PE guru offers helping hand to China

Terra Firma chief highlights $5b fund to invest in renewable energy, partnering with CDB

A Chinese business journalist would probably be skeptical about reports that a foreign investor is interested in China's renewable energy sector. After all, the industry is currently in the doldrums, and overcapacity has become a byword for the beleaguered sector.

But Guy Hands, chairman and chief investment officer of Terra Firma, one of the largest private equity firms in Europe, does not share this view.

On a November morning, Hands, along with several executives from portfolio companies cofounded by Terra Firma, held a CEO meeting in Beijing.

At the meeting, he elaborated his plan to partner with China Development Bank to set up a $3 billion to $5 billion fund to invest in global renewable energy projects.

Speaking to a crowd of Chinese reporters, Hands emphasized that he is mainly investing in non-China markets, mostly in Europe. And he is betting on generating plants, rather than equipment suppliers, currently the focus of China's renewable energy industry.

"You have to focus on the individual micro situation," Hands said. Unlike China, which Hands said is a "distressed" market, the renewable sector in the West remains "vibrant".

Governments are subsidizing electricity generated by wind or solar. And there is no problem regarding connection to the main grid. Terra Firma has also invested in grid companies to ensure that the power generated by its plants can be connected to the grid.

"There is demand for the infrastructure, huge demand," the former star trader of Goldman Sachs and Nomura said, in a brief and confident manner.

But the biggest reason for Hands to work with CDB is that his European solar farms do most of their purchasing in China. Having a good relationship with CDB, the creditor to many Chinese renewable energy equipment manufacturers could ensure his supply of cheap equipment, and at the same time, help him spot potential valuable renewable projects in China.

Unique investment strategy

Besides renewable energy, Terra Firma's aircraft and beef businesses in China are already thriving. AWAS, a portfolio company of Terra Firma, has rented 13 airplanes to Chinese airlines. And another portfolio company sold 1,000 head of cattle to China this year, and this number is expected to surge to 15,000 next year.

China is just a small part of Hands' business, which stretches from home rentals to cinemas, from the United States to Italy. He has just purchased Britain's biggest care home group, Four Seasons, for 825 million pounds ($1.32 billion). It followed another deal in March, when he bought the Garden Centre Group, a chain of 129 garden centers in the United Kingdom for 276 million pounds.

Big private equity acquisition deals are relatively uncommon in Europe today. For most PE firms, investing a large amount of money in a traditional business is full of risk.

But for people who know Hands, these deals are not unusual. The 53-year-old Briton has distinguished himself from his peers with his unique investment strategy. This basically comprises of hunting for undervalued businesses, which are unloved and overlooked by others, are heavily asset-backed, are in essential industries, and require fundamental operational change.

One of Terra Firma's success stories is Infinis. It was a small methane company ignored by its parent company WRG before Hands bought it.

By radically improving its on-site operations and adding wind and hydropower businesses, Infinis became the largest private renewable energy company in the United Kingdom.

"When I forecast another 10 years of stagnation in public equity markets, I find myself having to shout to be heard above the chorus of pessimistic voices," Hands wrote at the beginning of an article published in The Daily Telegraph last year.

When I asked him if this means he is bearish about the European market, he said he just saw the European economy as being "flat".

"People need to get used to Europe living in a state of constant crisis that will become a new reality, perhaps for a whole generation," Hands said. He is so passionate about the fate of the European economy that he devoted a quarter of his speech at the CEO meeting to it.

But that does not mean he is pessimistic about his business in Europe.

"It's all about what people's expectations are. Investing is normally about doing better than the expectations, because expectations are driving the price," he said.

"If you look at the markets which have done well, you would only find a market in which people are expecting to do badly each year, rather than the market in which people are expecting to do well, because when people expect to do well, prices go up. Then things don't happen that way, it goes down. But if things happen that way, the price would stay flat."

So he said he is basically buying low now.

But he is also keenly aware of the state of Europe's PE market.

He explained, at the moment, two factors are dictating the mood for investing in Europe. First, it is difficult to sell European assets at the price that sellers want. Second, it is difficult to buy European assets at the price buyers want.

"We are stuck in the middle. The mood can be summed up in one word: frustration," he said.

"Buyers can't get enough liquidity to buy so sellers don't want to sell. Sellers can't sell so investors are loathe to put more money in. It's an increasing problem and it's reducing the velocity of private equity investment in Europe."

But Hands also sees cause for hope.

"Despite widespread predictions of the industry's demise after the credit crunch, since the spring of 2009 there is clear evidence that private equity funds are outperforming public markets."

He said what's more important is that investors with a unique market insight always win. This is reflected in his latest investments in Four Seasons and Garden Centre Group. He said he is also interested in China's elderly-care business as he sees huge demand amid China's rapidly aging population.

"Transforming" is the most mentioned word by Hands: Transforming businesses, transforming strategies, transforming management teams.

"Private equity firms that are equipped with the expertise to add strategic and operational insights can transform and revitalize these 'zombie businesses'," he said.