Push the peanut
Sponsor-to-sponsor buyouts are in vogue – and to many investors, a cause for concern. Are private equity firms buying from other private equity firms doing the right thing? David Snow looks at the arguments.
These must be tough times in the private equity market because GPs are spending a lot more time with each other.
You can be sure that the partners at, for example, Warburg Pincus would just as soon not haggle terms with their counterparts of Odyssey Investment Partners. Rest assured that the pros at CSFB Private Equity, to give another recent example, are not ecstatic about providing an exit opportunity to Investcorp.
But there they are, these deal-starved private equity firms, buying and selling from one another because no one else in the market has the money or motivation to acquire assets.
The recent sale in the US of TransDigm to Warburg Pincus for $1.1bn serves as a particularly choice reminder of just how important a role private equity firms have come to play in the capital markets, not to mention how important a role these firms play for each other. In a world where strategic buyers have retreated and IPOs are dead, private equity firms are among the few motivated buyers out there. In a firm-to-firm transaction, each side solves a problem for the other. One side needs – needs – a liquidity event, and the other side has a mountain of capital that needs to be intelligently put to work.
In addition, from the buyer's point of view, the deal landscape is littered with low-quality, debtladen, no-earnings-visibility companies – deals a smart private equity team wouldn't touch with a barge pole. More often than not, a company with a solid management team, consistent earnings growth and a nice market position – in other words, a company that a private equity firm would find attractive – has already been brought to that level of quality by another private equity firm.
“How many times can a private equity firm say it will create more value?”
Good deals for whom?
In TransDigm's case, the company is now owned by a financial sponsor for the third time. TransDigm was formed in 1993 as an aerospace-components platform for New York buyout firm Kelso & Co. The inaugural transaction was the $56m management buyout of the aerospace parts business of Cleveland's IMO Industries. Five years later, Kelso sold the company to Odyssey for an undisclosed sum, although CSFB syndicated a loan valued at $175m to support the transaction.
Under Odyssey's ownership, TransDigm continued its consolidation play, buying up other aerospace components business such as Champion Aviation Products, Norco Inc. and Specialty Avionics Group.
Now comes Private Equity Act III. In June, Warburg Pincus acquired TransDigm in a $1.1bn buyout – impressive for a platform that started 10 years ago at one-twentieth of that valuation. Impressive, too, for Odyssey, which managed to return profits on a manufacturing investment started in the inauspicious vintage year of 1998.
But impressive for Warburg Pincus? Time will tell. The best case scenario is that TransDigm has reached a level of development at which Warburg Pincus' resources and skills are most needed. The firm is a global powerhouse with access to people and capital that the relatively smaller Kelso and Odyssey do not have. On the other hand, how much juice can this company possibly have left, having been given a makeover by two successive private equity firms?
The investors in the DLJ Merchant Banking Fund may be asking themselves the same question with last week's announcement of CSFB Private Equity's acquisition of Jostens, a maker of class rings and other academic memorabilia, from Investcorp for $1.2bn. What are the chances that CSFB is getting a diamond in the rough, a great deal? What changes can CSFB affect at Jostens that Investcorp and its co-investor, Deutsche Bank (now MidOcean Partners) didn't or couldn't?
For some market observers, the problem with private equity firms buying from other private equity firms is that it puts too many smart people on the same deal. “The attractiveness of investing in private equity is the inefficiency of the market,” says Kenneth Wisdom, a vice president at investment consultants Portfolio Advisors. “When you have a lot of participation in a deal, the inefficiency factor goes down.”
Wisdom stresses that deals like Jostens and TransDigm must be viewed on a case-by-case basis. Many of these firm-to-firm transactions, he says, mark a natural progression of a growing, healthy company, with each private equity owner able to add value in its own way.
