The Coach Makers Arms are owned by a daisy chain of business entities that lead to the mysterious offshore tax haven of Jersey-just a stone’s throw away from the front door near Oxford Street in London.
The structure was arranged by private equity firm TDR Capital, whose executives decided in 2017 to purchase a local watering hole across the street.
Now, TDR uses a similarly complex model in its largest transaction to date: the purchase of supermarket chain Asda from Walmart with debt of 6.8 billion pounds, which was approved by the Competition and Markets Authority earlier this month.
This is the largest leveraged buyout in the UK since KKR took over Alliance Boots 14 years ago. It puts the future of Asda’s 145,000 employees and an important part of the country’s food supply in the hands of little-known investors.
Under the leadership of former bankers Manjit Dale and Stephen Robertson, TDR was established as Tudor Dale Robertson with funding from American hedge fund billionaire Paul Tudor Jones.
Dell is the main figure of the company and smokes heated cigarette sticks during the meeting. He first cooperated with Robertson at Bankers Trust in London in 1995. It was acquired by Deutsche Bank four years ago. Their transactions included the establishment of Punch Taverns in 1998 and the sale of the chain to the acquisition group TPG the following year.
In 2002, Dell and Robertson, who were 37 and 42 years old, were out alone. A former colleague who moved to Tudor Investment Company introduced his new employer, and Tudor promised to invest approximately 155 million euros in the first fund of 550 million euros.
Over the past two decades, some things have changed—especially the amount of funds investors are willing to provide. TDR’s latest fourth fund manages 3.5 billion euros. Jones’ company is no longer officially involved, but is entitled to always receive 1 million euros from TDR a year, which is the result of a handshake transaction in the early 2000s. Jones and his investment company declined to comment.
But what has been very stable is that a small team invests a lot of its own funds and focuses on a few transactions. Although many private equity firms have evolved from a group of highly motivated deal-matchers to institutions with a multi-layered mechanism of checks and balances, TDR is still closer to the old model.
“I don’t like bureaucracy very much,” Dell told the Financial Times in a rare interview. “You know, I hope we can make the right business decisions with as little fuss as possible. That’s why we are a central office, a team. It’s all pretty compact. If that’s the case, you can go around in half an hour. Look at all the key people in anything you want to talk about.”
Most of these key figures are men. Even according to the standards of the private equity industry, TDR is male-dominated. Except for the head of investor relations, all 12 partners are male, and there has never been a female trading partner. Dell declined to comment.
TDR’s own executives are usually the largest single investor group in its funds, contributing approximately 10% to 15%, which is much higher than the 5.5% average of the acquisition fund stated by the data company Preqin. A person who has worked closely with TDR said: “The principle you have to follow is that it is basically Manjit and Steve’s family office.”
Dale said, “eat your own meals” is very important. “I think this is a good discipline. If you succeed, over time, you also happen to do well.”
The focus extends to actual due diligence. According to people familiar with the matter, when TDR acquired 332 bars from Mitchells & Butlers in 2010, the company’s executives visited each bar.
The financial engineering of the gym
The same person who worked with Dell and Robertson said that one element of the TDR investment approach is rooted in their early banker trust era: “You buy assets, get your money back, and then enjoy free options.”
Company documents show that the company used its fund of 190 million pounds and 528.5 million pounds of debt to acquire gym chain David Lloyd in 2013. Since then, TDR has recovered more than £550 million in dividends and other repayments, almost three times its initial investment. This is partly paid for by adding new debt to a company that currently owes more than £1 billion.
“The reason why TDR is cashed out is simply financial engineering or debt increase,” said Peter Morris, an associate scholar at the Said School of Business at the University of Oxford. “This means that David Lloyd is more vulnerable than when the pandemic hit.”
During the lockdown, the gym group took advantage of the British government’s vacation plan and the German government’s Covid-19 assistance program.
