John W. “Jay” Jordan has been a respected dealmaker for more than 35 years, starting his career in the 1970s at
Buyouts: What is The Jordan Co. most interested in right now?
We’re very portfolio-centric right now, focused on cutting costs, looking for add-on acquisition opportunities, and reducing debt. We are looking at new transactions. However, the credit cycle is such that there is not a lot of leverage available even though we may only use 1x leverage initially. As a group of executives, this is our fifth economic cycle, starting with the downturn in the mid-1970s, so we’ve sort of been there done that.
Buyouts: One of your colleagues said last year that the firm is interested in creating a banking platform. Where is that at?
We have been looking at the financial sector closely for the right type of opportunities but have not yet been able to find a model that works with our approach. The leveraged loan business is attractive. We would consider creating our own loan portfolio and migrating into the leverage loan and bank debt business with the goal of being a lending house, not a bank. However, because the spreads have narrowed dramatically, the upside is not there right now. We would do it on an un-leveraged basis and, on that basis, returns are not good enough.
Buyouts: Isn’t that a different approach for you? Doesn’t the firm usually buy an established, profitable company to use as a buy-and-build platform?
In many cases we create our own companies in industries we find attractive. An example would be Worldwide Clinical Trials, a contract research organization. We started that from scratch, bought five different add-ons in partnership with Dr. Neal Cutler, and we are continuing to build it.
Buyouts: The firm’s been ahead of the curve on a number of industry trends. What are some of the interesting strategic initiatives you’re pursuing now?
Well, one way we were ahead of the curve was by not overleveraging our investments and by refusing to do dividend recaps. Many private equity folks are in a heap of trouble now because they overleveraged their businesses and did recaps for their limited partners, and now the LPs are giving that money back. Most of our companies are leveraged somewhere in the range of 2.5x debt-to-equity. We could see a debt bubble building and leverage was getting out of control. We predicted exactly what happened, and we went the other way. We were de-leveraging while everyone else was leveraging. As a result, not one of our existing portfolio companies has had a default.
Buyouts: How far along is the $3.6B Resolute Fund II, closed in December 2007?
About 20 percent.
Buyouts: How many companies are left from Resolute I?
Eleven. Before we hit this cycle, we would be targeting 2009 for realizations, but I don’t think anybody is going to be exiting investments right now. We have very strong portfolio companies. However, the current macro-economic situation needs to improve substantially before there are exit opportunities. We’re not expecting any exits this year.
Buyouts: When do you think the economy will rebound
Your guess is as good as mine. The capital markets have behaved well in the last month, but that could be a false indicator. In the Great Depression, there were five stock market rallies of 20 percent or more. They were false indicators. Is that what we’re experiencing? I don’t know. But I don’t think we’re out of the woods just yet. Having said that, we’re very comfortable with our portfolio, although we’re not immune to the macro-economic cycle, so we’ll just have to wait and see.
Buyouts: In recent years, there has been a trend toward specialization in the buyout market, particularly in the mid-market. But The Jordan Company is still a generalist.
Our model has served us well for 35 years, and the private equity industry hasn’t changed all that much. We’ve done quite well being opportunistic, identifying a sector of interest and then building a platform strategy. We’re not going to change the model until someone has proved that the model is broken, and it’s not broken. We have very bright people with experience in certain industries, but we want to look at a broad spectrum of opportunities. And specialized firms aren’t without their faults. If you remember the late 1990s, a lot of firms set up telecom groups. Guess what? They lost big. There were hedge funds set up for the metals industry. They got crushed. We like the flexibility of being able to move around.
Buyouts: The Jordan Company hasn’t made a platform investment since August 2008, when it bought Harvey Gulf & International Marine. Do you expect deal activity to pick up for the firm?
We’re looking at opportunities all the time, but we don’t know when deal activity will pick up. Some people say prices have come down, but that’s nonsense. Prices have not come down. What’s happening is nobody’s buying and nobody’s selling. If you look back over the data, the highest returns in the buyout business came from the mid-to-post-recession investments. Is past prologue? Generally speaking, it probably is. We’re cautiously optimistic we’ll be able to make some deals over the next two to three years.
Buyouts: What about this year?
That’s a good question. I’d put a big question mark there. The most important quality in any private equity firm, especially with a model like ours, is patience. Patience, at the end of the day, will serve us very well since we’ve been through five cycles, and we have a history of understanding and getting through these things. As for our LPs, they are enormously happy with the current portfolio. I think most LPs, because of the denominator effect, are not terribly enthusiastic about any GP making investments. They’re probably delighted we’re not doing many deals. Our funds have an investment period of five or six years, so we have time.
Buyouts: How did your operations group come about and how active are they?
Our operations management group dates back to 1988. We were probably the first buyout group to create an operations initiative. We were doing quite well without the operations group but back then it was more about arbitraging and financial engineering, and we weren’t adding value. We thought that if we could add some value with an operations initiative, it could enhance our returns. Managing Partner Tom Quinn runs that group; he’s very experienced. His team is probably involved with about 35 percent of our portfolio companies at any one time. We also have seven or eight people on that team, plus a number of consultants that work project by project. In China, we have 15 people under Tom. Today, the first order of business is cost initiatives—procurement, manufacturing, inventory control, asset management and receivables. Next comes growth initiatives, and then strategic planning. There are companies in our portfolio that have reduced costs substantially in the last nine months.
Buyouts: Is this the worst cycle you’ve worked in?
The capital markets today are very toxic. There are certain dynamics today that didn’t exist in previous downturns. Some of these financially engineered derivatives affected the credit cycle and the capital markets to a much more dangerous extent. On the macro-economic side, we haven’t deteriorated to the level of 1974 to 1975. We may get there, but we’re not there yet. I happen to believe that if you truly valued all of the assets of the top 10 banks, most of them would not pass their stress tests. So from a capital markets perspective, this could be the most toxic period I’ve been through. Considering the circumstances, the Federal Reserve and Treasury Department are doing a decent job of managing the situation. We’ve been through this before in the 1970s when banks were insolvent and the Fed helped them work their way out of it. Still, it’s hard to compare this to other cycles, because we don’t know when the cycle will end.
Edited for clarity