1. You help run a nine-year-old firm that backs mid-sized, asset-rich companies in the United States and Europe. When do you expect to close your third fund?
Should be in the next month. We aren’t marketing anymore. It will be significantly larger than our Fund II, which was $1.45 billion.
2. How long have you been fundraising and how challenging was it for you?
We had a marketing period of 12 months. We were very successful in bringing in new domestic investors, but I’d say we found the international environment very challenging. That really has to do with the fact that during the time we were marketing, we were competing with commercial banks and investment banks that were trying to recapitalize and were raising billions of dollars from sovereign wealth funds. And of course I think all of us in the middle market were outgunned by the U.S. financial system recapitalizing at the same time.
3. What advantages do you think your investment strategy has in this market?
We’re pretty unique in that we have no legacy issues in our portfolio. Because we’re mid-market focused, we were able to avoid taking on large amounts of debt. By contrast, the larger buyout funds all have significant problems in their portfolio companies, many having to do with the leverage they bear. We use financing, but it wasn’t available to us at the kind of levels that the larger buyout shops were receiving.
4. In what areas do you see a lot of opportunity, and why?
We see opportunities to invest in financially distressed companies, both in the private and public markets. In some cases the opportunity is to recapitalize the company’s balance sheet. In some cases we see the opportunity to invest in mispriced debt that offers private equity-type returns. So we’re buying debt that’s performing at distressed prices. Another theme we’re pursuing is to utilize existing leverage in the system. The system has way too much leverage, and if we can affect transactions that don’t require us to raise new debt, then we think we can be very successful in putting out capital. By way of example, last week we announced an investment in a company called Macerich, which is a mall REIT that owns regional malls across the United States. We bought a 75 percent interest in one of their regional malls. We kept the existing leverage that was in place on that mall. Macerich earmarked our proceeds for paying down its debt. We have warrants in the company, and as the market learns that Macerich is de-leveraging, the stock price should rise. We get the benefit of both owning the real estate and having participation in the upside of the company.
5. What will you be doing differently with Fund III?
Look for us to pursue the same strategy that we did in our first two funds. But it will be more like Fund I (vintage 2001), in that we are again in a recessionary environment. Our strategy isn’t dependent on growth. Many buyout shops need growth in order for their portfolio companies to succeed, but we don’t. What we look for are assets underpinning our investments, and in this kind of environment we typically buy at below the replacement cost to the asset. We get comfortable with the valuations based upon what the replacement costs would be. By example, we bought a movie studio (Sunset Gower Studio) in our first fund. We were quite successful, achieving about a 2.5x return. We knew what the underlying assets were worth, so that anything we did to improve the performance of the company generated additional return for our investors.
Edited for length and clarity