Dell said the gym chain “better than most competitors” withstood the pandemic and “now can make good use of its market leadership, as shown by the record number of new members joining since the restrictions were relaxed. That way, the very successful refinancing recently was severely oversubscribed.”
Although TDR said this month that it would “inject 100 million pounds into the company” as part of its 350 million pounds “equity contribution”, it was also funded by debt: a loan from a professional lender, 17Capital, compared to the value of other companies owned by TDR , “Pay-in-kind” bills from outside investors, a form of borrowing where borrowers can defer interest payments and repay them with more debt.
Two people familiar with the matter said that TDR has recovered about 250 million euros originally invested in EG Group, which is a highly leveraged gas station company jointly owned by its co-founders Mohsin and Zuber Issa.
This transaction paved the way for the acquisition of Asda with Issas again. Although the supermarket group is valued at 6.8 billion pounds, TDR and Issas will only use 780 million pounds of their own funds. The remaining funds will come from the sale of some of Asda’s assets and increasing its debt burden. 780 million pounds, only 11.5% of the transaction price, at least partly from cash withdrawals from EG Group.
In addition to bars, gyms and gas stations, TDR has also invested in discount retail and cruise ships, industries that have been hit by the pandemic. It has agreed to acquire debt collection company Arrow Global and generator supplier Aggreko this year.
“This is an old world investment portfolio, just as much of the British economy is an old world economy,” Dell said. “Our belief is actually the subject of many of our investments, that existing companies have no reason not to innovate, except for their own structure and lack of foresight. We can inject and change these two things and apply capital.”
TDR has never let portfolio companies go bankrupt, although in 2017 it fought fiercely with bondholders over the future of Algeco, a modular space leasing company that has been owned since 2004. In the case that was later resolved, the valuable US subsidiary was in his own hands.
According to data released by an investor, as of September 2020, the internal net rate of return (a measure used by private equity firms to calculate its annual performance) of the third fund holding EG Group shares is 34.1%. Public employee retirement funds easily rank among the top quarter of buyout groups.
However, according to a report shared with investors, its second fund was raised in 2007, and by September 2020, its internal net rate of return was only 6.9%.
“This fund is almost a mediocre definition,” said a private equity expert. “This is not the purpose of people investing in private equity.”
Dell said that Algeco’s performance is a drag, but “in terms of return multiples, it is the second quartile of the fund.”
It is often difficult to track the details of how private equity executives are paid. But TDR Capital LLP’s account reveals some things. Morris’ analysis of the company’s house records shows that since its inception, it has paid 293.9 million pounds to its members (mainly TDR executives), of which revenue was 526.8 million pounds.
This amount is equivalent to salary, excluding carried interest, which is the mechanism by which private equity executives usually get a 20% profit share.
Dell said that these payments are “extracted from profits, and there is no contractual guarantee, depending on the continued performance of the partnership and its members.”
Although TDR’s investors include large American pension funds such as the Pennsylvania Employee Retirement System and the Japan Agriculture and Forestry CICC Bank, there are also a group of “family and friends” who pay lower management fees.
They include Paul Tudor Jones, Carphone Warehouse co-founder David Ross, who is the chairman of PizzaExpress under TDR, and Stephen Short, a partner at Simpson Thacher & Bartlett, who advised TDR. “There are many [investors], There are people who are more important than me,” Short told the Financial Times.
Several TDR dealmakers personally purchased shares in companies unrelated to the acquiring company. Some of them are supporting a group of former employees of Greensill Capital, a supply chain finance group that went bankrupt this year due to financial and political scandals and started a new company called Silver Birch.
Dell invested in Flight Club, a dart-themed bar chain, and the 16th-century hotel The Double Red Duke near the Cotswolds.
However, all their previous ventures pale in comparison with the multi-billion pound deal with the world’s largest retailer. Overhauling Asda may drag TDR into the spotlight.
“The acquisition of large retail companies will inevitably lead to higher visibility,” Morris said. “When TDR works with Asda, it may be more difficult for them to stay focused.”