“Citius, Altius, Fortius” is the Latin motto for the modern Olympic Games proposed by their founder, Pierre de Coubertin. It means “Faster, higher, stronger”. In addition to wondering why the motto is not in ancient Greek, I recently spent a few moments considering how it might also apply to private equity firms.

Silverfleet Capital recently failed to win the gold medal on two transactions because two other firms were prepared to pay considerably higher prices (over ten per cent of enterprise value in both cases). In each case these competitors were fast as well, going from being awarded exclusivity to closing the deals in very short order.

On that superficial information you might conclude that we need to shape up to compete. But will such aggressive behaviour by other firms ultimately produce strong returns for their investors?

In both cases mentioned above due diligence uncovered issues, especially with respect to current trading. Not surprisingly, the sellers were very keen to complete the transactions before what might be passed off as a blip turned into a trend. But were the buyers wise to be quite so quick to dismiss these potential problems?

To avoid dealing with the current trading issue with a slightly nervous bank syndicate, one firm even decided to use the LBO equivalent of anabolic steroids, the full equity underwrite, to allow them to get to the finish line that bit faster and with no debt facilities.

As for higher prices, I was also reflecting on how these have changed since my early days in private equity. Back then the next Olympic city was going to be Seoul in 1988. Rebecca Adlington had not taken her first stroke, even in amniotic fluid, and the height of the price was measured in Ebit with a multiple of 10x Ebit widely regarded as vertiginous.

Since then the measurement unit for price has been debased to Ebitda, sometimes with passing reference to a completely misleading “maintenance” capital expenditure figure that is usually only a fraction of what the company really needs to spend each year. Hence the high jump has turned into the pole vault without anybody appearing to notice and 10x Ebitda has become a height that gets cleared regularly.

And that is not all. In both of the transactions that I mentioned earlier, the short-term performance-enhancing drug of pro-forma earnings adjustments had also been extensively used to support the price, with seemingly little thought given to the long-term ability of the target to actually support the resulting debt structure. 

Private equity, like the modern Olympics, is highly competitive and in both fields of activity the pressure to win is intense, possibly even more so in transactions where silver and bronze medals aren’t awarded. However, if investment returns are to remain strong, the importance of investment discipline as well as rate needs to be recognised.
In the same way that athletes now require regular dope tests, LPs can play their role by ensuring that they receive enough information on each transaction, from entry to exit, that GPs cannot disguise their true performance either. 

Neil MacDougall is managing partner of Silverfleet Capital.