Carlyle Group’s Co-Founder Debunks Myths
There’s been a lot of press attention recently on the LBO industry—a business that the mainstream media often portrays as being run by a posse of money-hungry robber barons. In a first-day key-note address at the conference, Dan D’Aniello, a co-founder of
LPs See The
Flow Of Funds Slowing
It’s going to be nearly impossible for limited partners to match their 2006 contributions to buyout funds in 2007, according to principals from four top investment firms who spoke on the panel “Where LPs Are Placing Their Bets.” “Last year was extraordinary,” said Andrea Kramer, vice president of due diligence for funds-of-funds manager
In Negotiating Terms, GPs Should Observe The Golden Rule
While a handful of general partners have come to market with higher carried interests, fund terms only bounce around in a very narrow band, agreed four speakers on the “Funds of Funds Weigh In On Terms, Investor Relations” panel. Charles Jacobs, a partner with law firm Nixon Peabody, did note that, while the pendulum swings back and forth between GPs and limited partners, it tends to “stay a little longer on the GP side.” Later in the panel, fund-of-funds manager Kevin Kester of
Buyout Shops Should Leverage Their Purchasing Power
While there has been much talk about private equity portfolio companies leveraging their collective purchasing power,
Asset-based Loans Become A Popular Way To Finance LBOs
The asset-based lending market is booming, even as the cash-flow lending market remains strong. Over the past couple of years, more than $60 billion in asset-based securities have been issued, about $10 billion of which was used to finance LBOs, according to Deutsche Bank Managing Director Mark Funk, speaking on a panel called “Leveraged Lending Innovations To Enhance Your Returns.” Funk said this is the first bull market where cash flow loans and asset-based loans are competing for market share. Steven Robinson, managing director at GE Antares Capital, noted that traditionally, when lending multiples are high in the cash flow loan market, they’re low in the ABL market, and vice versa.
Technology Specialists Favor The Hairy, The Complex
Large buyout firms with eclectic tastes have piled into the technology market in recent months—as well they should have. Not only have they found herds of mature, cash-flow rich companies grazing undisturbed, they’ve also encountered swarms of banks, finance companies and hedge funds willing (perhaps too willing) to supply few-strings-attached leverage. That all sits fine with two veteran technology buyout professionals who were on our “Technology Sector Spotlight” panel, Alex Slusky, managing partner,
Going To Great Lengths To Dodge Auctions
During the “Auction Strategies To Beat the Competition” panel,
Evaluate Potential Managers As You Would A Target Company
Hiring mistakes are the number-one problem buyout firms have, Ted Bililies, a managing director at consulting firm ghSMART noted during the “Selecting The Right CEO For Your Portfolio Company” workshop. Studies show that people hire the wrong CEO to run their companies about 50 percent of the time, he added. Bililies said that general partners should learn to apply the same rigor they use during financial due diligence to selecting their management teams. To do this, the have to learn how to measure people quantitatively, rather than judge them qualitatively. “Make [the data about people] as hard and analytical as that other data,” he said.
Take-Privates Are Still Worth It
Even with greater activism from shareholders and more scrutiny from the press, delisting big public companies is still worth the effort, said four leading buyout players taking part on the “Taking Advantage Of The Gusher Of Take-Private Opportunities” panel. “If we thought we were overpaying, we wouldn’t do the deal,” said Bud Watts of
Outsourcing Has Passed Many Companies By
Surely by now all U.S. manufacturers are taking advantage of opportunities to outsource operations, source parts, and sell products in China and India, right? Actually, while companies generally recognize the opportunities in these regions, many just don’t know what to do about them, according to panelists in the session, “Guiding Your Portfolio Companies to Success In India And China.” Chip Chaikin, a Shanghai-based partner at
The Distressed Market Has Become Distressingly Crowded
The distressed market isn’t as inefficient as it used to be. “We don’t see any opportunities that don’t have a blue book wrapped around them today,” observed Angus Littlejohn, chairman and CEO of
Is Green The New Black?