However, not every firmto-firm deal is a sign of growth. For example, when a buyout firm ends up selling a portfolio company to a distressed specialist, you, the limited partner in this firm's fund, know you're in trouble. A private equity consultant says he has seen numerous instances of an original equity investor getting wiped out through a fire sale to a distressed fund. Once the portfolio company in question emerges from its difficulties, it is more often than not sold to a third financial buyer.
Another unhealthy version of a firm-to-firm transaction is when Fund II sells a company, or part of a company, to Fund III. In today's market, a company that was funded several years ago often needs fresh capital from a follow-on fund. “That happens quite often,” says the consultant, adding he prefers to see a new funding done in conjunction with an outside investor as a form of “third-party validation.”
Limited partners have nothing against owning growing companies, but sponsor-to-sponsor transactions present an additional potential concern – for an investor exposed to both the buyer and the seller, owning a portfolio company more than once takes some of the joy out of the private equity process. It means double jeopardy – taking a risk on the same company twice.
One investment advisor calls this practice “pushing the peanut.” He asks: “How many times can a private equity firm say it will create more value? Isn't it already fully valued?”
Depending on the specific circumstances of a company that is undergoing a secondary or even tertiary buyout, the answer to this may well be no. But buyers taking assets off another equity sponsor need to be asking themselves some hard questions about why they're doing it.
Deals & Exits
Fox Paine takes majority stake in Seminis
San Francisco-based private equity firm Fox Paine has acquired approximately 75 per cent of Mexican fruit and vegetable seed company Seminis after the company was bought out by its parent company Savia and its chairman and chief executive officer, Alfonso Romo Garza, in a deal valued at more than $650m. Fox Paine committed $222m to the transaction. The terms of the transaction involved Savia privatising Seminis, which it already owns, by acquiring Seminis' 15.8 million shares for $3.78 per share. Fox Paine then bought 75 per cent of those shares for $3.40 per share. Garza received the rights to purchase up to 34 per cent of Seminis following the merger.
Soros, Oak acquire Lucent switching business
Soros Private Equity and Oak Investment Partners teamed up to acquire the carrier-class switching business of Lucent Technologies. The terms of the deal were not disclosed. The division, which has been renamed Excel Switching Corp, provides carrier-class, open services platforms for communications networks. The company's converged services platform bridges traditional circuit switched networks with next-generation IP networks in either wire line or wireless environments. Lucent will continue to act as a sales channel for the product.
Advent boosts Aspen Technology stake
Boston-based private equity firm Advent International committed a further $100m to portfolio company Aspen Technology, a Cambridge, Mass.-based provider of software and services that improve profitability for process manufacturers. Advent first invested in Aspen in 1986. Under the terms of the agreement, Advent will invest $100m in cash to purchase a new issue of Series D convertible preferred stock from Aspen.
GTCR to acquire AMEX in $110m buyout
Culminating yearlong negotiations, Chicago-based private equity firm GTCR Golder Rauner has entered into a letter of intent to acquire the American Stock Exchange from the National Association of Securities Dealers, the largest securities-industry regulator in the US, in a $110m transaction. The firm beat out several rival bidders including the rival Chicago Board Options Exchange.
The NASD will reinvest all of the $110m in equity from the sale in the Amex, using a portion of it to meet pre-existing investment obligations to the market and leaving the remainder of the cash on the Amex's balance sheet. As part of the deal, the NASD will put some of the $110m toward promised long-term technological upgrades, along with other previously agreed-upon investments. The NASD, which acquired the AMEX in 1998, was reportedly looking for a sale price in the $500m when it began the auction process, but was ultimately forced to set its sights much lower.
Warburg Pincus acquires TransDigm in $1.1bn buyout
Warburg Pincus & Co beat out competition from rivals Thomas H Lee Partners, Aurora Capital Group, and a consortium comprising Berkshire Partners, Weston Presidio Capital and Greenbriar Private Equity to acquire TransDigm Holding Co, a supplier of highly engineered aircraft components, in a management-led buyout from fellow New York-based private equity firm Odyssey Investment Partners. The sale was reportedly valued at just over $1.1bn.
