An oak-panelled Victorian pub, The Coach Makers Arms is owned by a daisy chain of corporate entities that leads to the secretive offshore tax haven of Jersey — and ends a stone’s throw from its own front door near London’s Oxford Street.
The structure was arranged by the private equity firm TDR Capital, whose executives decided in 2017 to buy their local watering hole across the street.
Now TDR is using a similarly complex model for its biggest deal yet: the £6.8bn debt-fuelled acquisition of the supermarket chain Asda from Walmart, which the Competition and Markets Authority cleared earlier this month.
It is the UK’s largest leveraged buyout since KKR took over Alliance Boots 14 years ago. It puts the future of Asda’s 145,000 staff, and a crucial component of the country’s food supply, in the hands of investors about which little is known.
A ‘family office’
Led by former bankers Manjit Dale and Stephen Robertson, TDR was set up as Tudor Dale Robertson, with capital from US hedge fund billionaire Paul Tudor Jones.
Dale, a dominant figure at the firm, who smokes heated tobacco sticks during meetings, first worked with Robertson at Bankers Trust in London in 1995, four years before it was acquired by Deutsche Bank. Their deals included setting up Punch Taverns in 1998 and selling the chain to buyout group TPG the following year.
In 2002, Dale and Robertson, then aged 37 and 42, struck out on their own. A former colleague who had moved to Tudor Investment Corporation brokered an introduction to his new employer and Tudor committed about €155m for the pair’s €550m first fund.
Over two decades, a few things have changed — notably the amount of money investors are willing to provide. TDR’s latest fund, its fourth, manages €3.5bn. Jones’s company is no longer formally involved but is entitled to €1m per year from TDR forever, the result of a handshake deal in the early 2000s. Jones and his investment firm declined to comment.
But what has stayed remarkably consistent is a small team investing large sums of their own money and concentrating on a handful of deals. While many private equity firms have evolved from scrappy bands of dealmakers into institutions with layers of checks and balances, TDR has stuck closer to the old model.
“I dislike bureaucracy intensely,” Dale told the FT in a rare interview. “You know, I want us to make good business decisions with as little fuss as possible. And that’s why we’re one central office, one team. It’s all fairly compact. You can go around and see all the key people on anything that you want to talk about within half an hour, if that.”
The majority of those key people are men. Even by the standards of the private equity industry, TDR is male-dominated. All 12 partners, except the head of investor relations, are men, and it has never had a female dealmaking partner. Dale declined to comment.
TDR’s own executives are typically the single largest group of investors in its funds, contributing around 10 to 15 per cent, well above the 5.5 per cent that the data firm Preqin said is the average for buyout funds. “You have to work on the principle that it is basically the family office of Manjit and Steve,” said a person who has worked closely with TDR.
It’s important to “eat your own cooking”, Dale said. “I think it’s a good discipline. And if you’re successful, you also happen to do quite well over time.”
The focus extends to hands-on due diligence. When TDR acquired 332 pubs from Mitchells & Butlers in 2010, the firm’s executives visited every single one, according to people close to the deal.
Financial engineering at the gym
One element of TDR’s investment approach is rooted in their early Bankers Trust days, said the same person who has worked with Dale and Robertson: “You buy an asset, take your money back, and sit with a free option on the upside.”
The firm bought the gym chain David Lloyd in 2013 using £190m from its fund and £528.5m in debt, company filings show. Since then, TDR has recouped more than £550m in dividends and other repayments, almost three times its initial investment. That has been paid for in part by piling fresh debt on to a company that now owes more than £1bn.
“What allowed TDR to cash out was simple financial engineering, or increases in debt,” said Peter Morris, an associate scholar at Oxford university’s Saïd Business School. “That meant David Lloyd was more vulnerable than it needed to be when the pandemic hit.”
During lockdowns, the gym group tapped the UK government’s furlough scheme and the German government’s Covid-19 aid programme.
