Jon Moulton, the outspoken private equity and venture capital veteran, is certainly not shy of controversy. Lauded as the ‘maverick’ and pioneer of the industry, Moulton’s life and career is certainly bursting with intrigue and success, in equal measures. Aged 65, Moulton is currently Chair at Better Capital, the turnaround investment firm he founded in 2009. Editor and Private Equity Correspondent Sabian Phippen met Mr Moulton at Better Capital’s modest Leicester Square office, where he candidly reflects upon his unique journey, failures, regrets and gives an insight into his life, the future of private equity and the key to his accomplishments to date…
SP: Can you tell me about your early life?
JM: I grew up in Stoke-on-Trent, the son of a hand engraver to the Pottery industry – the last master engraver – I think. It was a dying trade.
SP: I read that as a child, you were ill for some time with tuberculosis (TB)?
JM: I was. As a result, I spent a lot of time with my grandfather, who was a successful entrepreneur.
SP: How formative do you think that was for you?
JM: Oh, very. I spent a lot of time wandering around with him at factories, power stations and places like that while he looked after me during the day. He really taught me quite a lot.
SP: Would you say that it was from him that you inherited your entrepreneurial side?
JM: I presume so. If you look at the offspring of my grandfather, most of them are really remarkably successful, and from not a really very rich background. He was, by local standards ‘well-off’; he had a nice car and house but nothing out of the ordinary.
SP: You then went onto Lancaster University to study Chemistry; why Chemistry?
JM: I took into Chemistry very heavily when I was a teenager. I was up to A-Level standard when I was 14 and even had my own lab at home. Nowadays I’d probably be put inside as a terrorist suspect. It was a quite substantial lab too.
I always enjoyed Chemistry, but by the time that I’d finished my degree, the UK chemical industry was in rapid decline. Actually, the first time that I was on television was when I explained to a man from Panorama that there were no jobs in chemistry. Needless to say that went down quite poorly with my professor at the time.
I used to have complete power and no liabilities: a lovely way of learning things
SP: So instead, you became trained to become a Chartered Accountant?
JM: Yes, doing mostly insolvency and bankruptcy. I trained up in Liverpool, running bankrupt businesses; in those days, accountants quite often ran bankrupt companies in a way that you don’t see nowadays.
I used to have complete power and no liabilities: a lovely way of learning things. So I ran everything from textile businesses to engineering businesses. And this was before I had even finished qualifying! A fantastic experience – but you can’t get anything like that now.
Then I went to Coopers & Lybrand in New York, becoming a manager and went quickly up through the ranks there, in a so-called ‘fast-track’ system. They sent three people a year to New York – and I was one of them – so I spent three years in the States, which is where I started in private equity in 1980.
My wife dragged me back – that’s a much fairer description
SP: And then you moved back to the UK?
JM: My wife dragged me back – that’s a much fairer description.
At the time, New York was buzzing. It was much further ahead of the UK in finance and the work ethic was incredibly different. In those days London was, really was pretty empty by 6 o’clock at night. Whereas in New York, you could often find yourself working through the night.
I did one spell at Coopers in New York where I did six straight months without a day off: not even a Saturday or Sunday or a bank holiday. Nothing. Those were hard days.
I had an opportunity to join a firm called K.K.R. when they were only about six people, but I didn’t take it
SP: At what point did you then did you then move into private equity?
JM: I started to see leverage buyouts in 1979; they were just starting to get going in scale in the US. I had an opportunity to join a firm called K.K.R. when they were only about six people, but I didn’t take it. I went instead to CVC in New York to do venture capital and took it from there. I stayed at CVC until 1985 and set up Schroder Ventures in London on 1st February 1985 becoming the first managing partner.
SP: That must have been quite a bit of a risk at the time? Especially given the fact that private equity was still a very nascent industry.
JM: It was very. There wasn’t a buyout fund in the UK and the total sum of all the venture funds wouldn’t have even added up to £100 million.
SP: But you saw an opportunity nonetheless?
JM: I did see the opportunity coming. I’d seen that it had, and could, be been done in the States. The first deal I did in the US was $250 million. Many, many years later, I finally matched that again.
SP: So would you say that moving into venture capital was planned or did you fall into it?
JM: No, it wasn’t really planned. I had opportunities to do other things. I could have easily ended up as a CEO or CFO in the US. I liked working in the States; I really was dragged back… and to a marked reduction in salary!
SP: What did you do after your stint as managing partner of Schroder Ventures?
JM: I stayed at Schroders until 1994 and then moved over to Apax Partners for a couple of years to get their buyout business in order. When I went to Apax, they were in a really bad way; they couldn’t raise a £100 million fund and their buy-in fund – which was a 1987 fund – was, at that stage, possibly worth 50 pence in the pound. They couldn’t raise any money.
So they wanted me in; I helped them raise money and bridge the buyout business for a couple of years. Ronald Cohen’s rather feudal system of management didn’t really gel with me, so I set my own firm up – Alchemy Partners in 1997.
I had made a few million pounds when I was at Schroders, so I could take quite a relaxed view on things for quite a long time
SP: The name Alchemy was a play on your scientific background then?
