5 questions with Kevin Callaghan

Last month, HMT, a Houston-based provider of products and services to the above ground storage tank industry, merged with Pasadena Tank Corp. Berkshire Partners Managing Director Kevin Callaghan, an HMT board member, says that he expects years of profitable growth for HMT, which has been a portfolio company of Berkshire since May 2007. “We expect, ultimately, that the merger realizes a good return for the shareholders,” Callaghan says. PE Week Managing Editor Alastair Goldfisher hooked up with Callaghan to chat about the private equity industry and, among other things, the upcoming NCAA basketball tournament.

Q: Berkshire invested in HMT from fund VI and VII. Fund VII is a $3.1 billion fund raised in 2006. How is that seventh fund coming and what are your plans for the next one?

We’re about one-third invested or committed for fund VII, so we are probably a couple years away from thinking about fund VIII, given our likely investment pace. Regarding size, we’ll figure it out when we get there. Our guiding principles have been to size a fund for the opportunity set we see at that time, to invest it at a pace such that we benefit from some timing diversification over an economic cycle, and to permit us to support a fairly large staff of 45 experienced investment and operating professionals. Above all, we try to think through what size best enables us to continue a consistent track record of top quartile investment performance.

Q: What‘s your outlook for M&A activity in 2008, for Berkshire and the industry?

Relative to 2007, we expect a lower volume in numbers and significantly lower in dollar volume for private equity deals. We expect strategic buyer M&A activity to be a far greater share of the overall M&A market than in 2007.

At Berkshire, we expect our portfolio companies will be active acquirers. We expect we’ll invest some significant dollars attractively, but it might not all be in traditional buyouts.

Q: One of the issues concerning many buyouts pros is last summer’s credit crunch. How’s that affecting you at Berkshire?

We have been in periods before when financing acquisitions was very difficult. The deals we closed then generally performed very well. As a middle market investor, a healthy portion of our activity requires financing that we can club together from some long-standing relationships, as we did in our $400 million Amsafe deal we closed last October. We expect that we will complete some non-traditional investment activity, which we have also done in prior periods, including minority investments and those not requiring new financing.

Long-term, the industry will get through this crunch, though we will probably have some rough times for vintage-year results. Many deals in 2006 and 2007, even now, look high priced. When corporate earning decreases occur and make a tough credit crunch worse, some of the PE deals done will look ridiculous.

Q: You participated at the dealmakers conference in Boston last month. Did you hear any interesting comments from the speakers at the event?

One notable comment came from a mega-fund buyer about the availability of credit. He said that he knew some lenders who were offering “zero times EBITDA” as a financing package. That sums it up pretty well for the foreseeable future on the big deals.

Q: You earned a bachelor’s degree from Princeton University and an MBA. from Stanford University. Can I assume you’re rooting for the Stanford Cardinal in the NCAA tourney?

Princeton has enjoyed a few March Madness glory days, including knocking off defending champ UCLA a few years ago, but not much lately. Stanford’s 7-foot Lopez twins are an interesting pair to watch. Several of my partners went to Duke University, so I have to mention the Blue Devils, but, secretly, I think the University of North Carolina Tar Heels are the better team.