Terra Firma writes off EMI by half, returns carry

The UK buyout house has booked a €1.3bn impairment – half the value of the equity investment – on the 2007 deal. It will also return €80m of carry to investors, because according to chief executive Guy Hands, 'our investors have suffered and therefore our rewards should suffer'.

UK buyout house Terra Firma has written off half its €2.6 billion equity stake in music group EMI, reflecting its view that equity invested in some deals done at the peak of the credit bubble – the EMI deal was inked in the summer of 2007 – looks unlikely to be fully recovered.

EMI:halved in value

The firm has taken a provision for an impairment of around €1.3 billion on the EMI investment. By doing this, rather than simply writing down the value of the investment, Terra Firma is sending a clear message to the market that the fund may not recover the money.

The move begs the question as to whether other private equity firms – particularly those in the large buyout space who executed deals during 2007 and 2008 – will start accounting for losses in the same way.

Our investors have suffered and therefore our rewards should suffer.

Guy Hands

Details of the impairment were contained in Terra Firma’s 2008 annual report.

The firm also made the unprecedented decision to return carried interest accrued since 2004 to limited partners, a sum amounting to around €80 million.

“In March, Terra Firma will distribute back to investors the carried interest (payments for strong investment performance) that had previously been earned (accrued in escrow, but not paid) and which would have formed the bulk of the reward for Terra Firma’s senior team,” said the report.

In his introductory letter to the report, Terra Firma chief executive Guy Hands said the private equity model of remuneration, whereby rewards are dependent on long-term investment performance, would be rightly applied to other areas of the financial services sector.

“Our investors have suffered and therefore our rewards should suffer at the same time. Such longer-term rewards throughout the entire financial system would have led to a very different world to the one we find ourselves in today,” he said.