Jon Moulton: His cure for the meltdown

Author: By Sean O’Grady

But, he warns, “unless we have dramatic action, we’re doomed to low growth, no growth, or going slightly downwards. It will get worse. Countries can’t manage public debt at 100 per cent of GDP for very long”. Why? Because “one day we’ll wake up and discover that no foreigner will buy gilts ? and we’ve had it”.

Gloom and doom is all-pervading. The euro, Moulton thinks, is “unstable” and has a one in five chance of breaking up. In the UK, inflation is “utterly, utterly inevitable ? only the timing and the extent are impossible to forecast… You don’t solve a credit crunch which came from an excess of credit by generating more of it”. House prices? Another 10 per cent drop is “not impossible”. That will be driven by unemployment and a wave of bankruptcies: “Corporate bankruptcies and restructurings will continue to rise ? optimistically for another 18 months and possibly a lot longer… When interest rates go up is when you’ll see companies hit the ground hard.”

Firms will also collapse when the banks stop lending them money. At the moment, the banks, Mr Moulton suspects, may be keeping some enterprises on life support ? contrary to the popular image ? because they are unwilling to make provisions and write off bad debts when banking balance sheets are so fragile ? “the accounting starts to get a bit dubious, to be honest”.

Listening to the founder of Alchemy Partners you subject yourself to the unrelenting, merciless, clinical logic of the trained insolvency practitioner at work. The very cleverest of these, like Mr Moulton, leverage their skills into private equity, where, let us be frank, they then make themselves really, really rich (about £100m in Mr Moulton’s case). They are a special breed ? like normal accountants, but without the soppy sentimentality. These are the oncologists of market capitalism ? the ones who have to deal with the chronic corporate cases, do their best for them and sometimes deliver very bad news. Or as Mr Moulton says of the banks and their care nurse, the Governor of the Bank of England: “You’ve got Mervyn King talking about the need to differentiate high street banks and casinos; I agree with him. We need to end up with a simpler banking system … There’s no sign of that happening. Mervyn seems to favour the sticking plaster to sort out the financial system rather than take the tumour out.”

The answer to the nation’s problems, says Mr Moulton, is a “turbo-charged Maggie Thatcher”, someone who will answer the nation’s call to rescue it from doom, just as she did 30 years ago: “Strangely I don’t see one around at the moment.” Maybe that is because, as Mr Moulton openly admits, it would mean someone with the guts to prune the public sector by 20 per cent ? taking the share of GDP taken up by public spending from 50 per cent of GDP to 40 per cent, at which point it does less damage to economic growth. Mr Moulton admits that means painful cuts: “You can’t pretend we can do it with the frivolous stuff … the magnitude of the cuts we need will cut into core programmes and affect sections of the population quite adversely. It will happen. It’s just a question of when. I’m actually quite angry because those problems are there ? unrealistic expectations and unrealistic spending for political advantage.”

Indeed, there is more than a passing resemblance between the views of this outspoken, highly quotable businessman and those of Mrs Thatcher in her prime. Not that Mr Moulton thinks business and politics mix that well; he wishes Sir Alan Sugar, the Government’s new adviser on entrepreneurship, “all the very best in his pointless endeavours”.

Like Margaret Thatcher, Mr Moulton is fond of Victorian values and pre-Keynesian economics. He even applies his austere moral code unflinchingly to private equity. He says that some of the “excesses” in the industry between 2006 and 2007 were “immoral”: “we went from whiter-than-white to shades of grey…” Prices of LBOs (leveraged buyouts) became extreme, fuelled by cheap credit: corporate earnings were inflated or “adjusted” upwards, to be “nearing fraudulent”.

One accountant supposedly boosted profit figures because bad weather had affected a client’s house sales ? “weather-adjusted pro-forma ebitda”. The private equity world has suffered and shrunk ? financially and reputationally ? since. The European Union wants to regulate it; Mr Moulton finds the latest directive “would give me a reason to think about moving out”, though he doubts it will get implemented in its present form.

Mr Moulton’s approach is to apply forensic logic to any problem. And that is it. He deploys figures with devastating, unanswerable effect. To him, economics, like accountancy, seems to boil down to a few simple, eternal ratios: “Here’s a piece of real Victorian-style economics. If we double our interest bearing debt, which is what we’re doing over the next four or five years, we’ll end up with something like another 4 per cent of our GDP being used to fund overseas debt ? so that’s 4 per cent out of the economy. The economy’s natural growth rate is, optimistically, 2 per cent ? so 2 in and 4 out. Even Charles Dickens could tell you the economy can’t grow with that burden of debt.” Not sure where Dickens comes in, but I take Mr Moulton’s Micawberish point all the same.

Mr Moulton delivers his doom-laden prophecies in his authentic original Potteries accent. It is much the most affecting thing about this entrepreneur, a man who has clearly felt no need in his professional career to layer a top-dressing of elocuted poshness on to the way he speaks. It has done him little harm. Many of us first heard his distinctive tones in 2000 when he appeared on Breakfast With Frost and unveiled his audacious bid for the Rover Group (later MG Rover), then being jettisoned by BMW. At the time Mr Moulton became a poster boy of hate for the the unions and flat-capped MGB drivers alike. Mr Moulton’s plan to slim the company and create a sustainable niche sports car company was derided as too harsh, almost cruel. Today, five years after the collapse of MG Rover, Longbridge is well on its way to becoming a retail park and Mr Moulton’s ideas do not seem quite so barbarous. Will we be thinking the same thing in a few years’ time about the painful surgery to the economy that Mr Moulton is now prescribing?

Jon Moulton: From chemistry to Alchemy

* Jon Moulton, qualified chartered accountant, was born on 15 October 1950, and has been buying and selling companies for 30 years. He is worth an estimated £100m.

* He studied chemistry at the University of Lancaster and trained as an accountant with Coopers & Lybrand. He still keeps himself up to date with scientific developments.

* A pioneer in the field, he became the managing director of “Citicorp Venture Capital” in London in 1980. He was with Schroder Ventures (now Permira) from its inception in 1985 until 1994.

* He founded the private equity firm Alchemy Partners in 1997 and he is now the managing partner.

* Alchemy offers visitors Belgian chocolates wrapped with gold foil and the slogan “Base metals to chocolate. An interim stage.”

* Alchemy’s Private Equity team advises the Alchemy Investment Plan, a fund investing from £25m to £150m that focuses on mid-market deals in the UK, Ireland and German-speaking Europe.

* The Alchemy Special Opportunities team manages a £300m fund focused on special opportunities in this crisis, from distressed debt investing to litigation funding.

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