Coach Makers Arms is owned by a chain of corporate entities that lead to the secret offshore tax haven in Jersey – ending a stone’s throw from its front door near Oxford Street in London.
The structure was arranged by private equity firm TDR Capital, whose executives decided in 2017 to purchase the local watering hole across the street.
TDR is now using a similarly complex model for its biggest deal to date: the £6.8 billion acquisition of Asda supermarket chain Walmart, which was authorized by the Competition and Markets Authority earlier this month.
It is the largest leveraged purchase in the UK since KKR acquired Alliance Boots 14 years ago. It puts the future of Asda’s 145,000 employees, a critical component of the country’s food supply, in the hands of investors about whom little is known.
Led by former bankers Mangit Dell and Stephen Robertson, TDR was founded under the name Theodore Dale Robertson, with capital from American hedge fund billionaire Paul Tudor Jones.
Dale, the company’s dominant figure who smokes heated tobacco sticks during meetings, first worked with Robertson at the Bankers Trust in London in 1995, four years before it was acquired by Deutsche Bank. Their deals included creating Punch Taverns in 1998 and selling the chain to acquisition group TPG the following year.
In 2002, Dale and Robertson, who were 37 and 42 years old, achieved success on their own. A former colleague who moved to Tudor Investment Corporation brokered an introduction to his new employer, and Tudor allocated about €155 million to the couple’s €550 million first fund.
Over the course of two decades, some things have changed – particularly how much money investors are willing to put forward. The last TDR fund, the fourth, is managed by 3.5 billion euros. Jones is no longer officially involved but is owed €1 million a year in TDR forever, as a result of a handshake deal in the early 2000s. Jones and his investment firm declined to comment.
But what has remained remarkably consistent is a small team investing large sums of its money and focusing on a few deals. While many private equity firms have evolved from declining groups of deal makers to institutions with layers of checks and balances, TDR has stuck more closely to the old model.
“I hate bureaucracy very much,” Dale said in a rare interview with the Financial Times. “You know, I want us to make good business decisions with as little fuss as possible. That’s why we’re one central office, one team. Everything is pretty compact. You can walk around and see all the key people on whatever you want to talk about in half an hour , If so “.
The majority of these key people are men. Even by private equity industry standards, TDP is dominated by men. All 12 partners, except for the head of investor relations, are men, and she’s never had a deal-making partner. Dale declined to comment.
TDR executives are usually the largest group of investors in its funds, contributing about 10 to 15 percent, well above the 5.5 percent that data firm Prekin said is the average buying fund. “You have to work on the principle that the office is basically the Manjit and Steve family office,” said one of the people who worked closely with TDR.
It’s important to “eat your own food,” Dale said. “I think it’s a good system. And if you are successful, you will do well over time.”
The focus extends to hands-on due diligence. When TDR acquired 332 bars from Mitchells & Butlers in 2010, company executives visited each one, according to people close to the deal.
Financial engineering in the gym
“You buy an asset, you get your money back, you sit with a free option on the upside,” said the same person who worked with Dell and Robertson, an element of TDR’s investment approach rooted in its early days as Bankers Trust.
The company bought gym chain David Lloyd in 2013 using £190m from its fund and £528.5m in debt, company filings show. Since then, TDP has recovered more than £550m in dividends and other payments, nearly three times its initial investment. This has been paid off, in part, by accumulating new debt on a company that now owes more than £1 billion.
“What has allowed the TDR program to cash in on the money is simple financial engineering, or increasing debt,” said Peter Morris, a research associate at Oxford University’s Said Business School. “This means that David Lloyd was more vulnerable than he should have been when the pandemic hit.”
During the closures, the gym group has benefited from the UK government’s furlough scheme and the German government’s Covid-19 aid programme.
Dell said the gym chain has weathered the pandemic “better than most of its competitors” and is “now well-positioned to capitalize on its market-leading position, as evidenced by the record number of new members joining since restrictions were eased and a very successful recent refinancing that… Significantly oversubscribed.”
