A wise man once wrote: “You take the good, you take the bad, you take them both and there you have the facts of life.” Ok, it was Alan Thicke, but the message served Jo and Tootie well for nine years. And it’s one that I wish Josh Kosman had kept in mind when writing The Buyout of America, which hits book shelves next month.
Kosman’s basic thesis is that leveraged buyouts are bad news, and that their practitioners either don’t care or have deluded themselves otherwise. Moreover, he believes that around half of all PE-backed companies will collapse between now and 2015, triggering another economic meltdown and adding two million folks to the unemployment rolls. Pretty cataclysmic stuff.
To be sure, I don’t dismiss any of the above out of hand. After all, we heard some of these same warnings two and three years ago about collateralized mortgage obligations, and look where ignoring that got us. We keep hearing big-name PE execs talk about how most of their por! tfolio debt doesn’t come due until at least 2013, as if 2013 is some vortex into which loan obligations will somehow disappear. The bill always comes due, and the only thing that will prevent certain mega-LBOs from failing will be a bailout by their existing sponsors.
Moreover, I fully support Kosman’s distain for PE firms that charge various fees to their portfolio companies’ balance sheets, particularly transaction fees and monitoring fees (no matter the particular GP/LP split). A private equity firm simply should not be able to preemptively profit on a company it helps bankrupt. Just because you can, doesn’t mean you should.
That said, Kosman’s case is brutally undercut by his failure to include any balance or counterargument. The best debater acknowledges his opponent’s point of view, and then either: (a) Points out its flaws, or (b) Accepts it as an exception to the rule.
Kosman, however, chooses to either ignore opposing points or dismiss them a! s PE industry propaganda. For example, he spends a bunch of time on PE involvement in the mattress market, where Sealy (KKR) and Simmons (most recently THL Partners) were leapfrogged by relative upstart Tempur-Pedic. He partially blames bad management decisions, but also cites leverage loads that caused Sealy and Simmons to cut costs (leading to no-flip, one-sided mattresses).
The irony, of course, is that Tempur-Pedic itself was private equity owned and highly-leveraged. Kosman mentions the first part exactly once, but never the second part – likely because it would have undercut the message about LBOs ultimately leading to ruin. If certain private equity strategies help improve businesses, lead to greater employment and economic prosperity – shouldn’t those be highlighted and contrasted with those that don’t?
Also getting short-shrift is the very existence of limited partners, whose role is described briefly and then forgotten (save for a brief piece on fundraising and a detailed explanation of the difference between gross re! turns and net returns). The book is clearly written for a general audience, but at times even I had to remind myself that when KKR gets $100 million in transaction fees, only $20 million of that goes to KKR personnel (although such a reminder is not required in some other cases, like with Bain Capital).
Finally, no mention at all of turnaround firms. The only one cited is Sun Capital Partners, and that is in reference to the disastrous Mervyn’s deal. You could say it’s irrelevant, except that turnaround firms – and many growth equity shops – are included in the performance benchmarks Kosman repeatedly cites.
Call me a sucker. Call me a suck-up. Call me a leveraged romantic. But I feel like I read half a book (or maybe 75% of one). Kosman is sounding a heartfelt cry, but he needs more nuanced notes to convince readers that wolves are at the precipice.
Charlesbank Capital Partners has bought five over-the-counter consumer products brands from McNEIL-PPC Inc., and has formed a related acquisition platform called Blacksmith Brands Inc. No financial terms were disclosed for the deal, which includes such products as Efferdent denture cleaner and Pediacare children’s cough medicine. Blacksmith will be led by former Prestige Brands chief Peter Mann, while its CFO will be former J.W. Childs president Dana Schmaltz.
Equifax Inc. (NYSE:EFX) has acquired IXI Corp., a McLean, Va.-based provider of consumer wealth and asset data, for $124 million in cash. IXI raised just over $9 million in 2004 and 2005, from Blue Chip Venture Co., Core Capital Partners, eCentury Capital Partners and Equifax.
Rubio’s Restaurants Inc. (Nasdaq: RUBO) has rejected an unsolicited $80 million buyouts offer from Levine Leichtman Capital Partners. The fast-casual restaurant operator also said it would continue exploring strategic options, and that it has retained Cowen & Company.
GreenPeak Technologies, a Dutch developer of ultra low power wireless and battery-free data communication technologies, has raised €13 million in Series B funding. GIMV and Robert Bosch Venture Capital co-led the round, and were joined by return backers DFJ Esprit, Motorola Ventures and Allegro Investment Fund.
Renewable Funding, an Oakland-based financier of property-assessed clean energy (PACE) programs, has raised $12.2 million in Series A funding. NGEN Partners and Draper Fisher Jurvetson co-led the round, and were joined by New Cycle Capital and law firm Wilson Sonsini.