JM: Actually it was more than. Originally, it was going to be a joint venture with Chemical Bank, so we thought that it would be a really good name. But then they fell apart, so that was that!
SP: How did you actually go about setting up your own private equity firm?
JM: It was easy in those days. No bloody regulation worth talking about!
SP: But presumably you would have needed some initial capital to get going?
JM: I had made a few million pounds when I was at Schroders, so I could take quite a relaxed view on things for quite a long time. In the event, it was week six that we turned cash positive at Alchemy. And that’s how long it took to get a fund together in those days.
SP: Did you have a kind of roller-deck of investors to go to persuade to commit capital?
JM: Of course I did; I knew them all. We had 350 people at the opening party of Alchemy, which was the day after I left Apax! An old friend organised the office for me, so it was all set-up, ready and waiting.
SP: You then left Alchemy in 2009 and started up Better Capital. Why did you start it and how is Better Capital different in its approach to investing?
JM: It’s very different. We set Better Capital up to be a specialist turnaround fund, which Alchemy had done previously, but it had had a very mixed performance in. Some of it was quite good, but the strongest performances at Alchemy were nearly all in business turnarounds.
I wasn’t prepared to back their purported skills in Financial Services
In traditional buyouts, we were probably average, or no better and the area that most of the partners, at that time, wanted to do – in Financial Services – we were absolutely in the bottom quartile. I wasn’t prepared to back their purported skills in Financial Services.
So, here I sit today, six years after leaving Alchemy, and the bulk of that portfolio is still not realised and still not worth more than when I left. So I think I got the call right on the strategy and I was also getting on in years and wanted to do something more interesting.
I actually, got one thing very wrong. I thought that in the happy days of 2009, there would be an absolute wall of turnarounds; there were all these highly leveraged buyouts that I thought would have hit the wall and stayed down, but they didn’t. Interest rates went to levels that none of us could imagine. Banks got into a very forgiving mode and, actually, the economy didn’t tank in the way that people had thought possible. But the thing that did surprise me, and it still does today, is that we have very, very limited competition in turnarounds.
SP: What is it about turnaround investing that interests you so much?
JM: Even though they are very painful – because they go wrong quite regularly – they can be extremely profitable. And sometimes they are very easy. It is quite an odd game. If you get it right, it’s great.
SP: Is there a magic key to a successful turnaround investment?
JM: I’ll tell you what the perfect deal is: the perfect deal is a strategic disposable – with inverted commas around ‘strategic’ – of a loss making subsidiary from a highly profitable parent. Because they have a bizarre dynamic; the company’s subsidiary might loose, say, £5 million a year, but the parent may be valued at 14x earnings. So it’s worth -72. So if they give it to you for £10 million – cash to us – that can be a very good deal. Particularly if you’re able to get it back into profit quite quickly.
SP: What have been some of your most favourite deals?
JM: The one at Schroders would undoubtedly be the buyout of Parker Pens. The most colourful would be Sheffield Forgemasters; before we bought them, one subsidiary hadn’t made profit since 1953. That was the deal that also involved the Iraqi supergun scandal, and that’s why it was definitely the most colourful!
But, overall, I’ve been involved in lots of deals that range from very, very successful to truly dreadful. That’s very much the nature of the trade. We’ve had some very nice home runs, some very remarkable occasions – Parker did nicely; seven years, 72% IRR and that was a heavy turnaround, a very heavy turnaround.
SP: Were there any deals that you regretted not being able to do?
JM: Yes, there were a couple actually. Ellerman Lines, that Nick Ferguson – a co-founder of Schroder Ventures – stopped. Shocker that was. That was a 70 odd percent return investment I had to give to Charterhouse. We’d done all the work and he turned it down.
SP: What about MG Rovers?
JM: That was in my Alchemy days. I still don’t know whether I regret it or not; it certainly would have been fun to complete. Other than that, there aren’t many deals I regret. But I do regret most of the right-offs. Newbridge Networks was probably the biggest mistake while I was at Schroders. I think we made 4x our money, maybe 4.5x, but it was our biggest ever mistake because if we’d held it for another year, it would have been 72x our money. So we exited way too soon.
SP: Why was that?
JM: We were in quite a difficult venture fund: Venture Fund II. It was struggling for performance, and when we saw something we could actually take a good dose on, we took it.
I’ve done everything from, barely visiting to working as a full-time CEO for ten months in my career
SP: How hands-on do you personally get with some of the companies that you’ve acquired? Typically, of course, you don’t manage the companies that you back.
JM: I’ve done everything from, barely visiting to working as a full-time CEO for ten months in my career. I’ve done everything. If anything, I’m probably better the more hands-on I get. The results certainly show it. The problem is, it buggers your lifestyle up completely. And at my age now, I think it’s probably a bit late to doing that now.
SP: Can you tell me a bit about the J.P. Moulton Charity Foundation?
