Private equity must accept lower returns: Guy Hands

PARIS (Reuters) - Private equity is plagued by too many players, overblown expectations of returns and up to $1 trillion in uninvested cash, Terra Firma TERA.UL Chairman Guy Hands told a conference in Paris on Thursday.

A founder of Terra Firma and leading player in the private equity industry, Hands made the headlines recently when he lost a lawsuit against Citigroup (C.N) which he had accused of tricking him into buying music group EMI for $6.8 billion in 2007.

The lawsuit, rare in the closely knit world of financiers, laid bare the fever that had gripped private equity before the 2008 financial crisis and the dangers of loading too much debt onto a company.

Hands, who refused to discuss the court case, said the leveraged, big-ticket deals that were once the industry bread and butter were no longer the norm.

"2004 to 2007 was an anomaly...the Woodstock years. We have to accept reality and stop chasing ghosts. We are back where we were," Hands said at the SuperInvestor 2010 conference.

In future, buyout funds will return to "basics," he said. Rather than buying a company, increasing its debt and selling it again three years later, as they did in the boom, private equity would have to invest in good businesses and hold on to them for five to seven years.

Investors would have to give up the hope of 20 percent returns and settle for 8 or 9 percent.

Hands also took aim at "pass the parcel" deals, where one buyout fund sells a company to another without necessarily creating value. He said between fees and costs, 30 percent of investor equity could be lost in such deals.

"If private equity increasingly goes this route then it only has itself to blame when governments, unions, employees and eventually investors don't support it," he said, adding that so far this year half the deals done in Europe were "pass the parcel."

But he said there was still room for success, without going into detail about Terra Firma's strategy.

"No, we won't be able to float another private equity firm for 10 or 20 billion. No we aren't going to create a lot of billionaires. But we will still be able to be paid bloody well," Hands said.

(Editing by Erica Billingham)