While TDR said this month it would “inject £100m into the company” as part of a £350m ‘equity contribution’, that is also being funded through debt: a loan from specialist lender 17Capital against the value of other businesses TDR owns and “Pay-in-kind” bonds from outside investors, a form of lending where borrowers can defer interest and pay off additional debt.
Two people familiar with the matter said TDR has already recovered nearly €250 million it originally invested in EG Group, a highly leveraged gas station company it co-owned with co-founders Mohsen and Zubair Issa.
That deal paved the way for the acquisition of Asda once again with Issa. Although the supermarket group is valued at £6.8 billion, TDR and Isas will only raise £780 million from their own money, with the rest coming from selling some of Asda’s assets and increasing its debt burden. The £780m, just 11.5 per cent of the deal price, comes at least in part from the withdrawal of funds from EG Group.
Besides bars, gyms and gas stations, TDR has invested in retail and discount cruise ships, sectors that have been hit hardest by the pandemic. This year it agreed to buy debt collector Arrow Global and Aggreko, a supplier of power generators.
“It’s an old world wallet, like most of the UK economy is an old world economy,” Dale said. “Our belief, which is in fact the subject of a lot of our investments, is that there is no reason why incumbents should not innovate, regardless of their own structures and their lack of vision. We can inject these things, change them, and apply capital.”
TDR has never gone bankrupt a portfolio company, although it got into an uphill battle in 2017 with bondholders over the future of Algeco, a standard space rental company it has owned since 2004. Lenders have sued over TDR’s plans to transfer control of the company A valuable American subsidiary is in her hands, in a case that was later settled.
By September 2020, those in its third fund, which owns its stake in EG Group, had a net internal rate of return — a measure that private equity firms use to calculate their annual performance — of 34.1 percent, according to data published by one investor, the state’s public employee pension fund. Oregon, which places it comfortably in the top quarter of the acquisition groups.
But his second fund, raised in 2007, had a net internal rate of return of just 6.9 percent by September 2020, according to a presentation shared with investors.
“This fund is pretty much the definition of the average,” said one private fund specialist. “It’s not what people invest in private equity to get.”
Dell said Algeco’s performance was a drag but it was a “comfortable fund in the second quarter in terms of refund multiples.”
It is usually difficult to track down the details of how private equity executives are paid. But TDR Capital LLP’s calculations shed some light. It has paid £293.9m to its members – most of whom are TDR executives – since its inception, out of £526.8m in revenue, Morris’ analysis of Companies House records shows.
The payments, equivalent to salaries, do not include transferred interest, which is the mechanism by which private equity managers typically receive a 20 percent share of profits.
The payments were “a fee paid out of profits, not contractually guaranteed and dependent on the continued performance of the partnership and its members,” Dell said.
While TDR investors include large US pension funds like the Pennsylvania Employees’ Retirement System and Japan’s Norinchukin Bank, there are also a group of “family and friends” that pay lower management fees.
They include Paul Tudor Jones, co-founder of Carphone Warehouse, David Ross, who chaired TDR’s PizzaExpress, and Stephen Short, partner at Simpson law firm Thacher & Bartlett, who advised TDR. “There are many [investors], and more important than me there,” Short told the Financial Times.
Several TDR dealmakers have purchased stakes in companies in which the acquisition firm is not involved. Some of them are backing a group of former employees of Greensill Capital, the supply chain finance group that collapsed in a financial and political scandal this year, to start a new venture called Silver Birch.
Dale invested in the Flight Club, a chain of darts-themed pubs, and The Double Red Duke, a 16th-century hotel near his home in the Cotswolds.
However, all of their previous ventures pale in comparison to a multi-billion pound deal with the world’s largest retailer. And Asda’s fix could drag TDR into the spotlight.
“Big retail-oriented corporate buyouts will inevitably lead to a higher profile,” Morris said. “When the TDR program gets involved with Asda, it can be difficult for them to stay under the radar.”