After Buyout Bust, Who’s Left Smiling?

Today, the buyout market seems to be heading for a return to normalcy. Lenders are poking their heads out of their shells, and the economy looks poised for growth. As the dust settles, it seems like a good time to reflect on the last few years and recognize some firms that have emerged from the rubble as leaders, and some that are still nursing their wounds. We based the selections below, listed alphabetically, on our previous reporting, fund performance, fund raising, portfolio company performance, transactions struck in the last two-plus years, and interviews with sources. Unless otherwise noted, subjects declined to comment or did not return requests for comment.

SmilingHellman & Friedman LLC

Hellman & Friedman seemed to thrive during the economic crisis.

Thanks in part to banner exits such as DoubleClick, a $3.1 billion deal, the San Francisco shop, whose funds are consistent top-quartile performers, closed its seventh and largest fund at $8.8 billion in October 2009, including a $300 million slug from the California Public Employees’ Retirement System. It was one of the largest funds to close since the credit crunch took hold in the summer of 2007. The firm has also remained active on the deal front, and in November it bought Web Reservations International, an Irish company that provides online reservation services, for $314 million, from Summit Partners. The firm, along with General Atlantic, also took health care company Emdeon public, though much of the proceeds were used to pay down debt; shares of the company were trading near its initial public offering price of $15.50 as of deadline. It remains to be seen, however, how some of the deals the firm cast during the downturn end up, including its $2.4 billion buyout of Getty Images Inc. in July 2008.

Kohlberg Kravis Roberts & Co.Alexander Navab, the co-head of KKR’s North American private equity operations, recently said he expects large-scale buyouts to return to the mark. If that happens, Kohlberg Kravis Roberts & Co. will likely be a major player thanks in part to how it performed during the recession.

To be sure, KKR took its share of lumps. Mortgage backed securities nearly killed KKR Financial Holdings in 2008—shares of the publicly traded specialty finance company were trading at $5.90 at deadline. And the firm’s nascent infrastructure program suffered a setback when George Bilicic, whom KKR hired from Lazard to lead the effort, returned to Lazard after only a few months. But overall the firm’s Midas Touch seems to have remained intact.

Highlights included the successful IPO of Dollar General, the refinancing of about $20 billion in portfolio company debt in 2009, and scoring a public relations coup with its partnership with the Environmental Defense Fund—an initiative the firm said helped portfolio companies save millions of dollars. KKR also made a series of notable acquisitions, including its buyout of Oriental Brewery, South Korea’s second largest brewery, in May 2009 from Anheuser-Busch InBev for $1.8 billion; and, more recently, its November 2009 buyout, alongside General Atlantic, of TASC Inc. from Northrop Grumman Corp. in a deal valued at $1.65 billion. The firm also expanded its global presence by opening offices in Dubai and Mumbai.

Marlin Equity Partners LLC

Los Angeles-based Marlin Equity was probably the most popular buyout firm in recent years, and with good reason: Its first fund, a vintage 2005 vehicle with $65 million in commitments, has generated a 260 percent IRR, and its 2007 fund, a $300 million pool of capital, has generated a 32 percent IRR.

Riding on that success, last year the firm raised $650 million for its third fund, soaring past its $450 million target in just under four months and turning away another $350 million in willing commitments. Along with its performance numbers, LPs were drawn to the firm because of an approach seemingly well-suited for the times. The firm invests in distressed companies, debt-for-control deals, corporate carve-outs, and in under-performing growth companies in need of operational improvements. Peter Spasov, principal, credited the firm’s 20 operating partners with giving the firm the ability to invest in challenged companies that most mid-market buyout firms wouldn’t touch. “The financial engineering days are done,” Spasov said. “You need to bring operational value to the table and that’s resonating with LPs.” Now comes the hard part of putting a substantially larger Fund III to work when the firm still has about 20 percent of Fund II left to deploy. Spasov said the firm sees plenty of opportunity over the next few years as significant amounts of debt come due.

Leonard Green & Partners

Leonard Green & Partners has emerged as a leader in the upper mid-market as much for what it didn’t do as what it did.

Sensing the buyout boom had peaked, executives shelved buyouts after their September 2007 acquisition of Scitor Corp., a company that provides engineering and technology services for national security agencies. Drawing on their banking backgrounds at Drexel Burnham Lambert and Donaldson Lufkin & Jenrette, Managing Partners John Danhakl, Peter Nolan and Jon Sokoloff instead invested $800 million since mid-2008 in minority equity and debt investments, including its $425 million investment in Whole Foods Market Inc., the firm’s largest investment yet and a big success.

