during the refinancing, with some commentators questioning the GP's devotion to saving Phones4u.

A public spat followed, with BC Partners accusing Vodafone and EE of reneging on future partnership agreements. Nonetheless, critics pointed to an overreliance by Phones4u on a handful of partnerships and the company's failure to respond to market trends. Administrator PwC was ultimately able to safeguard more than 2,000 jobs by divesting a number of stores and in-store concessions to EE and Phones4u's main competitor, Dixons Carphone.

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• Advent International
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