A salutary tale of how Wesfarmers lost millions from its private equity arm

The untold story of how Wesfarmers shareholders have lost more than $170 million.

Bad luck, bad timing and very bad returns are not normally associated with leading business figures Michael Chaney, Richard Goyder and James Graham.

Chaney is a former Wesfarmers chief executive and will return soon as chairman, after a less than memorable decade as National Australia Bank chairman. Goyder has been Wesfarmers CEO for the past 10 years and before that was its finance director. Graham has been on Wesfarmers’ board for 17 years and is chairman of its investment banking arm, Gresham Partners.

So how did these corporate doyens end up having their names attached to a Gresham private equity fund that has returned minus 10 per cent a year for the past 10 years? Its unitholders have lost about 45 per cent of their initial capital investment. And the close linkages to Wesfarmers mean Wesfarmers shareholders have lost more than $170 million over the past six years. Just to rub salt in the wounds, Gresham Partners has pocketed about $25 million in fees since 2004.

The sorry tale of Gresham Private Equity Co-Investment Fund is not widely known. As the name says, it is not for the prying eyes of the public. Chook Roast obtained details after contact from a disgruntled investor, who hopes publicity will serve to warn others attracted to using leverage for outsized returns.

The fund was formed in 2004 to invest in management buy-outs or buy-ins, expansion capital injections, industry consolidations and public-to-private transactions. It targeted Australian and New Zealand companies with enterprise values of up to $500 million. In each case, thin slivers of equity and huge dollops of bank debt were invested. Leverage turbocharges returns only if the business earns enough to both pay interest and grow.

The Gresham investor says he stumped up $50,000 in 2004 because Chaney was a director of the fund’s responsible entity, Gresham Funds Management. He has $20,000 left.

Chaney resigned from Gresham FM in 2005 and Graham told investors he was remaining “within the Gresham Group as the chairman of Gresham Partners Holdings”. Goyder joined Gresham FM’s board of in 2005.

The fund made six investments: New Zealand retailer Noel Leeming, printing group GEON, mining services company Barminco, fashion retailer Witchery, tourism and resorts group Anthology, trucking company Silk Logistics and disposable nappy company Australian Pacific Paper Products.

Reading 10 years’ worth of the fund’s annual reports, it is clear that not enough attention was paid to profitability. As each year passed, company descriptions contained less about financial performance and more about each business’s unrealized potential.

Many managers deluded themselves about the prospects of a turnaround in conditions and it was obvious only one business could cope with the tough economic conditions of the global financial crisis. Businesses were sold for no return or at a loss. Equity was wiped out as banks took control of companies.

As the fund spiraled into losses, Gresham kept clipping the ticket, as it was entitled to do. But in hindsight it appears a lopsided reward system. Gresham did change people running some companies but it made no difference.

The fund was supposed to be wound up in June 2015 but deteriorating mining industry conditions mean the largest single investment, Barminco, cannot be sold. Gresham FM has extended the fund’s life until 2018.

The latest annual report says it all: “As at 30 June, 2014, unitholders had invested 95¢ per unit in the fund and have received cash distributions of 31.2¢ per unit, resulting in a net cash investment in the fund of 63.8¢ per unit … the net assets of the fund had an assessed carrying value of 19.3¢ per unit.”

The fund suffered from bad timing. It launched a highly leveraged investment strategy just before the crisis. Also, it had bad luck. Many investments were in areas vulnerable to a rise in the Australian dollar, which soared to more than $US1 in 2011.

But it is hard to avoid the conclusion that Chaney, Goyder and Graham put their names to an operation that was not up to the high standards you would expect from men of their business acumen and history.

how can we help you?

Contact us at the FEP Capital office or submit a business inquiry online.