francine: guy hands is one of the most prominent names in private equity. he started his career at goldman sachs before building an empire through take-overs, becoming the biggest landlord in the u.k. he has invested in green industries, fast food, and famously, music, with the takeover of emi that ended in a $2 billion loss. today, on "leaders with lacqua," we meet guy hands, the chairman of terra firma. guy hands, thank you for speaking to bloomberg tv.

guy: thank you very much for inviting me. francine: how has the private equity world changed in the last 20 years? guy: it has gone from being entrepreneurial to very institutional. you have seen that across every asset management business. if you go back 20 years, there were lots of companies at roughly the same level. today, you have the top 10, probably 80% of the industry, and then another 2,000 to 4,000. amongst that, you have some really entrepreneurial players, but the top 10 have to give good institutional performance, which means they are very risk-averse, a diverse portfolio, focus on institutionalizing processes, and they are very good, but they will not give you great returns. francine: is it less exciting if you have an institutional way of looking at risk? are they fighting for the same

thing? do they miss opportunities? guy: they miss opportunities, but they take less risk. for me, that is less interesting. but for them, particularly for the people of other companies, it is much more profitable. you make your money by gathering as opposed to performance. it is a different way of life. francine: how do you operate? guy: i try to be an asset gatherer. i wasn't particularly successful at that. i am now operating on deals i really love with standout performance and going back to the levels of risk i like taking. francine: how do you find the company? do you look for an industry? that you say this'll be disrupted, or is it a specific company regardless of what they do? guy: it is a combination of both. we have themes in terms of industries which we are looking at, but some of them i have been looking at for 20 to 30 years. and i having yet found the time

i want to buy. for example, the shipping industry that is looked at for years and years. sometimes, it is opportunistic. you find a company that seems very, very cheap. the company we bought in finland looked extremely cheap. francine: how does it change the way -- you are sitting on the money and are waiting for an opportunity? or, do you wait for an industry to change before you go in? why are you not finding anything in shipping? guy: shipping has always been concerned about where the cycle was. i have missed the up cycle a number of times, and also the down cycle. what i am looking for is a transaction where i will get my money back if things go wrong, and if things go right, i will make two to three times my money. at least. getting those two correct is really important. the main thing i have learned over the last 20 years is how

much leverage you have is incredibly important. because if you have too much leverage, then even if you have got it right, you run out of time if there is a cycle against you, whereas if your leverage level is low enough, you will make it through eventually. francine: will shipping be disrupted? your investment was in industries that were going to be transformed. how do you transform the shipping industry? guy: the transformation is in how people receive the goods that go on boats, et cetera. and also, the other thing is that shipping has to a large extent over the previous years been very subsidized. it is very important to a lot of governments. there has been a lot of subsidization, whether it's koreans, or germans, and that is for tax benefits. as that moves away, you move to

a business that is more rational, frankly, and fits more into how a normal business -- when we did the aircraft leasing business, a lot of people thought aircraft leasing was incredibly risky. all the businesses that i have owned, it was the one year to year that we could predict what the earnings would be. however, the question is how much leverage you put on. when we had bought, we had 85%. when we sold, 60%. people were putting 95% leverage on boats 10 to 15 years ago. if there is any movement against it, they went wrong. francine: talk to me about the music industry. was that a regret? guy: i think you have to learn from things. i regret the fact we didn't make money. obviously. it was an absolute disaster financially. but from the point of view of our thesis about what would happen in the music industry, we were 100% right, even down to the year of recovery. from our point of view on the

reason you value a music company, we were 100% right. if we had held on, we would've made three to four times our money. as a minimum. my regret is we put on too much leverage with one bank as we went into a complete financial meltdown. the bank could not afford to continue to loan, and we could not find anyone else to take the loan. in the end, it ended up as a financial disaster, though operationally, what we set up is how the music business is run today. francine: did it change the way you saw your investments? did it change you? guy: it changed me hugely. when you lose that sort of money both personally and for your investors -- and we were the

ninth biggest private equity firm in the world when we did it. none of the top 10 private equity firms are today managing less than $100 billion, and we are managing $5 billion, so it totally changed. but i think it probably, at the end of the day, has made me a better investor. i would say i learned more from it that i could possibly learn from a successful deal. francine: what did you learn from it? if there is a deal of the century right around the corner, what are the steps you look at? guy: number one, you have to get the leverage right because you can't predict the future. no one was predicting that the markets would collapse within two months. number two, you have to be very firm about your thesis. if you have an investment thesis, just go with it. it is better to go fast than to go slowly. it is better possibly to go slightly in the wrong direction than keep trying to correct it. we spent too long frankly trying to be fair and reasonable rather than say, this is how we will do this business and this is what we want to do and you are either with us or against us.