Dale said the gym chain had weathered the pandemic “better than most of its competitors” and “is now well positioned to take advantage of its market-leading position, as shown by the record number of new members joining since restrictions have been eased and the recent highly successful refinancing which was heavily oversubscribed”.
While TDR said this month that it would “inject £100m into the company” as part of a £350m “equity contribution”, that is also funded by debt: a loan from specialist lender 17Capital against the value of the other companies TDR owns and “payment-in-kind” notes from outside investors, a form of lending where borrowers can defer interest and repay with further debt.
TDR has already taken back more than the roughly €250m it originally invested in EG Group, the highly-leveraged petrol station company it owns with co-founders Mohsin and Zuber Issa, two people with knowledge of the matter said.
That deal paved the way for the acquisition of Asda, again with the Issas. Though the supermarket group is valued at £6.8bn, TDR and the Issas will stump up just £780m of their own money, with the rest coming from selling off some of Asda’s assets and increasing its debt burden. And the £780m, just 11.5 per cent of the deal price, comes at least partly from taking cash out of EG Group.
Alongside pubs, gyms and petrol stations, TDR has invested in discount retail and cruise ships, sectors hit hard by the pandemic. It has this year agreed to buy the debt collector Arrow Global and Aggreko, a supplier of power generators.
“It’s an old-world portfolio, like most of the UK economy is an old-world economy,” Dale said. “Our belief, which is actually the theme of a lot of our investment, is that there is no reason for incumbents not to innovate, apart from their own structures and their lack of vision. And we can inject and change both of those things and apply capital.”
TDR has never yet had a portfolio company go bust, though in 2017 it got into a gruelling fight with bondholders over the future of Algeco, a modular space leasing company it has owned since 2004. The lenders sued over TDR’s plans to transfer control of a valuable US subsidiary to its own hands, in a case that was later settled.
By September 2020, those in its third fund, which holds its EG Group stake, had made a net internal rate of return — a measure private equity firms use to calculate their annual performance — of 34.1 per cent according to data published by an investor, the Oregon Public Employees Retirement Fund, putting it comfortably in the top quartile of buyout groups.
But its second fund, raised in 2007, had a net internal rate of return of just 6.9 per cent by September 2020, according to a presentation shared with investors.
“This fund is pretty much the definition of mediocre,” a private funds specialist said. “It’s not what people invest in private equity to get.”
Dale said the performance of Algeco was a drag but that it was “comfortably a second-quartile fund in terms of multiple of money returned”.
Details of how private equity executives are paid are typically difficult to track down. But accounts for TDR Capital LLP shed some light. It has paid out £293.9m to its members — mostly TDR executives — since it was set up, out of £526.8m in revenues, Morris’s analysis of Companies House records shows.
The payments, the equivalent of salaries, do not include carried interest, the mechanism by which private equity executives typically receive a 20 per cent share of profits.
Dale said the payments were “drawings paid out of profits, are not contractually guaranteed and are dependent on continued performance by the partnership and its members”.
While TDR’s investors include large US pension funds such as the Pennsylvania State Employees’ Retirement System and Japan’s Norinchukin Bank, there is also a cohort of “family and friends” who pay lower management fees.
They include Paul Tudor Jones, Carphone Warehouse co-founder David Ross, who chaired TDR-owned PizzaExpress and Stephen Short, a partner at the law firm Simpson Thacher & Bartlett, who has advised TDR. “There are plenty of [investors], and more important ones than me in there,” Short told the FT.
Several of TDR’s dealmakers have personally bought stakes in companies that the buyout firm is not involved with. 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 has invested in Flight Club, a chain of darts-themed bars, and The Double Red Duke, a 16th-century hotel near his Cotswolds home.
All their previous ventures pale in comparison to a multibillion pound deal with the world’s largest retailer, however. And overhauling Asda could drag TDR into the spotlight.
“Buyouts of big retail-oriented companies inevitably bring a higher profile,” Morris said. “When TDR becomes involved with Asda, it may be harder for them to stay under the radar.”