Green is in. Or is it? During the “Consumer Products Sector Spotlight,” panelists debated whether a company’s friendly environmental policy is a good reason to consider an investment. Michael Sweeney, a managing director at
New LPs Still Getting Access
Despite the increasing power of general partners to limit access to their funds, newly active limited partners agreed that they could still find ways in. “We’ve had good access to the [GPs] we’re interested in,” said Shawn Wischmeier, chief investment officer of
Media Is Alive And Kicking
Buyout pros might be bearish on big daily newspapers, but they’re bullish about other areas of the media industry, according to the speakers on the “Media Sector Spotlight” panel. “The demand for content and information is insatiable,” said James Rutherfurd, executive vice president and managing director of
Small Market, Big Pay Check
Some say there’s a personnel war raging in the buyout market—with smaller firms on the defensive. It’s difficult enough for small buyout firms to attract top talent, let alone keep them from being poached by mega firms. That’s part of the reason why we’ve seen a number of small and mid-market firms increase their carried interest fees, said Riverside Company Partner Loren Schlachet during the “Mega vs. Mid vs. Small: Does size Matter?” panel.
Making A Big Newspaper Work
Conventional wisdom holds that civic pride prodded moguls David Geffen and Jack Welch to consider pouring money into failing enterprises like daily newspapers. But Brian Tierney, who led an investment group in the $515 million purchase of Philadelphia’s two daily newspapers, said they may not be foolish investors. “I look at them as Brian Tierney wannabes,” Tierney joked in a workshop hosted by Royal Bank of Scotland on dealmaking in a challenged industry. Few are willing to give big dailies a chance for long-term survival, yet Tierney said critics undervalue the power newspapers wield in metro markets. His team has found growth through big investments in Internet operations and circulation, while reaching a landmark labor pact with the papers’ unions.
The Great Debates: Are Buyout Pros Behaving Badly?
In the final session of the conference, Andrew Ross Sorkin, private equity reporter and columnist for The New York Times, needled the industry for its many foibles. He chided buyout firms for quickly taking money out of portfolio companies while ostensibly providing little value in return; for appearing to have gentlemen’s agreements not to compete for one another’s deals; and for participating in a market rife with conflicts of interest. While conceding a point here and there, Kevin Conway, managing partner at
DP: Buyout firms talk a lot about how they create value. But in fact they often take money out of portfolio companies within weeks or months of closing a deal. Is that a sustainable model?
ARS: I don’t think it can possibly be a sustainable model long-term. Look at the Hertz transaction [a 2005 take-private led by Clayton, Dubilier & Rice], a transaction that obviously looks like a quick flip. How is it possible that after 12, 14 months, you can make this amount of money? What possibly could have been done operationally that actually fixed this company in any meaningful way? From a perception perspective, that is the problem.
KC: I agree that the time period we’re in right now is not sustainable. The financing markets have driven much of the recapitalizations where buyout firms can take all of their equity off the table, sometimes within nine to 12 months. On the issue of how private equity firms make changes that quickly, the fact is, sometimes there haven’t been many changes made. Our particular model is very driven by making operating improvements. Many people focus on the closing date of a transaction. But in many of our transactions we’ve been looking at an industry for literally years. Often we’ll look at a particular transaction and work on the inside with the management team for as long as a year or two. And it often takes months from signing a deal to closing. You end up having four or five or six months lead time. We don’t wait until the closing. We’re already working with the management team on the organizational structure. We ask questions like, Are the right people responsible for the right things? Is the compensation system aligned with what we’re trying to get done? If you get a head start, it’s not impossible to make changes and see dramatic results.
DP: Do you believe there is collusion among private equity firms today?
ARS: Sort of. When I wrote a column two years ago raising the issue it wasn’t so that the Justice Department would look into this. I didn’t think of it as a legal issue so much as a process issue for boards that were considering selling companies. I don’t think there’s direct collusion, but I do think there are gentlemen’s agreements where firms, in effect, say, I’m not necessarily going to jump a deal here. You see evidence of that in how ineffective go-shop provisions are. I don’t think it’s a real legal issue, but I think if you’re a seller it’s an issue you have to think about.
KC: I don’t think there’s collusion. Buyout firms are 100 percent economic. Many don’t go after a business under a go-shop provision because they look at the company and say, That other buyout firm’s been in there for a year, they’ve done all sorts of work, I can’t get within 20 percent of the price based on public information, and it’s going to take a lot more resources to chase after the company. They drop out, and people look at that from the outside and say, “Oh that’s collusion, or a gentlemen’s agreement.” In fact, the firm is basically saying, “I have a better place to spend my time with the promise of a higher return.”