so it is quite tribal. when you have a belief that something needs total transformation, you have to go in and get it done. that is what we felt. the other thing is, don't accommodate people. you have a business you are trying to achieve. it needs an organization. don't worry about the individuals. you know? individuals are second to the business thesis. good individuals will adapt. bad individuals just have to go. it is not always bad individuals. that is fine. don't try to appeal to everyone. business is not about being loved. in fact, the most important thing about management is getting people to do things they don't want to do. if they want to do it, it is easy. francine: what if you doubt your thesis? do you ever doubt your thesis? guy: no. francine: you have never in 20 years doubted your thesis? guy: no. i get a lot of things wrong, but my investment thesis, how i want

to transform things, it is the one thing i have been always able to hold onto and get right. it can take me a very long time to make my mind up on that investment thesis. emi, i started looking at music companies in the 1990's. when the cd came out, everyone thought the business was going to be wonderful. i saw a problem ahead. it is like what has happened in the economy of the u.k. everyone forgets that the reason people got better off under blair was the enormous increase in personal buying. the reason there is not rioting in the streets in the u.k. and people don't feel the economic change since 2007 is the increase in personal bonding. francine: coming up, treating politics like business. find out how guy hands would shake up the system. ♪

♪ francine: private equity pioneer guy hands has made his name and fortune in the u.k., but how good of a business opportunity is investing in britain with brexit uncertainty hitting firms across the country? and, how would he use his knowledge of turning around struggling companies to reshape politics? guy hands is still with me. if the u.k., if it were to be a company, what would be your thesis? how do you fix it? guy: the first thing is you have to be honest with the people and explain actually what a mess the economy is in, what a mess the social system is. once you explain that, you need to get an agreement about how you move forward. if you don't accept the initial problem, you can't. what you find in businesses is people tend to want to reject it as a problem, particularly the

people in charge, because they have been responsible. in the u.k., the political class is responsible. francine: you have personal responsibility -- unless you have a private equity on your back or an investor. guy: when you take over a company, all the people are still there in opposition. in the conservative party, may has to deal with all the people in her party. that is more difficult than the opposition. jeremy corbyn has to deal with the labour party. there is a slight difference. if you ran a company as bad as the economy is run in the u.k., you would get voted out. it is not the fault of the chancellors or jeremy corbyn, it is the political system, which is not fit for purpose for today. francine: how do you change the system? guy: change in political systems normally comes when there is a real crisis.

the good news, i think, about the brexit debate is that it has shown there is a crisis. it has shown the political system in the u.k. has stopped working. and, changing that, i think, will happen over the next five to 10 years regardless of how brexit turns out. francine: we talk about grand coalitions, which don't work any better. if a two-party system doesn't work, and the coalition doesn't work, what does work? is there a country that actually has a better constitution or better parliamentary process? guy: the reality is that the parliament use processes were all designed pre-internet. slightly bizarrely, and i am not saying they follow it, some of the new african states have some -- if you read the constitutions, actually some really good ideas, good corporate governance. they don't necessarily practice

it, but they have great ideas. when you look at the u.k., assets have risen to a stage -- -- to stage where the internet did not exist. it was written when people respected authority. it was written when britain was not multicultural. so many things have changed. my view is it is not about grand coalitions or a middle party, it is about the political class sitting down with the population and not lecturing them, but actually saying, how do we run a country which is multicultural and has such enormous divisions in wealth, is competing in the global world, and that starts with the honesty to admit we have got problems. francine: you talk about transforming the u.k. if you bring that to business, how many will be disrupted by the internet, and on the

technology and has that , transformation been done, or can you still find value? guy: they will all be disrupted. francine: the new ones? guy: all of the businesses we see have been or will be disrupted. the disruption will be where there hasn't been disruption yet. it will not finish in my lifetime. we are on the edge of seeing some of the effects. francine: can private equity come in, or will it be the disruptors, like facebook, that will transform it? guy: it is a combination of the two. one of the interesting things is if you take something like softbank, they have tried to combine both, not necessarily extremely successfully, but they have had the great emotional images. they have the right vision. the problem is putting that vision into execution. francine: what are they getting right? guy: in terms of the long-term demographics, the types of

industries they are going after. i think where they are getting it wrong is they are overpaying, and believing you can disrupt it without necessarily having the operating platforms in place, and if i look at the businesses we purchase, one of the things i do, the granddaddy of transformation, is i try to slow my people down and say spend time trying to work out how you will get the actual platform to carry out the transformation. ♪ francine: up next, find out why guy hands thinks one industry is ripe for disruption. more with the terra firma chairman, next. ♪

♪ francine: terra firma has invested more than $17 billion in 34 businesses since 1994.

