peHUB Wire: Tuesday, May 19, 2009

Today’s guest column is from Felix Salmon, a financial blogger for Reuters Blogs. He takes a look at Michael Lewis’s review of “The Snowball,” the authorized Warren Buffet biography, and determines why Buffet never went into private equity (despite his kind words about the asset class).

Why Warren Buffett would never have gone into private equity

Here’s a snippet from that Michael Lewis review of The Snowball:

“Buffett’s second great decision was to maximize, at great financial cost to himself, the interest that the public might take in his business affairs. In 1986, Congress passed a tax reform that changed how Berkshire Hathaway’s capital gains were taxed. Previously, those gains had been taxed only once, when a shareholder sold his shares. Now, so long as Berkshire remained a public corporation, Buffett would need also to pay tax on any gains from the sale of stocks inside his portfolio. There was an obvious solution, and it was seized upon by public fund managers everywhere in Buffett’s position: shutter the corporation and become a private equity fund. At the time Berkshire had $1.2 billion of unrealized capital gains. ! Buffett might have doled these out, and then restarted as a partnership free of corporate double tax. Instead, at a cost to himself that Schroeder puts at $185 million, he kept Berkshire intact.

A man who cares so deeply about money reveals himself most wholly in his decisions to part with it. Buffett had exchanged cash for an audience.”

Would Buffett really have gained from going private? I doubt it, somehow: having sought-after equity with which to pay for acquisitions was extremely valuable to Berkshire Hathaway. What’s more, Buffett prides himself on (to a first approximation) never selling anything; he doesn’t even pay a dividend. As a private-equity fund manager, he would have to give his investors back their money at some point, and that would mean selling assets he loved.

What’s more, there’s something fundamentally unegalitarian about private equity funds: they’re for millionaires only, while a large part of Buffett’s dream was always to take ordinary middle-class Americans and make them millionaires. (On paper, at least, since they never got any dividends from their stock, and he encouraged them regularly never to sell their BRK stock.)

So I’m not sure that it really makes a lot of sense to say that Buffett took a decision which personally cost him $185 million. It doesn’t make sense with hindsight, since Buffett went on to make untold billions more and become even wealthier than he would have become had he gone private. And it doesn’t make sense in terms of opportunity cost either, since while going private might have saved Buffett $185 million in taxes, it would also have cost him a number of golden opportunities down the road. Indeed, Lewis himself explains that Buffett is a master at monetizing his reputation:

“By 1986, Buffett’s every move was being watched, and usually cheered. His fame became not only a pleasure but an asset. His capital became unlike anyone else’s, because it came with his name attached to it. Warren Buffett saw deals that no one else saw, and had access that no one else had. If the stock market was a roulette table, he had his hand on the wheel.”

Later — much later — a handful of private-equity groups (TPG, KKR) started to get some small measure of the kind of access that Buffett had enjoyed for years. Even then, however, that access was entirely a function of their ability to borrow money, and it disappeared the minute that the market in leveraged loans dried up.

Finally, as Lewis says, “as rich as Buffett became, he never stopped measuring himself by how much money he had”. When Berkshire Hathaway was trading at a significant multiple of book value — as it nearly always was — Buffett could judge how much money he had just by taking the number of shares he owned in Berkshire Hathaway and multiplying them by the share price.

If Berkshire went private, however, Buffett could do that no longer: he would have to measure his own wealth on book value alone. Which, while surely a large number, wouldn’t be quite as large as the market value of his stake in Berkshire Hathaway. And that might well make the difference between him being the richest man in the world and, well, not being the richest man in the world.

Given that choice, it’s quite easy to see how he chose the former course of action.

***A few other notes: Yesterday Connie posted an interview with Peter Thiel, entrepreneur, venture capitalist, and enemy of VC gossip blog Valleywag. He says, among other things, that Valleywag is not unlike Al Qaeda. You can read it right here.

***Remember, I (Erin) am filling in for Dan for the next two weeks. Email press releases, tips, or comments to

Top Three

SumTotal Systems has amended its merger agreement with buyout firm Accel-KKR after receiving a competing offer from Vista Equity Partners. Accel-KKR has topped Vista Equity’s latest offer by $0.5 per share, agreeing to purchase SumTotal for $4.80 per share. This offer is $1 per share higher than Accel-KKR’s initial agreement to purchase SumTotal for $3.80 per share.

OpenTable Inc., an online restaurant reservation system, now expects its IPO to price in a range of $16-$18 per share, above the previously estimated range of $12-$14. OpenTable has backing from Benchmark Capital, Impact Venture Partners, Integral Capital Partners, Windspeed Ventures, and direct secondary firm W Capital Partners.

