Update 14 February 2014

Interesting addition to this story with the news today that Asahi, which bought Independent Liquor off PEP and Unitas Capital, is now suing them for misrepresenting the financial position at the time they bought it. This will be one to watch very closely.

Ok; it's growly time, so block your eyes if you're a bit sensitive to people being slagged off.

Who is the target of the vitriol this time, you may wonder?

Pacific Equity Partners.

And who the zark might they be, you're wondering.

Pacific Equity Partners (PEP) is one of many, many beasts which operate under the guise of "private equity funds". A private equity fund is just a privately-funded company that buys other companies and watches them grow. This is kind of the same process as Warren Buffett has used to become the world's [arguably] richest man - buy a sound company; hold, the returns will come.

Unlike Buffett's investment vehicle, Berkshire Hathaway Inc, private equity funds aren't listed on the stock exchange. (that's why they're private funds) The shares can be owned by pension funds, private individuals, trusts and anyone with plenty of millions of dollars to kick the thing off.

PEP has been around since 1998 when it was set up by a bunch of people, most of whom had been working for Bain & Co, a US management consulting firm. (Interestingly rated "best company in the world to work for eight years in a row.)

Among other entities, PEP currently owns:

Energy Developments Ltd - a low-carbon energy producer with a present generating capacity of 436MW. To put that in perspective, that would be about 4% of New Zealand's total capacity, so quite a lot for one private company to hold. About 60% of their power generation is from waste greenhouse gases from landfills and coal mines - clearly someone has seen the value of carbon credits.

Veda Advantage Ltd. This is a name few people actually know, but is one which every adult ought to know, because Veda is by a huge margin the number one credit information company in Australasia. If you want a bank or finance company loan, are applying for a credit card, or want to open any kind of business charge/credit account, there is about a 95% chance the lender/financier will be checking you out through Veda. Have you ever been sued for a debt, had a default on a hire purchase, had late payments on credit card bills?

If you're not sure, ask Veda, because they will know. As a side issue, you should actually find out what information Veda has on you to make sure it's correct! They have always been completely ethical in their dealings, but like everyone, can make mistakes. They will certainly correct mistakes as long as you are able to provide proof.

Independent Liquor. Top-selling RTD alcohol drink maker across NZ and Australia.

About 450 Hoyts' cinemas, 250 Sizzler Restaurants, 115 KFCs across Australia, legendary Kiwi biscuit company Griffin's Foods and 200 Godfrey's vacuum cleaner stores.

The capital of PEP is alleged to be $A5.8 billion, just outside the level of the top 50 pefs in the world. As a private fund, their figures are not publicly available by right.

That's who PEP are.

What have they done that's so bad?

In 2004, PEP bought the Angus & Robertson and Whitcoulls chains of book stores across Aus/NZ from their UK owner, adding Border's book chain in 2008. They were merged into a single management unit, REDGroup, in 2008.

This was one of the few really lousy investments the boys at PEP have made, buying booksellers in a shrinking market, and even worse, as far as NZ is concerned, getting into the shrinking market by buying Whitcoulls and then Borders at the same time as every Post Office was re-branded into a bookshop/post office/Kiwibank branch.

As a result, the business was allowed to slowly strangle itself through lack of money. Serious alarm bells started sounding prior to Christmas 2010 when it became obvious that instead of stocking up for Xmas, Whitcoulls and Borders were selling their shelves dry to create cashflow for wages.

There is a provision in New Zealand to prosecute company managers and directors who allow companies to trade while insolvent, however, the administrators have jumped the gun and stated:

The administrators' report concluded that it was unlikely the group was insolvent for any material period before its collapse and no breaches of directors' duties had been identified.

While I'm sure the administrators, Ferrier Hodgson, are very adept at what they do (charging up to $800 per man-hour for doing it) I find it incredible that executives did not know that the company was not just insolvent, but near total collapse. Their shelves were empty, the company was bleeding money and they were clearly on stopped credit with many suppliers. Even a moron would have known they were in the shit. If that the executives didn't know, why did they all the chiefs resign upon being placed in liquidation? A sensible executive to whom no blame could be attached would be staying to help clean up and make the best of a bad situation - a process which would earn kudos from management, administrators and future employers. All employee payments are being met, so it's not like they need to have worried about being paid.

It is most important to realise that under new NZ commercial provisions, REDGroup chose to use voluntary administration, so have actually employed Ferrier Hodgson direct - they are not court-appointed liquidators, as would have been the case in the past. Accordingly, I can only wonder at the ethics of a company retained by the shareholders passing judgement on those very shareholders and managers.

Anyway, some quick fire-sale action brought salvation to PEP when the current owners of Farmer's Trading Co and Pascoe Jewellers bought the lot.

In a sweet coincidence, the amount of the sale was just enough to cover the secured debts of REDGroup and the $1.5m owing to the Inland Revenue Department.

Other creditors, being unsecured and with no rights whatsoever, are owed $21.5m in New Zealand. The liquidator has today asked those unsecured creditors to accept a paltry 3 cents in the dollar on their debts. These debts will be mainly to publishers, but will include a raft of small businesses with small debts. For many, coming in the midst of a global recession, it will have been the final straw - a debt to a company considered undoubted, with a history of over a century in NZ.

I'm guessing that the bankers, to whom most of the secured lending was owed, had parent company (PEP) guarantees to cover the debt, so it was essential to avoid any debts remaining to banks, otherwise PEP itself would have been made to pay the difference if those guarantees existed. As a former commercial bank manager, I'm pretty sure that would have been the case.

So, we have arrived at a situation where a company with over $A5 billion in capital, and turnover in the multiples of billions of dollars, has quietly walked away from an investment, leaving Kiwi companies $20+ million out of pocket. Unlike banks, most of those companies will not be able to pass on the costs to customers, because in a competitive marketplace like the current one, firms becoming too expensive will be left lonely at the tender table.

To me, the whole scenario stinks. We've seen how land developers have been able to walk away from their leaky buildings without penalty, we've seen how the Andrew Krukzeiners, David Hendersons and Mark Hotchins of the world have been able to walk away from poor management costing mum & dad investors (and the IRD) hundreds of millions of dollars, and now, we've been treated to a display of the selfish ethics of a gigantic group with a dodgy investment - just walk away with a:

Fuck you, New Zealand!

I imagine the story in Oz is much the same, but with more dollars.