"Everyone still has far too much debt"

Jon Moulton, founder and chairman of Better Capital (BCAP), has a contentious idea for fixing Britain's economic woes. "You start 10 years ago by assassinating Gordon Brown: that would have the most favourable impact on the economy."

It is a typically forthright comment from Moulton, the 60-year old veteran of the private equity industry: past targets of his caustic comments have ranged from bonus-hungry bankers to his fellow venture capitalists.

Indeed, the very name Better Capital is a thinly-disguised dig at his past colleagues at Alchemy Partners. He founded that firm in 1997 but left in September 2009 after a disagreement over strategy with his colleagues. A letter explaining his decision and attacking his successor was widely-circulated. In it, he said: "Alchemy is not what it was", and "I would do it again - but better".

If the share price is the only judge, Moulton is already doing that. Better Capital raised £210 million in a flotation on the Alternative Investment Market in 2009, moving up to the main market last year. Unlike virtually every other quoted private equity fund, Better's shares trade at a premium to their net asset value.

Not, says Moulton, because of any enthusiasm from analysts - all of whom recommend selling because of the premium.

That is partly because Better Capital plans to distribute all its profits rather than, as most rivals do, keeping some capital retained in the business. "In five years' time [when he hopes the firm's investments should start being sold] we expect our share price to be falling sharply."

Moulton is not afraid of biting the hands that could feed him: one of the advantages of making Better a quoted company rather than simply raising an unquoted private equity fund is not only that it was very fast but he also got to deal with different investors.

While the same firms of institutional investors put up the money, it came from different departments. "If you go the [publicly quoted] route, you get about one hour of grilling, the questions are intense, but you get a decision quickly."

If you are raising a private equity fund, however, it can take six months to get a decision and the questioners "are interested in your inside-leg measurement and events that happened 15 years ago".

Investor enthusiasm for Better Capital was particularly striking given that private equity has been in the doldrums, and that quoted companies such as Candover (CDI) have had to wind themselves up or undergo restructurings.

Moulton is convinced there will be more pain in the industry to come. "There are 85 private equity companies in London, doing 50 deals between them. Some will fail, but slowly. Some of them are funded for 10 years, so it will take a long time."

He was one of the more vociferous in warning of the dangers of the build-up of debt in the economy ahead of the financial crisis. Back in 2006, he said: "We're looking at an overheated market right now and we'll see some spectacular falls in the next year or two. It's just a matter of time.

"Over the last six years it's been easy to raise debt. This flood of fresh capital into the market has enabled buyers to pay more for companies. While you can make a lot of money in the buyout market just by watching the debt multiple ascend, there'll come a point when portfolio companies will find it tough to repay the interest on their loans; and at that point we'll see liquidations and distressed companies."

A year later, he told the Treasury Select Committee that some members of his profession were "abusing what is already a generous tax regime".

He still believes that excessive bonuses are an issue: he has just been looking at two individuals, with exactly the same backgrounds: one works as an accountant and is paid £60,000 a year plus £10,000 in bonuses; the other for a bank, where he is paid £80,000 a year and a £100,000 bonus. "That does not seem right."

He does not think the country is anywhere near solving its problems. "Everyone - companies, consumers, and government - still has far too much debt.

"The government is adding £500 million a day to our debts - I think that's the right calculation." That may be bearable while interest rates are at their current lows but, with inflation already a real problem, he thinks we are storing up trouble.

He favours "more severe and rapid cuts, get the pain over and done with, debt reduced for the country, for companies and for people.

"There is also a huge moral issue about the way we are running the country. For every £4 of income, there is £5 of expenditure. The extra £1 is coming from debt which those coming after us will have to service." And, he adds, "very low interest rates are rewarding those who borrow at the expense of those who are saving. A rise in interest rates will find us all out".

Just before we met, he was addressing an audience of bankers and was surprised at their lack of knowledge of interest rate history. He asked them for how many of the previous 40 years interest rates had been below 4%.

Guesses ranged from seven to 10: the answer, says Moulton is just two - the current period. "The average over that period has been 7.7%." If rates get back towards that sort of level, it could be disastrous for the economy - but it could be good for businesses like Better. "Worse is better for us," he says.

The high rating for Better suggests investors think that, even although Moulton is no longer at Alchemy, he still has the power to bring them lots of gold.

