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Neil O'Leary doesn't believe that having a fund on tap would necessarily have been in the best interests of investment firm Ion even though he says investors in general
are 'starved of conduits' for their money

Neil O'Leary doesn't believe that having a fund on tap would necessarily have been in the best interests of investment firm Ion even though he says investors in general are 'starved of conduits' for their money

Neil O'Leary doesn't believe that having a fund on tap would necessarily have been in the best interests of investment firm Ion even though he says investors in general are 'starved of conduits' for their money

Three Goldman Sachs foot soldiers have just finished chatting with Ion Equity boss Neil O'Leary before he settles in to be interviewed.

Needless to say, he won't divulge the details of that meeting, only to note that it indicates that at least on some levels business in the private equity world is ticking over -- despite the calamitous state of markets.

But for now at least, Ion Equity is keeping its powder dry.

Since it was founded in 2000, it has evolved into a serious boutique player, with acquisitions totalling nearly €1bn under its belt. Most notably, perhaps, was its pounce on the Statoil and Shell forecourts in Ireland -- two deals that between 2005 and 2007 cost Ion about €400m.

The resulting Topaz brand (the chain should rack up revenues of about €3.5bn for 2008) has embarked on a major marketing campaign that Mr O'Leary says has helped revenue at its outlets rise by anywhere between 15pc and 40pc.

Tougher

It's a welcome development for Ion, but cannot hide the fact that the investment house will from now on be operating in a very different and much tougher environment.

"There's no doubt that the future is very uncertain in relation to funding and liquidity," admits Mr O'Leary, whose father was a creamery manager in Midleton, Co Cork.

Almost since its inception, Ion has heavily associated itself with Anglo Irish Bank, with almost all of Ion's deals having been bankrolled by the institution whose headquarters are just a minute's stroll from Neil O'Leary's office off Dublin's St Stephen's Green.

A new world economic regime could make it much trickier for Anglo to provide the finance that Ion and others once took for granted.

Mr O'Leary, a former UBS banker who set up the Ion Equity with two colleagues from Dolmen Corporate Finance, isn't fazed.

"It's not like we have to keep churning out deals," he says. "We're not under any pressure to do something. There's still a lot of value to be created in the businesses we have."

He points out that when Ion engineered its €110m acquisition of Cork-based business services group and wind energy firm SWS in 2006, it was Ulster Bank that stepped up to lead financial backing of the deal.

"That was a €300m fundraising led by Ulster," he explains. "That was project finance, while Anglo has been more our partner for acquisition finance."

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So will that historic relationship with Anglo survive, even if the bank itself manages to emerge from the current crisis as a standalone entity?

"On almost every deal we did, we had a number of banks we talked to," Mr O'Leary says.

Among those deals was Ion's initial tilt at Breeo, the business owned by Dairygold Co-op spin-off Reox. Breeo's brands include Galtee, Calvita and Shaws.

Ion made an unsolicited approach last year for the business unit that Kerry Group ultimately agreed to buy for €165m.

Kerry's plan was recently blocked by the Competition Authority and the food group plans to appeal the ruling. Mr O'Leary says that Ion had already approached other food companies with a view to acquiring them if it could manage to pull off the Breeo deal.

"When we looked at Breeo, our funder wasn't Anglo or Ulster, so we have other relationships."

With Anglo, O'Leary says Ion has worked with a team of bankers who were tough on the private equity house in terms of analysing potential deals and associated risks.

"To us, Anglo always seemed like strong, sensible partners. We hope that in some way we can work forward with that team and we've been a good client for them."

Financing, he says, if not available locally, can probably be sourced elsewhere.

Ion has been renowned for providing some hefty returns for its directors and clients (300pc on UK-based Blue Ocean Media, for instance), but in at least two deals was able to use the former strength of the domestic property market to dramatically play down deal debt.

After it bought Usit in 2002, a €15m debt pile was eliminated not only by realigning the business model of the travel company, but by selling properties owned by the group that included a hostel and hotel in Dublin as well as other premises in Cork and Galway.

With Shell, Ion subsequently sold eight petrol stations for €80m, representing over half the outlay it ponied up for the network.

Mr O'Leary, a former solicitor who is shortlisted for the Industry Entrepreneur of the Year gong at next week's Ernst & Young awards, admits that those types of deals, where property could be sold off to recoup investment, won't be as readily available as in the past.

"A deal such as Shell would certainly be much more difficult to do right now," he admits.

"The whole Shell transaction was underpinned by our ability to sell off what was about 3pc of the business volume via eight stations and to get more than two-thirds of the total price of the whole business back," adds Mr O'Leary.

When the Statoil chain was subsequently acquired, Ion didn't even need any more equity to complete the transaction. The timing could hardly have been better.

"It's difficult to predict what change brings, but there's no doubt that for many people there will only be change for the worse," Mr O'Leary believes.

"But we can offer turnaround and restructuring capabilities, so there's opportunity there."

Ion never raised an equity fund, and instead relied on sourcing finance for each individual deal. But with liquidity effectively frozen, Mr O'Leary doesn't believe that having a fund on tap would necessarily have been in the best interests of the firm, even though he says investors in general are "starved of conduits" for their money.

He says that to do some of the deals Ion has done, the firm would have needed a massive fund due to regulations that, for instance, only permit 20pc of certain funds to be invested in any single deal.

"It could take six or 12 months to raise a fund, and some of our deal opportunities emerge quickly, so we wouldn't have had time to react."

He adds that having a fund would also have put Ion under pressure to use it.

"In situations like that, other firms could be inclined to take on deals simply to use the money as much as to drive returns from them. Once the money from a fund is in use, you can take an annual fee. That's something we don't do."

By not pursing a fund strategy, Ion has also afforded itself flexibility in terms of determining the timing of exits without being pressurised, according to Mr O'Leary.

"There's no compulsion on us to exit any business. There may be points in time when it's better for a business to be part of someone else's consolidation play rather than ours; but inevitably if we wanted to sell businesses today, we'd be looking at longer time horizons," he says.

Mr O'Leary adds that on a number of occasions -- and most recently just a couple of months ago -- Ion was offered "significant" cornerstone investments to start funds, including a restructuring fund. They've all been turned down.

For the time being at least, Ion will remain focused on shepherding its existing businesses, which also include British fuel distributor Blue Ocean Associates, which was acquired early this year for between €150m and €200m.

But still on the agenda is the development of a premium budget hotel chain, starting in the UK and possibly extending to Ireland.

A site has already been acquired in Manchester for the Pillo Hotel brand; while cities including London, Edinburgh, Glasgow, Birmingham, Bristol and Liverpool have also been scoured as potential locations.

"It's a slow burn," admits Mr O'Leary, who says that between 15 and 20 hotels are likely to be established under the brand within the next 10 years or so.

Meanwhile, the current global financial earthquake will, believes Mr O'Leary, lead to a shift in wealth over the next two to three years.

"Anybody sitting on cash now is going to have massive opportunities due to what's happened. Assets are going to be written down so far that there's going to be a lot of value out there."

Finding it amidst the rubble will be one of the biggest challenges.


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