JM: It’s a medical charity largely funded out of my old wealth and gains, an occasional speaking fee and things like that get chucked in and that all funds the charity’s work. Overwhelmingly, we fund clinical trials; we’ve funded about 18, right the way across medicine. So it’s quite a substantial organisation and it’s been running for around ten years now.
I do quite a lot of work in that area; I’m currently a trustee of the UK Stem Cell Foundation. It’s an area of real personal interest.
My wife has made it perfectly clear that this would involved ritual emasculation with a hot iron!
JM: My wife has made it perfectly clear that this would involved ritual emasculation with a hot iron! I now live in Guernsey, so that restricts the opportunity. But Guernsey’s own politics is quite funny; it’s really rather a rich little island, where political parties are illegal.
SP: So politics is a no then?
JM: Well I’ve dabbled in it, but I haven’t actually contributed anything to the Conservatives for six years now. I’ve really never been a Cameron fan. I’ve never managed to get my head round the idea that a public relations man should run a country. I don’t think Cameron has very much in the way of, shall we say, core beliefs. I have an unreasonable liking for determined people with beliefs.
SP: Jeremy Corbyn?
JM: I certainly admire him – I think he’s a nutcase – but at least he’s determined. If you go back to previous generations, people like Wedgewood Benn [father of Tony Benn], had views that were virtually 100% different from mine. But, you could respect the bastard, because he believed them, and could argue them.
On the other side, you’ve got Enoch Powell, who again, you wouldn’t agree with a great quantity of what he did, but you’ve got to admire that at least the bloke said what he felt, and he had his arguments to go with it.
I much more admire people like that. Some miserable gits think; ‘do you think it would be better if I said this or that?’ and having spent some time hanging around things like the Number 10 Policy Unit, that is how it’s done.
SP: Outside of work and charitable causes, what else keeps you busy?
JM: Nowadays, when I want to switch off, I play chess, tennis or go walking. I also travel quite a bit too. I’ve travelled a great deal in my career, but I never used to actually see anything.
SP: You’ve also previously and quite controversially criticised the tax arrangements around private equity funds; do you still think that the current tax arrangements are perhaps overly favourable?
JM: I think that they have moved very recently into much more sensible territory. Having watched some private equity firms get into very advanced tax planning and I’ve always thought it daft.
I’ve always paid that which I should legitimately pay, without resorting to extreme structures. But so many in the industry did, so sooner or later it was going to get trodden on; and it has been.
SP: As a pioneer of private equity, what do you think the industry will look like in ten years’ time?
JM: Actually, I rather fear, that it will look very similar to the way it does today. I think it’s a mature industry. I don’t see dramatic change; I see a slow drift of money towards the mega-funds, simply because that makes them more institutionally usable and because more compliance drives it that way. Brand names appear to have more value than you might imagine. But other than that, that’s the only dramatic change coming.
There should, logically, have been some marked reduction in the terms of trade over the years, but its actually been quite slight. Fees and carry aren’t as generous as they were, but they’re not much less generous. The economies of scale haven’t really gone to the investors in the way you might expect.
SP: Especially given the rise of co-investments?
JM: That’s making a dent in it and that’s probably the way in which fees are most under pressure. Co-investment is – best will in the world – always something of a nuisance, and sometime a very large nuisance.
But I think the industry will look something very like its current form in the next ten years; and probably not much bigger or smaller.
I do an enormous amount of angel investing and I’ve actually made more money doing that, than I have working
SP: Where do you think the future of venture capital will be?
JM: The venture side will be more volatile. Venture, after 20 years of going nowhere in the UK, has just had three or four years of quite decent performance. I think we’re just about to see the bubble bust. It’s changed quite a bit; it’s also very cyclical.
I do an enormous amount of angel investing and I’ve actually made more money doing that, than I have working. I’ve got a team of four who support me doing just that. And that’s really what has made me money over the years.
Hindsight is a remarkably useful tool; I’ve made more mistakes that you can imagine
SP: Finally, some reflections. Looking back on your life and career so far, is there anything you would have done differently if you could?
JM: Lots. Hindsight is a remarkably useful tool; I’ve made more mistakes that you can imagine. I’ve made bad investments, chosen bad people, believed bad things, made miscalculations, been arrogant: I’ve done all these things. I could make a really good long confession – they’re all true.
One of the characteristics I have, which is probably why I’ve lasted so long in the game, is that I am genuinely insensitive
Any I particularly regret? Actually not. One of the characteristics I have, which is probably why I’ve lasted so long in the game, is that I am genuinely insensitive. I just think: “Oh f*** it” and carry on.
SP: Would you say that you have any kind of mantra that you follow in life?
JM: Do what you enjoy; it’s as simple as that. Try as hard as you can, to be as honest as you can. Nobody succeeds at it totally, but standards of integrity nowadays have diminished in lots of things. Even such basic things as an accountant’s report. Integrity has gone out of the system.
SP: If you could talk to your 21-year-old-self, what would you say?
JM: Besides doing what you enjoy, if I was to add anything else, it would be: be lucky.
Correction: We reported that the deal Mr Moulton regretted not being able to do was “Park Development line” this is incorrect, and was actually “Ellerman Lines”.