Data Robotics Inc., a Santa Clara, Calif.-based developer of automated data storage products, has raised $10 million in Series E funding. Focus! Ventures led the round, and was joined by return backers Greylock Partners, New Enterprise Associates, RRE Ventures and Sutter Hill Ventures.It had previously raised $43 million since 2005.
Onehub Inc., a Bellevue, Wash.-based provider of web-based collaboration and file sharing software, has raised $1.3 million in Series A funding from seed backer Ingition Partners and individual angels.
Lein Applied Diagnostics Ltd., a UK-based developer of non-invasive optical measurement technology, has raised £1 million from the UMIP Premier Fundand the National Endowment for Science, Technology and the Arts (NESTA).
IngBoo, a Sunnyvale, Calif.-based! online marketplace for information updates, has raised $800,000 in se ed funding. Backers include Elis Nemes and Saeed Amidi of Amidzad Partners, Doug Tsui of Horizon Ventures and Allen Miner of Sunbridge Partners.
American Industrial Partners has acquired the operating assets of Celerity Inc.’s systems integration business. No financial terms were disclosed. TPG Capital acquired Celerity in early 2006, and it also has received funding from Sovereign Capital and Tennenbaum Capital Partners.
Frazier Healthcare Ventures has formed a partnership with Steven Nelson, former chairman and CEO of General Medical, to identity and acquire companies in the specialty medical distribution and products industry. www.frazierhealthcare.com
Global Infrastructure Partne! rs has acquired up to a 40% convertible preferred interest in Terra-Gen Power Holdings LLC, an ownerand/or operator ofover 800 megawatts of renewable power facilities in the U.S.The seller isArclight Capital Partners, which will retain an interest in Terra-Gen.No financial terms were disclosed.
Hamilton Robinson Capital Partners has led a buyout of Spartech Industries Inc., the wheels unit of Spartech Corp. No financial terms were disclosed.
Collection Associates LLC, a portfolio company of LaSalle Capital Group, has acquired Money Recovery Nationwide, a Lansing, Mich.-based provider of debt collection services to the healthcare industry. No financial terms were disclosed.
Noetiz Corp., a Redmond, Wash.-based provider of software that automatically generates business intelligence from enterprise applications, has acquired Jaros Technologies Corp., a Granite City, Ill.-based provider of business analytics. No financial terms were disclosed. Noetiz has raised just over $20 million in VC funding from firms like Polaris Venture Partners and Sigma Partners.
Adeye, a UK-based mobile and social media marketing firm, has acquired Storyz, an Australian provider of a social media platform that connects users and communities through a “content-neutral” media format. No financial terms were disclosed. Storyz had raised VC funding from Motorola Ventures. www.storyz.com
E-trader Group has acquired Koodos Ltd., a UK-based operator of a discount fashion retail site. No financial terms were disclosed. Koodos had raised around $10 million in VC funding from Atlas Venture.
Equinix Inc. (Nasdaq: EQIX) has agreed to acquire Switch & Data Facilities Co. (Nasdaq: SDXC) for approximately $689 million in cash and stock. The deal is expected to close in Q1 2010. Switch & Data had raised private equity funding before going public in 2007, and PE backers CapStreet Group and Seaport Capital still hold minority stakes.
Och-Ziff has emerged as the buyer of TPG Capital’s 9% position in UK department store Debenhams. TPG sold the stake earlier this week for approximately £100 million, but without disclosing the buyer. Read more…
Raytheon Co. (NYSE: RTN) has completed its $350 million purchase of BBN Technologies Inc., a Cambridge, Mass.-based provider of R&D and solutions fornati! onal defense and security missions. BBN Shareholders included Accel Partners, General Catalyst Partners and Commonwealth Capital Ventures.
Southfield Capital Advisors has agreed to sell Dealers’ Financial Services to Dollar Financial Corp. (Nasdaq: DLLR), for approximately $118 million in cash. Dealers’ Financial is a Lexington, Ky.-based provider of services to enlisted junior military personnel seeking to purchase new and low mileage automobiles. It was acquired by Southfield Capital in November 2006.
Firms & Funds
Blackstone Group (NYSE: BX) shares rose 7.5% yesterday, which some options analysts attributed to an expectation of positive earnings news when the firm reports next Friday.
CIT Group is expected to file for bankruptcy protection in the coming days, according to Reuters.
Growthworks has agreed to merge with Seamark Asset Management (TSX: SM), in order to form a mid-sized, diversified asset management company in Canada. It will be called Matrix Asset Management, and led by current Growthworks president and CEO David Levi.
The Teachers’ Retirement System of Oklahoma has hi! red Franklin Park to manage a $400 million discretionary private equity account. Franklin Park replaces Aldus Equity, which was fired after its founder Saul Meyer was indicted as part of the New York pay-to-play investigation. Myer has since pled guilty. www.ok.gov/TRS
Donald Layden, former general counsel of Metavante Corp. and president of Metavante International Group, has joined Warburg Pincus as an advisor.