Recently the firm re-entered the buyout market, acquiring AerSale Holdings Inc., a company that buys used aircraft, for $250 million, and it also plans to invest as much as $350 million in IMS Health Inc., the publicly traded health technology company that TPG and CPP Investment Board agreed to buy in November for $5.2 billion. A study released in 2009 by a French business school named Leonard Green the best performer over a 15-year period, and it was one of only a few firms to have three funds listed in a study of the 77 all-time top-quartile funds by Buyouts in November. The firm still faces challenges, of course. Green Equity Investors IV LP, a $1.85 billion, vintage 2003 fund, has generated a 0.9x investment multiple and a -1.80 IRR, according to CalPERS, while Green Equity Investors V LP, a $5.3 billion, vintage 2007 fund, has generated 0.9x and a -11.1 IRR as of June 30, 2009, although it is still very early in the life of that fund.

Odyssey Investment Partners

Odyssey Investment Partners battled Marlin Equity for the most notable fundraising achievement of 2009.

The New York-based shop raised $1.5 billion for Odyssey Investment Partners IV LP, double the size of its predecessor fund, after producing some stellar Fund III exits during the recession. In May 2008, Odyssey Investment sold Norcross Safety Products LLC, a maker of protective equipment for workers, to Honeywell International Inc. for $1.2 billion. Executives declined to discuss exact returns, but Odyssey Investment bought the company in 2005 for $495 million, including debt. In 2007, the firm sold construction equipment rental company Neff Corp. to Lightyear Capital for $900 million; Odyssey Investment bought Neff in 2005 for $510 million. One source said the firm’s gross returns in the aggregate are north of 3x. “They’re one of the best firms out there,” this source said. The firm was not without its embarrassments, however. Last year, an investigation into an alleged kickback scheme at the New York City Employees’ Retirement System mentioned Odyssey Investment, among 20 other buyout and venture capital firms. The firm has not been accused of any wrongdoing.

HurtingBruckmann Rosser Sherrill & Co.

Bruckmann Rosser Sherrill & Co. seemed poised to create a top mid-market franchise in the late 1990s, but the firm has hit a rough patch in recent years.

Its first two funds, raised in 1996 and 1999, generated gross returns of 2.1x and 1.7x, respectively, according to a source close to the firm. Nevertheless, the firm suspended fundraising for a third fund after hitting the fundraising trail in 2007 with a target of $600 million (Buyouts reported in October 2007 that the firm had raised $250 million). One of the firm’s companies, Lazy Days R.V. Center Inc., filed for bankruptcy in 2009, and another, EZ Lube, filed in late 2008. There has also been some turnover. In October 2008, Managing Director Rice Edmonds left to start his own firm, Edmonds Capital LLC.

On the positive side, the firm made about 3x its investment in B&G Foods, a pickle maker, via an initial public offering in 2007, and it generated undisclosed distributions for its investors in June and July of 2007 through recapitalizations of AMF Bowling Worldwide, an operator of bowling alleys, and Seroyal, a distributor of nutritional supplements. The firm remains active on the deal front. In December, it made a $25 million minority investment in Ruth’s Hospitality Group Inc., owner of the Ruth’s Chris Steak House chain.

Cerberus Capital Management

Cerberus Capital concluded 2009 with a spectacular return, earning 22x its investment Talecris Biotherapeutics Inc. via an IPO. It was a welcome respite from a few years in which the firm suffered tough losses through some historic bad deals.

Cerberus Capital made its name with distressed investing. But even it miscalculated just how bad this last recession would be. Most notable, of course, was the firm’s disastrous bet on the U.S. auto industry with investments in Chrysler and car loan provider GMAC LLC. Its equity in Chrysler was wiped out when the company declared bankruptcy, and its stake in GMAC was nearly eliminated when it received a government bailout. The firm’s equity check for the $7.4 billion investment in Chrysler was reportedly only around $1.2 billion, with co-investors supplying the rest, but Chrysler wasn’t just any deal. The publicity-shy firm presided over the demise of an iconic American company. In August 2009, investors withdrew $4.77 billion, or 70 percent, from the firm’s hedge funds, according to the Wall Street Journal (its private equity business did not suffer withdrawals, since investors in those funds commit for long periods. Co-founder Stephen Feinberg attributed the withdrawals to a liquidity crisis among LPs). That same month, six professionals left the firm to form their own turnaround shop, Tenex Capital. But don’t write off Cerberus Capital. These deals represent barely a fraction of the $25 billion the firm manages.

Fenway Partners

This New York-based shop was poised to establish itself as a premier mid-market firm after raising more than $900 million for its second fund in the late 1990s. But it appears to be trying to get its balance back after a number of challenging deals, turnover and lackluster fund performance.

