The Benz factor
Auto industry executives know something about secondary transactions which private equity professionals might want to pay attention to: Mercedes Benz cars retain their value much better than Volvos.
Sure, Volvo makes appealingly quirky but sensible cars. They provide great customer service, the cars are reliable, and so on. But according to Santa Barbara, California-based car price forecasting service Automotive Lease Guide (ALG), when it comes to resale value, Volvos (and Buicks and Kias and Saabs and Saturns…) can't hold a candle to the almighty Mercedes Benz.
The ALG charts the resale value of cars three years after their original purchase. The cars that change hands at the smallest discount to original price are, in the “luxury” category, made by Mercedes-Benz, BMW and Acura. In the “industry brand” category, the cars that hold up best, pricewise, are Volkswagen, Honda and Toyota. Volvos typically fall to
below-average resale values. This may sadden fans of Volvos, who argue that these family-friendly vehicles are safe, dependable and, if viewed from certain angles and with a certain utilitarian aesthetic, not un-attractive. They may support their pro-Volvo arguments with repair frequency statistics, with customer-satisfaction surveys, with slow-motion crash-test footage – all to no avail. For the secondhand car buyer, Volvos lack that certain je ne sais quoi which makes age, mileage, condition and colour less critical factors.
Sadly, the best way Volvo lovers can increase the value of their cherished station wagons upon resale is by placing a Mercedes star on the hood. When it comes to secondary sales, some factors, such as prestige and the perception of quality, are more important than the actual history of the vehicle in question.
This principle is currently being driven home in the private equity industry, which is currently experiencing something of a fire sale in partnership interests. Call them superficial, but the average buyers of secondary private equity would prefer a used Mercedes with a few dings in to an immaculate used Volvo, according to secondary market insiders. In other words, they'll take a dented prestige fund over a worthy but less reassuringly familiar fund any day.
Secondary private equity partnerships are typically valued from the ground up. Valuation specialists assess each portfolio company and make a determination as to when the interest in each company might be sold and for how much. The individual valuations are added up to create an estimated net asset value (NAV) for the private equity partnership interest. But other factors come into play that ultimately determines the price for which the interest in question changes hands.
Of these, perhaps the most important, and the hardest to quantify, is the brand value of the fund's management team. A fund managed by veteran Silicon Valley venture capitalist firm Kleiner Perkins, for example, will experience high demand in the secondary market. A first-time fund managed by BubbleRush Capital (a fictitious name in case you were wondering) will find few interested buyers, even if the assessment of the underlying portfolio companies is comparable to that of the Kleiner Perkins fund.
People in the flow of secondary transactions say that partnership interests of prestigious, well-established firms like Kleiner Perkins are often transferring at 100 per cent of NAV – this despite the grave uncertainties in the technology investment market. Less “prestigious” (to be defined shortly) names change hands at 50 per cent, 30 per cent, even five per cent of NAV. Some can't even be given away.
Talk to The New York Private Placement Exchange (NYPPE), a Greenwich, Connecticut-based transfer agent for private equity partnership interests, and you'll be told that the firm divides managers into five “tiers,” with Tier I being the most in-demand. According to NYPPE managing member Laurence Allen, the rankings are determined by a combination of factors, including his firm's knowledge of a discount to NAV at which a secondary transaction has taken place. Allen's firm also looks to “buy lists” submitted by secondary buyers. Essentially, buyers make known to the market which specific managers they are interested in buying. Certain names appear again and again on these lists, says Allen, and this boosts their ranking on the NYPPE's five-tiered system. Certain manager names never appear on anyone's buy list. You can guess where the metaphorical Mercedes and Volvos appear.
Let's say you have a $10 million commitment to a partially funded venture capital fund managed by BubbleRush Capital. The GPs at BubbleRush may have investments in some of the exact same early stage companies as the (fictitious) Prestige Partners. You may even argue that BubbleRush's portfolio is better. But try as you might, no one wants to buy out your interest, while a piece of the Prestige fund trades for 60 per cent NAV. Why? Perhaps there are simply more buyers who want a relationship with Prestige. How the current Prestige fund performs is beside the point – buyers want access to the next fund, which they predict will do very well, given the long, successful track record of the investment team.
