THL, Bain Capital write down investments

Private equity firms across the board are having to cut the value of their investments as the economy sinks.

Bain Capital wrote down third-quarter values for investments in media, retail, and restaurant firms, such as Clear Channel Communications, Michaels Stores and Outback Steakhouse, according to a letter recently obtained by Reuters.

Such a letter to LPs is not uncommon, though they are rarely made public.

The letter, dated Nov. 25, said radio operator Clear Channel’s business has declined due to softness in advertising spending. As a result, the firm marked down the equity portion of its investment to $428 million, or 0.85x cost, meaning the fair market value is 85% of its original investment. Also, its investment in wholesale distribution business HD Supply is valued at $617 million, or 0.65x cost, according to the letter, as it was impacted by the housing slowdown.

Its investment in crafts retailer Michaels Stores was written down to $377 million, or 0.65x cost, while its investment in Outback Steakhouse was written down to $189 million, or 0.35x cost, to reflect “continued weakness in traffic and increasing costs,” the letter said.

Most dramatically, Bain marked down the value of yacht maker Bavaria Yacht to zero. “While we still believe this is an important company in its industry, Bavaria is suffering from exceedingly weak sales as a result of low consumer confidence and scarce consumer credit,” the letter said.

Similarly, buyout firm Thomas H. Lee Partners wrote down $524 million of its investments in Univision Communications, Nielsen Co. and Hawkeye Energy Holdings in its latest fund, reflecting a decline in the value of the investments, according to a letter it sent to LPs.

“While the fund VI portfolio is certainly affected by the current economic environment, our analysis shows that overall it is in reasonably good shape,” said TH Lee’s letter, dated Dec. 16. The fund may have to be written down again in the fourth quarter, as the economy and markets deteriorated further in the last three months of the year. The firm raised $10.1 billion for fund VI, which closed in 2006.

“Although we are bearish about the financial outlook for 2009 and believe this cycle will be longer and more painful than prior downturns, we do believe that in the next six to 18 months there will be some tremendous buying opportunities and have in fact seen an uptick in new deal activity,” the letter said.

But TH Lee stressed it would “rather miss the absolute bottom than jump in too soon.”

TH Lee says that a big hit was taken on its investment in ethanol producer Hawkeye, which was written down to $64 million from $352 million after being hurt by unprecedented volatility and swings in the prices of corn, oil, gasoline and ethanol, which sent earnings tumbling 48 percent.

The fund’s investment in Spanish-language media firm Univision was written down to $373 million, from $497 million, although the letter said that the valuation should be recovered as the advertising environment improves.

TH Lee is also an investor in Clear Channel, which the firm has not written down. The $17.9 billion leveraged buyout of Clear Channel closed in July.

TH Lee’s fund invested $446 million in equity and $238 million in senior debt in the radio conglomerate. The letter detailed more than $500 million in potential cost savings from Clear Channel, which this month announced 1,850 job cuts. —Megan Davies, Reuters