EMI's bankruptcy pain felt in Canada
News item: Citigroup takes control of EMI
The music industry hasn’t been the same since Napster or iTunes, of course, but that didn’t stop private equity shop Terra Firma from leading a 4 billion Pound takeover of record label EMI in August 2007. Citigroup provided debt to the tune of US$2.5 billion of the US$6.5 billion going-in price.
Normally, this would matter only to music lovers and bank watchers. But, since our CPP Investment Board has committed 300 million Euros to Terra Firma’s 2006-vintage third fund, EMI’s situation matters more than it might otherwise. Given the vast array of PE managers that call the CPPIB a partner, one would be naive to expect 100% success. The EMI deal is a simple reminder of the perils that lay in the path of everyone who invests in the large buyout space. Sometimes, even the big deals go bad.
As of June 2010, CPPIB had E185 million into Terra Firma III, and at that point it was reporting a carrying value of E57.5 million. Given the turn of events this fall and winter, the March 2011 Terra Firma numbers won’t be pretty — although they won’t be released until a year from now. With ~$30 billion committed to private equity (see prior post “CPPIB’s 25% Private Equity concentration” Feb 21-10), this is simply an expected bump in the road in the universe of alternative managers for any large asset manager.
With Terra Firma’s 2002-vintage Fund II showing a 1.3x return on that series of investments, folks are unfortunately still underwater even if they’ve been loyal to Guy Hands for the past decade.
MRM
CPP’s fund investment in Terra Firma is only part of the story. Some LPs coinvest additional capital in certain companies alongside their fund partners. From their principal investing website, it appears that CPP invested additional capital in EMI:
http://www.cppib.ca/Results/Financial_Highlights/principal_investments.html
That’s interesting. Thanks for the link. I hadn’t known that we’d doubled-down on the EMI investment.
MRM
With EMI, Freescale, ONO and other principal investment gone bad or worse, with perhaps some of the KKR deals Dollar, Alliance Boots and maybe a few Telecoms probably doing ok, the overall outcome of this internally run portfolio looks wobbly, and since no performance is disclosed on these assets we can presume they want more time for a Skpe or another asset to pop and show a better long term outcome. I am not concerned with a middling performance per se, but these guys are upping the risk, Skype being an example, to go for the home runs and hope the earlier investments are eclipsed by one or two ever bigger newer investments. I hope the Board is on this serious risk management issue. Better yet, how about they just disclose how they are doing in this headline grabbing deal making activity? They probably are beating the public markets anyway, so it doesn’t seem like a good call to have zero disclosure on all this.