2.3 From as early as 1999 the Department had received expressions of interest from potential investors that were aware of the possibility of a privatisation. UBS Warburg maintained contact with 44 of these potential investors. In November 2001, the Department held meetings with eight trade investors and 15 private equity firms. In January 2002 further exploratory meetings were held to test the market. Under the instruction of the DERA Partnering Team, UBS Warburg arranged meetings with the following investors: 3i, Charterhouse, Candover, Permira, Legal & General, Cinven, CVC, Electra Partners, the Carlyle Group (Carlyle), and SERCO. Four of these firms - Permira, Carlyle, CVC, and Cinven - had also attended earlier meetings with the Department and QinetiQ management. All parties expressed a strong interest in a partnership that would give them day-to-day management control and allow them to exit the business within three to five years via a flotation.
2.4 The Department made it clear that, despite the scope for synergies, defence manufacturers would not be considered as potential strategic partners to guard against potential conflicts of interest. Following the exploratory meetings, the Department was aware that the strategic partner was most likely to be a private equity firm. The Department foresaw two major risks associated with this:
■ Private equity firms desire a higher rate of return on their investment than trade investors. They were, however, less likely to be concerned about the lack of an established commercial track record. The Department also felt that a private equity firm would maintain the independence of QinetiQ and have a greater focus on developing the value of the company prior to an exit.
■ The top management of QinetiQ were likely to be offered substantial financial incentives by a private equity investor, a politically sensitive issue. The Department believed that this risk could be managed by seeking to ensure that it would only happen if the pubic sector also earned substantial returns from the eventual flotation.
2.5 Although QinetiQ was a complex business with some challenges, it had many of the characteristics of a candidate for a private equity deal. It had a solid asset base, good cash flows, and stable customers. It also had a number of significant contracts, including the Long Term Partnering Agreement (see Box 1, page 23) which, although not in place at the time, would be finalised before the deal was completed. QinetiQ's growth prospects were less certain and it did not have an established track record as a commercial business. Approximately half of its revenue was subject to competition and this figure was set to increase. This meant that a strategic partner would need to adopt a hands-on approach to managing their investment. QinetiQ was, however, capable of generating sufficient cash to service a reasonably high level of debt and had the prospect of asset disposals to accelerate this process.