Warburg Pincus will not take on TransDigm's close to $400m in debt. TransDigm will be retiring its debt through the equity commitment Warburg Pincus is committing to the deal. Warburg Pincus is making its equity commitment from the $5.3bn Warburg Pincus Private Equity VIII, which closed in April last year. Credit Suisse First Boston, which advised Odyssey on the sale of TransDigm, is providing close to $700m in debt financing to support the deal. A major portion of the financing will be senior debt while the rest will be in the form of a high-yield bond offering.
Kohlberg & Co pays $155m for coach assets
Kohlberg & Co acquired two regional units of Coach USA from UK bus transport company Stagecoach Group in a $155m buyout. The deal comprises an equity component of $128.5m and an interest-bearing loan note receivable of $26.5m, repayable no later than 63 months from date of close. Coach USA's West region operates in California, Colorado, Nevada, Arizona, Wyoming and North Dakota, running 1,153 vehicles and employing 2,200 people. The South Central region encompasses coach operations in Texas, Tennessee, Arkansas and Louisiana, running some 400 vehicles and employing more than 800 people. A total of 18 businesses are included in the sale.
TAA ssociates makes $250m exit of software Co
Boston-based TA Associates portfolio company Kintana signed a definitive agreement to be acquired by Mercury Interactive Corp for approximately $125m cash and $100m in Mercury Interactive stock. Sunnyvale, California-based Kintana provides software products and services that enable enterprises to manage and automate the process of implementing and evolving software technology.
Cerberus agrees $230m car rental deal
New York-based distressed investment specialist Cerberus Capital Management was selected as the preferred bidder to buy out ANC Rental Corp, the fourth-largest car-rental chain in the US, for $230m, but still has a number of legal hurdles to overcome before it secures the asset.
Florida-based ANC, which controls approximately 22 per cent of the US car rental market share, entered Chapter 11 bankruptcy protection in November 2001. Under the terms of the proposed agreement, Cerberus will also assume more than $2bn in debt secured by rental cars and other current liabilities and $60m in non-vehicle debt.
The deal also includes $150m in net working capital. A federal bankruptcy-court judge in Delaware would have to approve the sale following an auction process, which could attract new bidders. If another bidder emerges and wins, Cerberus would receive a break-up fee of about $12.5m and as much as $1.5m in other costs.
CSFB buys Jostens from Investcorp in $1.2bn deal
New York-based CSFB Private Equity has acquired education memorabilia company Jostens from global investment firm Investcorp for approximately $1.2bn. CSFB led the investment through its DLJ Merchant Banking Partners III, and affiliated funds. The firm will acquire Jostens for a cash consideration of approximately $48 per share of the 10.3m fully diluted common shares outstanding.
The equity component of the deal is approximately $500m, and CSFB is also assuming Jostens longterm debt of $563.7m. Jostens is currently 88 per cent owned by Investcorp, its co-investors and MidOcean Partners, formerly DB Capital Partners, the private equity arm of Deutsche Bank, who led the buyout of Jostens in December 1999 for approximately $826m, plus the assumption of about $100m in debt.
Following the final close of the deal in May 2000, Jostens was 94 per cent owned by Investcorp and co-investors, and Jostens senior management. The equity component of the deal was $227m. Founded in 1897, Minneapolis, Minn.-based Jostens provides school-related affinity products and services including yearbooks, class rings, graduation products, school photography, and awards for athletes and fans.
Weston Presidio, TD Capital commit $100m to CurtCo
San Francisco-based private equity firm Weston Presidio Capital Management and TD Capital Communications Partners, jointly committed $100m to Malibu, California-based CurtCo Media Group to assist in the development of a magazine publication acquisition platform.
Funds & Buyside
Deutsche Bank hits market with $550m securitised PE offering
Deutsche Bank is seeking to further unload its inventory of private equity partnership interests through the sale of approximately $550m worth of collateralised fund obligations in a vehicle called Silver Leaf. Silver Leaf includes $330m in debt securities and a $220m equity strip.