His past record is impressive: one of the earliest Alchemy deals was the acquisition of do-it-yourself business AG Stanley, from Boots at a total cost of £3 million: two years later, it was sold for £430 million and it also doubled its money in deals such as the buy-out of software company Riverdeep.

So far, Better Capital has made just four deals and a few add-on acquisitions: the UK business of Reader's Digest; aerospace supplier Gardner; Calyx, an IT services business; and part of Connaught, the public sector service supplier which collapsed last year, which has now been renamed Santia.

The £80 million invested so far is a bit behind schedule but, says Moulton, another deal would put it on target - and there are already two in the pipeline.

Better focuses exclusively on turnarounds: companies which are doing badly "through bad strategy, bad management or sometimes just bad luck". It invariably introduces new management, drives through a restructuring, sorts out the balance sheet and sets about restoring profit. "It sounds easy, and it is - provided you have people with the wit and the moral courage to do it."

He thinks company managers often delude themselves about the state of their business. He cites one executive who recently boasted that he had sold off part of the business for an excellent price. When Moulton asked for details, he said he could not remember - which, said Moulton, suggested either a serious lapse of memory, or that he was somewhat exaggerating how good the sale actually was.

At Reader's Digest, the key issue was a £125 million pension deficit, which forced its American parent to put it into administration. That deficit is now in the Pension Protection Fund and the magazine has been revitalised with a new editor, refreshed content, more free copies and better distribution. Moulton says it is now back in profit.

The businesses Better buys will often be bought out of receivership, or will be put into receivership soon after the deal to facilitate the turnaround.

To make those four deals, Moulton and his team looked at 420 companies: a ratio that, he says, owes much to these abnormally low interest rates. Of the 420, a further four were acquired by competitors and 20 have gone bust.

"The rest are being kept in business by the banks. A bunch of companies that are not viable have been left to stagger along. Darwin is not being allowed to operate."

That is obvious in the statistics on corporate failures, which are "unhealthily low" - so much so that even the Bank of England is commenting on it.

Moulton points out that our bankruptcy rates are a third of that of Germany, where the economy is far stronger - and that the lowest rates in Europe are in Greece, Portugal and Ireland, where the banks and the government are facing the biggest crises.

"The banking business is very strange," says Moulton. "It is making super profits, which are being distributed to themselves as bonuses rather than to shareholders." He has looked at investing in the banking industry but, he says, there are considerable barriers to entry - which help the incumbents to make these super profits - so he has not yet been willing to take the plunge.

Moulton still has traces of the accent of his northern home, where he went to the local grammar school then studied chemistry at Lancaster University. Deciding there was no money in chemistry, he joined Coopers and Lybrand - now part of PricewaterhouseCoopers - as a trainee accountant.

On a posting to New York, he had a spell at KKR, the legendary American buy-out specialists, which stirred his interest in private equity. He then returned to Britain to work at CVC, Schroder Ventures and Permira before arriving at Alchemy.

He says that none of his classmates from university went on to be employed in chemistry. "It was terrible when I got out: ICI was collapsing." Now, he believes the country really needs scientists and engineers but that means "we need to grow new companies".

"The government talks about rebalancing the economy, which implies it was balanced before. There is too much reliance on financial services and pharmaceuticals, but we are starting to lose jobs there too."

For many, Moulton will always be remembered for the deal he did not do: he tried to put together a rescue package for the Rover car company but was rejected in favour of the Phoenix consortium which, far from saving it, brought it to the brink of collapse while taking large sums out of the business for themselves. He still has to answer lots of questions about that abortive deal.

"I still bump into people who want to talk about it. That is most probably because anyone over the age of 50 started their love life in the back of a Rover."

Moulton is already very wealthy - the 2010 Sunday Times rich list puts his fortune at £150 million - so he has no need to carry on working. This has given him the funds to invest in alternative energy projects, including wind farms and tidal energy projects. He does it because the area interests him "and to make money".

But it has also taught him just how variable wind can be. "This has been a terrible year for wind - a one in 100 year," he says. "I was surprised by the variability of wind: sometimes you get 100% of the average, sometimes 30%." The lesson, he says, is not to use leverage - something which Better does not use in its companies either: all are debt-free.

But, says Moulton, only those who don't know him would suggest he retires. "I'll go on until I stop enjoying myself."

This article was taken from the May 2011 issue of Money Observer.