Perhaps buyers have more confidence that the Prestige team will be around five years from now, that they will be able to successfully exit their struggling portfolio companies. Buyers are also aware that buying into partnerships means being on the hook for future capital calls. Who would you rather have managing your money going forward – Prestige Partners, who were investing together back when floppy disks were actually floppy, or BubbleRush, who drafted their PPM three years ago in a Stanford dorm room?
What's the resale like?
If (or as a growing number of practitioners prefer, when) secondary transactions become a more pervasive feature of the private equity market, and when these trades become accepted as a standard tool for portfolio management, investors will become increasingly interested in resale value.
The most important consideration in making a fund commitment will remain, “How will this do over 10 years?” But LPs may want to have some assurance that if, for some reason, they need to rearrange their portfolio three years from now, they won't take a bath on their secondary sales. They may be pleased to learn that funds managed by Firm A have never changed hands for less than 50 per cent of NAV. In contrast, limited partners may hesitate to invest with Firm B, whose previous partnership is selling at a 95 per cent discount. “Does the market know something about Firm B that I don't?” they may well ask.
Selling a used car is fairly easy – the market is large and the transactions, routine. You might not get top-dollar for your 1999 Volvo, but at least you can sell it. You may have to take a haircut on the price (particularly if you need it off the driveway quickly) but it will go.
Quite the opposite is presently happening in the “used” private equity market, where a huge crop of sellers are new to the game, and traditional buyers are insisting on deep, deep discounts. In this market, unless you're selling a Benz, be happy if you end up with enough for a cab fare.
AmericasDeals & Exits
Acquisitive Investcorp provide exits for PE firms
New York-based private equity firm Investcorp made three acquisitions over the past month, two of them from other private equity firms. Investcorp acquired window manufacturer MW Manufacturers from New York-based Fenway Partners in a deal valued at $185m. The company was acquired by Fenway Partners in 1995 in a deal valued at approximately $200m. The business is reported to generate approximately $200m in sales.
Investcorp also acquired Aero Products from Miami-based middle market firm Trivest for $231.5m. Trivest reports that it made six times its initial investment of approximately $30m and an IRR of more than 200 per cent on the deal. Investcorp also acquired recreation equipment and playground company PlayPower. PlayPower manufactures indoor and outdoor playground systems, water slides, floating docks and boat lifts, and running tracks.
Consortium backs $675m cable buyout
A private equity consortium including Providence Equity Partners, Quadrangle Group, and TD Capital Communications Partners backed cable entrepreneur Bill Bresnan's acquisition of Comcast's cable television systems in the Rocky Mountain area for a total of approximately $675m. Comcast received $525m in cash plus preferred and common equity interest in Bresnan's company, Bresnan Communications, worth approximately $150m. Comcast is selling cable systems in 197 communities in Montana, Wyoming, Colorado and Utah. This is the second time Bresnan's group has looked at these assets. He proposed buying them from AT&T Broadband more than a year ago for more than $700m in cash. AT&T Broadband merged with Comcast in November 2002 in a deal valued at $72bn. Comcast is selling the systems to reduce its debt and focus on more metropolitan areas.
Warburg Pincus agrees to $125m Wellman PIPE deal
New York-based private equity firm Warburg Pincus agreed to invest up to $125.4m in polyester packaging products company Wellman. The investment comes in the form of convertible preferred stock, according to a press release. Warburg invested $20m in the form of a convertible subordinated note that can be exchanged into preferred stock and receive warrants to purchase 1.25 million shares at $11.25 per share. Wellman manufactures polyester packaging products and polyester fibres. The company also recycles its products for use in its products. The funding will be used to pay down existing debt.