Fenway Partners raised $702 million for its third fund in 2007, falling far short of its $1 billion target. That fund, considered a vintage 2006 vehicle by the Oregon Public Employees Retirement Fund, has generated an investment multiple of 0.89x and an IRR of -7.9 percent as of Sept. 30, 2009. (Fund II, a 1998 vintage, generated a 1.25x investment multiple and a 6.7 percent IRR). The firm’s last major investment came in June 2008, and its last major exit was in December 2006, according to its Web site and CapitalIQ. An agreement to sell one company, American Achievement Corp., which would have netted the firm a 3.1x return, fell apart in December 2008 because of issues concerning regulatory approvals; however, Fenway had already generated 2.2x its invested capital through dividend recapitalizations. American Achievement also twice defaulted on its debt. New Creative Enterprise, an outdoor living décor and gift vendor Fenway owned alongside Blue Capital Management, filed for Chapter 11 bankruptcy in December 2008.

The firm has also experienced turnover. In April 2008, Mark Genender, a managing director based in Los Angeles, left Fenway after the firm decided it was too difficult to run a West Coast satellite office; Genender has since joined Star Avenue Capital, a mid-market growth equity vehicle established in conjunction with Irving Place Capital and Creative Artists Agency to invest in consumer and retail brands. And in the summer of 2008, Mac LaFollette, a managing director, left the firm to pursue an entrepreneurial opportunity.

The firm has seen some positive news in recent years. Most recently, in June 2009, Moody’s raised American Achievement’s corporate family rating to ‘Caa1’ from ‘Caa2’ due to debt reduction, improved liquidity, flexibility under financial covenants and the extension of the company’s revolving credit facility. From 2006 to today, the firm has deployed $470 million of Fund III in 17 deals, many of them bolt-ons to existing companies, so the firm has plenty of dry powder. Fenway also returned an undisclosed amount of capital to investors in 2008 and 2009 through dividend recaps taken out of 1-800-Contacts, a retailer of contact lenses. The firm has hired four new junior members to the investment team, and most of Fenway’s six managing directors have been with the firm since the mid- to late-1990s. Executives at the firm marked Fund III down aggressively, according to a source close to the firm, but expect it will ultimately return 2x its invested capital.

Nogales Investors Management

Nogales Investors debuted at the beginning of the decade with a $100 million fund thanks in part to the solid reputation of its founder, Luis Nogales, the former president of Spanish-language television network Univision and a former employee of Presidents Richard Nixon and Bill Clinton, and support from blue-chip institutions including CalPERS and the California State Teachers Retirement System. But the future is unclear for the firm, which one source referred to as “a rudderless ship.”

Fund I has been mediocre, generating a 0.50x investment multiple and -29.3 percent IRR as of June 30, 2009, according to CalPERS. Nogales had hoped to rebound with Fund II, a $245 million pool of capital it raised in 2007, but results of that fund so far have been mixed as well, generating a 0.80x investment multiple and a -32.7 IRR. In February 2009, one of two remaining companies in Fund I, Insync Marketing Solutions, filed for Chapter 7 liquidation bankruptcy. There has also been some turnover, with three executives departing by September 2008, when Buyouts profiled the firm. However, the firm has beefed up its staff to seven investment professionals from four, and there’s still time to make Fund II a winner. CalPERS, for one, appears to be patient with the firm. Spokesman Clark McKinley told Buyouts in 2008 that Nogales “has done a good job raising money from other partners and is building his firm. It will take a few years to develop a track record.”

Quadrangle Group

Executives at Quadrangle Group would likely prefer to forget 2009.

Between the departure of founder Steven Rattner to become President Barack Obama’s car czar, the firm’s association with an alleged pay-to-play scandal, staff departures, a suspended fundraising, and the closing of a London office, it’s surprising the firm is still in business.

But Quadrangle could pull through and make a name for itself without Rattner. In April, investors waived a key-man provision, which allowed the firm to continue making new investments. A source close to the firm notes that, while Rattner’s departure assured that Quadrangle’s effort to raise Fund III would remain suspended, the firm had actually stopped raising the fund before Rattner left in what was an extremely difficult time for most firms to raise fresh capital. The firm had no realized losses in 2009, having long since written off Metro-Goldwyn-Mayer, which is going through a pre-packaged bankruptcy and auction. In 2009, the firm hired three executives for its asset management team and promoted four professionals. In December, Quadrangle sold its remaining stake in Cinemark Holdings Inc., a Plano, Texas-based movie theater chain, and on Feb. 3, the firm announced its first investment in India, buying Tower Vision India Pvt. Ltd, a manager of 5,000 telecommunications towers.