The triple-A bonds pay a rate of 90 basis points over LIBOR, according to market sources. The securities for sale are backed by more than 700 underlying portfolio companies, primarily owned by buyout funds. The deal involves 65 funds to which Deutsche Bank originally committed $770m.
To date, the bank has contributed a total of $615m to the underlying managers. Of the 65 funds, 53 are buyout, including big US names like The Blackstone Group; Hicks, Muse, Tate & First; Kelso & Co; Madison Dearborn Partners; Bain Capital and Welch, Carson, Anderson & Stowe. Six funds are venture capital while the rest are distressed and mezzanine.
The underlying valuations of the funds were arrived at by assigning the lowest of three estimates – that assigned by the general partner, Deutsche Bank, or by consultant Bearing Point, which was hired by Deutsche Bank to independently value the partnerships.
The Silver Leaf transaction is another in what is becoming a popular route to liquidity by large institutional investors. Silver Leaf was spearheaded by Jeffrey D'Souza, a director in Deutsche's London office, who advised on the landmark Prime Edge deal in 2001 that marked the first time a bundle of private equity funds were rated by a rating agency.
At least one third-party investment group is seeking to raise capital to buy Silver Leaf's subordinated and equity securities, a source says, adding that a series of triple-B securities in the deal has an attractive 40 per cent credit support mechanism.
Deutsche's sale differs from earlier private equity securitisation deals sponsored by AON and AIG in that both of those institutions retained ownership of the subordinated securities in an effort to get capital relief, while Deutsche is attempting a total risk transfer by getting the assets completely off its books. Deutsche Bank spun off its direct private investment group, DB Capital Partners, in February in a $1.6bn deal that created MidOcean Partners.
Venture lender Lighthouse closes Fund V on $366m
Lighthouse Capital Partners held a final close for Lighthouse Capital Partners V on $366m. Lighthouse makes investments in the form of secured loans to early and expansion-stage companies that have received venture capital financing. Lighthouse invests across several sectors, including communications, enterprise computing, storage, biotechnology and medical devices.
Lighthouse Fund V drew several returning limited partners, including Massachusetts Institute of Technology, University of Richmond and Dartmouth College. New limited partners include Teachers Insurance and Annuity Association of America, State Teachers Retirement System of Ohio, Key Capital Corporation, SDCERA, Quellos Private Capital, Howard Hughes Medical Institute, Hamilton Lane, Verizon Investment Management Corporation, as well as Pacific Corporate Group-advised clients FPPA of Colorado and the State of Rhode Island.
Edgewater closes $200m IT fund
Chicago-based private equity firm The Edgewater Funds closed its fourth fund, Edgewater Private Equity Fund IV, on $200m. Edgewater launched the fund in the second quarter of 2001. The firm's prior fund closed on $170m in September 1999. Edgewater was founded in 1991 by James Gordon. The firm invests in early and late-stage companies in the Internet infrastructure, information technology, broadband communications, media, financial and health care technology sectors. Edgewater lists 13 portfolio companies.
Palladium suspends fundraising for Fund III
New York buyout firm Palladium Equity Partners has halted fund-raising activities on its latest fund, targeted at $300m. In a letter to investors from Palladium managing member Marcos Rodriguez, the firm announced it was “suspending” efforts to raise Palladium Equity Partners III. “In the current environment, it has become apparent that the fundraising process for Fund III will demand significantly more time than we had originally anticipated,” Rodriguez wrote. In addition, the letter stated that Palladium co-founder Timothy Mayhew “has decided to pursue other opportunities” because of the “postponement” of fund-raising activities (Mayhew subsequently joined New York-based private equity firm Fenway Partners as a managing director). Palladium, which hired Boston-based Monument Group as its placement agent to raise the fund, closed its second fund on $300m in 2000.