some have been huge success stories. what kind of leadership does it take to reshape a company and sell a vision and strategy to others? guy hands is still with me. is your next venture going to be somewhere where you can change culture? it seems almost easier to change culture if you do it your way. guy: it is never easy to do culture. it is emotionally the most difficult thing. i would say that for making maximum amounts of money, changing culture is essential. you can sometimes find companies where you don't need to change culture and you can still make money, but then the question is, why are they not doing it right in the first place? they don't have enough money, skills? what is the reason? one of the things i do when i interview people, a lot of people look for what is good

about them, i always look for their weaknesses. francine: you figure it out for yourself? guy: i normally try to figure it out through the interview, then i ask them. if they know, that is great. if they don't know -- for example, i was interviewing somebody recently for a senior management job who would be in charge of a lot of people. he needed to be a particular type of person for that role, and he is completely introverted. i said, do you like pubs? not really. do you like going out and socializing? not really. what would you say your biggest fault is? i'm not a particularly gregarious person, i'm gonna have to mix with a lot of people. i will have to work at it. it will be difficult for me. but i understand that. francine: he got the job? guy: we are still going through it. i said if he will get the job, i need a mentor for him to help him. i also want to sit down and offer him another job, a strategic job.

he has a dream of being ceo, but i actually think he would be a wonderful strategist, because he is incredibly bright, very introverted, and he does not make decisions based on people, which for strategists is perfect, not great for a ceo. guy: do you have a killer question for your interviews? how long do your interviews usually last? guy: if they are going well for the person, they last about one hour. i would say my killer question is, to me, is actually, tell me your faults. i learn more about people asking them that question. francine: if i ask you to tell me your faults? guy: very impatient, not consistent, and totally focused on what should happen. not how it should happen. francine: you are hired. talk to me about that cash sitting in private equities, $1 trillion. what are they waiting for?

guy: back in 2012, i sat down with an infrastructure investor who had a huge amount of money, a u.s. pension fund, enormous amounts of money. i said, what are you doing? are you investing? he said, we are not investing and put everything on hold. i said, why? he said we are getting less than 10% on infrastructure. that is ridiculous. i said ok, how long do you think it will take to recover? they said, it will probably take two to three years. do you think prices will be down 30%? possibly. 50-50 chance? yes. in three years time, if prices aren't down, you will get fired. if prices are down and you invest, no one will blame you. so my advice would be invest. you can't wait for years. a lot of people with private

equity money are waiting. their investors are looking at it and saying we are paying you 2% a year, and you are just waiting? my calculation is the moment people, investors are losing 7% of the money they are giving through fees on money which isn't invested and that is a lot , of money. at some point, the investors will say enough is enough. they are waiting for a better market. when it comes, it might be too late. francine: when you talk about better market, is it less central bank policy? less qe? that has distorted everything. guy: it has distorted everything and it will take years and years, if ever, for that distortion to be sorted out. the main distortion of that is that the very wealthy have gotten much more wealthy. the poor have been supported in the west, and the middle class has been effectively decimated in terms of their aspirations. aspirations of housing, schooling, university.

if you were a middle-class child born in 1980, you are much better than being a middle-class child being born in 2000. francine: do you ever get fed up or bored with private equity and wish you could focus on one company? guy: at times, yes. you mentioned children. every one of them is like a child. i fall in love with them. once i have bought them. then, i have to be very, very strict about getting rid of them, so it is like being a strict parent. it is difficult, and you have to send them off to university at some point and say goodbye. that is when you sell them. it's a question of how quickly they will mature to the point where you can sell. francine: is there one company you did not want to sell that maybe you fell in love with more than others? guy: a company i didn't want to sell and we got rid of it and did not get anything for was emi. i would have loved to hold it

through the transformation and we only did half of it. away from emi, we sold the pubs quite early. at the time, there was still a lot to do. and there still is a lot to do in the pub industry. we transformed 8,500 pubs in the 1990's. it needs transforming again. it has not moved on. francine: how would you transform it? guy: it is difficult. i would have to go through the numbers. last time we transformed it, we moved it from being male-dominated to being spread across different demographic groups. i think over the last 10, 15 years, we had this enormous ability to sell far more drink, through the change in the licensing laws. and it became too dependent on a rather drunken culture. and i think one needs to really

move away from that. when you look at what young people are doing today compared with 10 years ago, and when i say young people, 14-year-olds, 15-year-old's, they are drinking less, less drugs, less sex, and they have a different, more serious attitude to life. the laddy or ladette pubs are very big now, and i think that will go. the same with a working man's pub died out in the 1990's. you know, spit and sawdust, you go there and drink 12 pints of beer and roll home to your wife, food is in the oven, burnt. that went. today, getting drunk on a friday night, saturday night, monday night, wednesday night, i think that will go. it will go because government will legislate against it or because the culture will change anyway. therefore, pubs need to think

about what they will give the new young people who are very different from the young people of 10 years ago. francine: guy hands, thank you so much. guy: thank you. ♪

manus: you are watching the "best of bloomberg daybreak: middle east." saudi arabia and other key producers signal intentions to keep oil supplies constrained. will russia play ball? riyadh says they will respond with strength and determination if iran starts a war. the saudi king calls for an emergency arab summit. the uae launches a program offering permanent residency. will it be enough to entice wealthy ex-pats to stay? ♪