Greylock Partners will move its headquarters from Boston to Silicon Valley. Greylock partner Don Sullivan will relocate to California and the firm plans to add several new positions, including partners, to its Silicon Valley office in the coming year.

VC Deals

One Net Entertainment Limited, a wireless gaming developer, has recieved a $20 million investment through its parent company, Leo Technology Limited, a subsidiary of Techfaith. Investors include IDGVC Partners and Infiniti Capital Limited, based in Hong Kong., a renewable energy company that develops, owns and operates biogas plants in Europe, has raised €60 million in new equity. TCW Group led the round and was joined by returning investors Altima Partners, Green Partners, Halcyon and Ludgate Environmental Fund. Concurrently the company entered into a €10 million mezzanine debt facility with Ecofin.

Buyout Deals

American Industrial Partners, a buyout firm based in New York, has offered to purchase the RV business of Fleetwood Enterprises for $53 million, according to court documents. The business, which was previously owned by Tennenbaum Capital Partners and Marathon Asset Management, filed for Chapter 11 bankruptcy protection in March.

Monier Group, owned by private equity firm Paribas Affaires Industrielles, is in talks with three suitors about a possible takeover. They are Apollo Management, TowerBrook Capital and York Capital.

Rock Hill Capital Group, a Houston based private equity firm, completed the acquisition and recapitalization of SouthWaste Services, Inc. The transaction was financed with equity from Rock Hill Capital I, existing SouthWaste shareholders. Macquarie Bank and The 1818 SBIC Fund, a mezzanine fund managed by Brown Brothers Harriman, provided financing.

Kona Grill Inc., an Arizona-based restaurant, saw shareholder Mill Road Capital offer to buy it yesterday for $27.9 million, or $4.60 per share.

Corridor Capital, a Los Angeles-based private equity firm, has, alongside SPB Partners, has purchased a controlling stake in TrashMasters LLC, a regional waste hauling business, for an undisclosed amount.

Warburg Pincus, a New York-based private equity firm, has completed its acquisition of Enodis Global Ice Machine, a maker of commercial ice machines, from The Manitowoc Company. The business will be remained Scotsman Industries.

Onex Corp. plans to acquire the assets of Tropicana Las Vegas Resort and Casino, a bankrupt company which the Canadian private equity firm has been acquiring the debt of, later this year, subject to regulatory approval.

Six suitors, including Apax Partners, TPG, and a joint bid from Carlyle Group and Providence Equity, are through to the second round of bidding for a 500 million euro ($680 million) stake in Springer Science and Business Media.

PE Exits

BakBone Software Incorporated will purchase ColdSpark, a provider of email infrastructure platforms, for $15.938 million. ColdSpark is backed by JK&B Capital, a Chicago-based venture firm that targets the communication industry.

PE-Backed M&A

Cornerstone Records Management has acquired Nova Records Asset Management, a record storage business, for an undisclosed amount. Cornerstone Records Management is a portfolio company of Chicago-based Sterling Partners.

Mid-Oaks Investments, an investment firm based in Buffalo Grove, Ill., has purchased Dispoz-o, a disposable plastic food packaging maker, for an undisclosed amount. The deal is an add-on acquisition for Mid-Oaks Investment’s portfolio company, Wilkinson Industries, which Mid-Oaks purchased in 2004.

Firms & Funds

China’s national pension fund, the National Social Security Fund (NSSF), is seeking cabinet approval to invest billions of dollars in foreign private equity funds this year.

Navis Capital Partners, a Malasia-based buyout fund, has dropped the target on its latest vehicle, Navis Asia Fund VI LP, from $1.75 billion to $1.25 billion, according to LBOWire.

The U.S. Treasury has preliminarily granted BlackRock Inc a second-round interview to buy toxic assets from U.S. banks, using taxpayer money, the Wall Street Journal said on its Website late on Monday.

Human Resources

Omar Khalil has been promoted to Senior Associate with Santé Ventures, an early-stage life sciences venture capital firm. Meanwhile the firm has added Jim Graham as a Senior Associate. Graham was previously an engagement manager in the Healthcare practice of McKinsey & Company.

Dave Matheson has joined Onstott Group, a Massachusetts-based executive search firm, as Vice President. Matheson was previously working for iRobot.

Laurence R. Bronska and Andrew W. McCune have joined McDermott Will & Emery as partners in the Corporate Department based in the Chicago office. Bronska and McCune, formerly Co-Chairs of the Midwest Private Equity Practice at DLA Piper, focus their practice on private equity transactions.