Thayer falls short on $300m
Washington, DC-based Thayer Capital held a final close on $300m after seeking $1bn for its fifth fund. Thayer Capital, which invests broadly across growth manufacturing, business services and industrial components sectors, launched fund raising for its fifth fund in September 2001. Its previous fund closed on $880m in 1999. Thayer had hired Merrill Lynch's placement agency to raise the fund.
MDS closes C$211m Fund II
Cambridge, Mass-based life science investment specialist MDS Capital, the venture capital arm of global health and life sciences company MDS Inc, has closed its ninth fund, MDS Life Science Technology Fund II, with more than C$211m, slightly above the original target of C$200m ($155.3m), bringing total funds under management to over C$1bn. MDS now has seven institutional and two retail funds under management. Fund II is the largest institutional fund raised to date. MDS began fundraising for Fund II last June.
Arsenal exceeds $250m target at final close
New York-based Arsenal Capital Partners held a final close on its debut buyout fund, rounding up $300m for a vehicle that was launched two years ago with a target of $250m. Arsenal Capital focuses on middle-market buyout opportunities in the manufacturing, healthcare and business services sectors. The firm's limited partners included Adams Street Partners, Wilshire Private Capital, National City Equity Partners, Northeast Utilities Pension Fund, LGT Capital Partners and BOKF Equity Fund, a private equity fund-offunds of the Bank of Oklahoma. Arsenal Capital targets companies with revenues between $50m and $500m.
H&Q names new COO
Palo Alto-based H&Q Asia Pacific has named Sean Warren a managing director and chief operating officer of the firm, replacing chief financial officer Purvi Gandhi who will continue to work for the firm's fund raising process on a parttime consultancy basis.
Warren joins the firm from Robertson Stephens Asset Management, where he served as president and chief executive officer. Before that, he worked for Soros Fund Management, where he eventually became a managing director and helped establish and manage the firm's presences in Asia and Europe. He also represented Soros' interests in a number of Asian private equity funds.
Former Massachusetts acting governor joins Arcadia
Arcadia Partners, a Boston-based venture capital firm venture capital firm focused exclusively on the for-profit education and training industry, has appointed Jane Swift, the former acting governor of the state of Massachusetts, as a special general partner. Swift became Massachusetts' first female governor – and the youngest in the nation – in April 2001, after Governor Paul Cellucci resigned to become the US ambassador to Canada.
Arcadia was established in 1998 by Liam Donohue, Andrew Hallowell and Michael Margolis. The firm currently has approximately $50m under management and has completed over 18 investments in companies that produce textbooks and other educational materials.
Bain Capital's McKenna returns to Advent
Boston-based Advent International has announced that David McKenna has rejoined the firm as a partner in its Boston office after three years with local rival private equity firm Bain Capital. McKenna, who worked at Advent for eight years prior to Bain, will concentrate on buyouts and growth equity investments in North America, with an emphasis on industrial technology buyout transactions.
McKenna is joining Advent's technology buyout team, which includes fellow partner Chris Pike and senior partner and team leader Doug Kingsley.
Cliff Robbins parting ways with General Atlantic
Cliff Robbins, a former partner of Kohlberg Kravis Roberts & Co who joined General Atlantic Partners in 1999, is reducing his role at the Greenwich, Connecticut-based firm in order to broaden his investment focus away from the technology sector.
“I have decided that I want to pursue a broader investment mandate than one limited to information technology and its uses,” Robbins, who is one of 18 partners at General Atlantic and who sits on the firm's six-member executive committee, said in a statement. “Accordingly, I have informed my partners that sometime this year or next I would expect to pursue other investment ventures which could also possibly include General Atlantic.”
Robbins led investments in Creditek and Business Logic, and is a director of several private companies, including eOne Global and IP Value.
CalPERS seeks changes to pay structure
The California Public Employees' Retirement System is seeking state legislation in order to be able to pay the pension's senior investment professionals and chief actuary market salaries.
