Page 68 - Five Forces of Americanisation Richard Hooke 04072025 final post SDR1

The UK Defence Industry in the 21 Century
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The Five Forces of Americanisation

Its research demonstrates what investment bankers know very well: private equity
houses or buyout funds have, “on average … essentially ignored margin growth as a
driver of value over the last decade and have been carried along by multiple
expansion."
In other words, the size of the financial premium to be achieved by improving
performance or repositioning the business is far outweighed by a policy of holding an
asset long enough to benefit from improvements in its market environment.
Increasing debt (“leveraging up the balance sheet”) helps. It increases the value of the
equity that finances the company (and realised by its sale), as long as future cash flows
are dependable and supportive.

Median indexed value-creation drivers for global buyouts

Source: Bain & Company, "Global Private Equity Report," March 11, 2024
(deal entry years 2013-23)

That is why, according to The Financial Times’ Sylvia Pfeifer and Kaye Wiggins,
Advent’s purchase of Cobham “left Cobham with $3bn in net debt, more than 5.5
times its earnings … and a huge rise from just $72m when it was a publicly-traded
company”. As we have seen, ratings agencies like Moody’s and S&P would not support
this level of public company debt, cutting off any support from the corporate banking
community. By December, 2020, Advent had also “reclaimed $1.46 bn of the
“preferred equity” that had helped fund the purchase. This demonstrates the fact that
acquiring a business following its cash call to shareholders and cutting its debt burden
is an attractive proposition to a would-be private buyer. (As Advent had found when
buying both Laird Plc (the Cobham CEO’s previous employer) and, later, Ultra, as well
as with Cobham.) Targeting a UK company trading at between a 10-20% discount to a
US market that will offer a number of interested buyers adds to the attraction, as does
the pricing and availability of US debt.

It is worth questioning why Private Equity funds appear to be less risk-averse than
public companies in terms of debt. The answer is that the private owner follows
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Modern Portfolio Theory (“MPT”) and focuses on the performance of its diversified
portfolio of investments as a whole. While each asset itself might be quite volatile, the
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