UK - Hermes wagers future for Riva

While the news may be construed as 'yet another failure for private equity' it could better be seen as private equity paving the way for a brighter future for a portfolio company. With the equity already under water, the backer could have pursued a fire sale or dissolved the target altogether, which would have incurred vast job losses. Instead, by working with the banks to reduce the debt to a 'more manageable level' the company has a future. According to a source: "Having cooperated with the banks, the amount of debt is now drastically reduced, so the business is likely to re-emerge in the future as a more robust company."

Such a business could prove ripe pickings for another private equity investor - many players have suggested that the best opportunities for buyout houses this year and into next will come from restructurings and/or businesses acquired by banks through debt-for-equity swaps.

The development is not news for Hermes' investors, which saw Riva initially written down in 2007, and then again in 2008 to zero. The write-downs were a reaction to a 'triple whammy' for the firm: the smoking ban, the Gaming Act and the economic downturn. "The changes in the Gambling Act were worse than the worst-case scenario we'd modelled," the source reveals.

Riva is one of ten companies in Hermes' direct portfolio from its second fund, with many of the others said to be 'performing on plan'. The first fund returned a gross IRR of 29%, putting it around the top-quartile mark.

Hermes initially invested in Riva three years ago, when it bought Mayfair Gaming from Risk Capital Partners in a £27m deal that saw Risk reap a 62% IRR, illustrating the robustness of the gaming market at that time. In 2006 the nine-year-old Riva employed 250 people. Hermes' plans to growth the business through acquisitions saw it bolt-on Thomas Holdings, owner of the Beacon brand, for £75m later in 2006. Enter 2007 and the smoking ban was closely followed by the changes announced in the Gaming Act, which kick-started the destructive chain of events. Early last year Hermes pumped in an additional £4m towards a restructuring , bringing its total outlay in the business to nearly £50m.

Former Riva chief Simon Hannah, whom Hermes backed in the 2006 deal, has bought seven - more than half - of the Mayfair clubs for a nominal fee. Chairman Bob Scott, also managing director of Coral bookmakers, has stepped down. The remaining entity, consisting of six clubs, is to be replaced by Brian Mattingley, who also had ties to Gala Coral.

Both Gala and Buckingham Bingo are other private equity-backed gaming tragedies. Gala went through a series of buyouts, and is now owned by Cinven, Permira and the beleaguered Candover. Permira, which acquired a stake in August 2005 when the business was valued at £1.9bn, has written down its investment to zero. Buckingham was acquired by Alchemy Partners in December 2005 for £54m, with another £6.9m being pumped in by the backer just a couple months later. Alchemy also had to write off its investment in the company for many of the same reasons that have affected Riva and Gala. At the end of last year, it was reported that Riva and Buckingham may have pursued a merger, though that did not materialise.

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