In May, the California Supreme Court upheld a ruling that indicated that public pensions' constitutionallyderived powers do not allow them to go outside civil service laws to hire investment managers and set salaries. Twenty-eight managers and the chief actuary are affected by the ruling.
“The California Supreme Court ruled that CalPERS' constitutional powers didn't extend to hiring of personnel,” Controller Steve Wesley, a member of the CalPERS board of administration, said in a statement. “We now must create the appropriate l egal authority to establish these investment and actuarial positions.”
Merrill Lynch appoints Brera's Cribiore
Alberto Cribiore, the founder of New York private equity firm Brera Capital Partners, has been named to Merrill Lynch's board of directors.
Cribiore started out in the private investment industry in 1970 at EXOR Group, the investment office of Italy's Agnelli's family. He remains the managing partner of Brera Capital, a firm he founded in 1997. Originally from Milan, Italy, Cribiore was previously co-president of buyout firm Clayton, Dubilier & Rice, which he joined in 1995.
Fenway hires Palladium's Mayhew as MD
New York-based private equity firm Fenway Partners announced it has hired Timothy Mayhew from Palladium Equity Partners, a firm he co-founded in 1997. Mayhew joins Fenway as a managing director, where he will help the firm identify and grow investments.
Prior to forming Palladium, Mayhew was a principal of Joseph Littlejohn & Levy, which he joined in 1993. During his tenure there, Mayhew oversaw the investment in Liberty Broadcasting and worked closely with several portfolio companies including Foodbrands America, Kendall International and OrNda Healthcare.
“We've known Tim for a long time and recognise that he is a talented professional who shares our firm's investment philosophy and values,” Peter Lamm, chairman and chief executive officer of Fenway Partners, said in the statement. “He is an excellent addition to our team at a time when the opportunities to deploy capital have become more attractive.”
Chester joins placement agent MVision
Paula Chester, the former director of private equity for the $100bn New York State Common Retirement Fund, where she was responsible for a portfolio of over $16bn of commitments in alternative investments and real estate opportunity funds, has joined UK placement agency MVision as a director of the firm's New York-based US operation, MVision Private Equity Advisers USA.
MVision has already established its credentials as a market leader, helping to raise a number of distinctive funds in 2002 and 2003,” Chester said in a statement. “It is committed to providing its clients with the disciplines and resources traditionally found in the bigger firms and the dedicated delivery of customised advisory services that are the hallmark of independent firms.”
Chester became director of private equity at the New York State Common Retirement Fund in 1999 when she switched to the position from her role as general counsel to thencomptroller H Carl McCall. She stayed with the Fund until resigning in December 2002.
Harvest Partners hires Whitney's DeFlorio as MD
New York-based private equity firm Harvest Partners has hired Michael DeFlorio, formerly of Whitney & Co., as a managing director. While at Whitney, DeFlorio led transactions in the manufacturing, business services, and healthcare sectors. Prior to joining Whitney, DeFlorio held positions at American Industrial Partners and Donaldson, Lufkin & Jenrette. “We've known Michael for a number of years and are pleased he is joining us,” Tom Arenz, a senior managing director at Harvest Partners. “Michael's success in working closely with management to build value fits well with Harvest's investment philosophy.”
Bain Capital Ventures hires Maikranz
Bain Capital Ventures, the venture capital fund of private equity powerhouse Bain Capital, announced it named Jim Maikranz a special advisor who will work with the firm's portfolio companies. Maikranz will specifically assist with sales methodology, marketing, lead generation, product positioning and general strategy.
Maikranz joins the Boston-based firm from JD Edwards, where he was a senior vice president of worldwide sales. In that position, he was responsible for the development and execution of sales strategies, sales support activities and strategic alliances. Prior to that, he was senior vice president of sales at SAP, where he developed sales strategies.
Maikranz has held senior roles at IBM, NCR and Cullinet Software. He has also been on the board of directors at several software companies including Iona, Netfish, and DataSynapse.