Warburg Pincus has also added to its stable of energy sector portfolio companies by leading a $260m round of funding for oil and gas exploration start-up Antero Resources Corp. Joining Warburg Pincus in the round are Yorktown Energy Partners V, LP, Lehman Brothers Merchant Banking Group and the Antero Resources management team.
Viscogliosi Brothers exits ProDisc in $350 deal
New York-based private equity firm Viscogliosi Brothers, which specialises in orthopaedics, has sold its artificial disc company Spine Solutions to European strategic buyer Synthes-Stratec for up to $350m. The deal includes a $175m payment upon closing and $175m more may be paid on achievement of milestones and FDA approval.
Spine Solutions developed and markets the ProDisc system, a totally artificial disc system designed to reduce back pain and restore mobility after spinal surgery. The product is already approved in Europe and is selling in 26 countries. The products have no been used in 2,300 patients worldwide. Viscogliosi Brothers formed Spinal Solutions in 1999 and then acquired the rights to the ProDisc system from Aesculap AG, who worked with Dr. Thierry Marnay in developing the product.
Morgan Stanley Capital Partners acquires ethanol producer for $75m
Morgan Stanley Capital Partners, the private equity division of Morgan Stanley, acquired ethanol manufacturer Williams Bio-Energy from natural gas company Williams for approximately $75m.
Williams Bio-Energy owns and operates an ethanol production plant in Pekin, Ill. and owns 78.4 per cent of another plant in Aurora, Nebraska. The group also has agreements to market ethanol produced at third-party plants. The company was sold so Williams could focus on its natural gas activities, raise cash, and reduce working capital expenses.
Thomas Weisel recaps trade show company
San Francisco-based Thomas Weisel Capital Partners provided $30m of debtor-in-possession financing to help finance the recapitalisation of Key3Media Group, a global operator of information technology tradeshows and conferences that had filed for Chapter 11 bankruptcy protection.
Thomas Weisel Capital Partners will acquire approximately 68 per cent of Key3Media's bank debt and approximately 38 per cent of its bonds (11.25 per cent senior subordinated notes due 2011). Under the proposed plan, Thomas Weisel Capital Partners will own approximately 99 per cent of the recapitalised company, and the general unsecured creditors and bondholders will initially own the remaining one per cent of the equity, with the right to buy up to an additional 10 per cent of the equity.
LLR Partners, MidCoast Capital back Dime Capital MBO
Philadelphia-based middle market private equity firm LLR Partners and Pennsylvania based secondary specialist MidCoast Capital have partnered with former managers of Dime Capital Partners to acquire the investment assets of that firm. Dime Capital Partners was acquired by Washington Mutual Bank when the bank bought Dime Bancorp in 2001 for $5.2bn. Dime Capital Partners' management will continue to manage its portfolio of 30 equity and debt investments. The partners have also formed a new management group called Prometheus Management Group.
Berkshire Partners takes Acosta minority stake
Boston-based private equity firm Berkshire Partners has acquired a minority interest in outsourced sales, marketing, and merchandising company Acosta. Acosta will retain a majority interest in the company. The company reported turnover in 2002 of $620m. Acosta provides outsourced sales, marketing, merchandising, and promotional services to clients throughout North America. The company was funded in 1927 and has more than 10,000 employees. Acosta says it will use the capital to invest in technology and to fund expansion.
New Mountain acquires ChoicePoint audit business
New York-based New Mountain Capital has acquired audit and inspection business CP Commercial Specialists from ChoicePoint for $87m in cash. CP Commercial, based in Overland Park, Kansas, provides audits and property survey services to the insurance industry, as well as inspection services for government and other industries. The company operates 25 branches across the US. New Mountain is headed by former Forstmann Little partner Steven Klinsky.
One Equity Partners buys PWC's network security business
One Equity Partners, the private equity division of Bank One, has acquired PricewaterhouseCoopers' third-party identity management, online security and transaction processor, beTRUSTed, for a total of approximately $30m. beTRUSTed is focused on identity solutions and trust services. The company operates a number of authentication, secure storage, directory management, and document workflow technologies for a companies networking infrastructure. The company's solutions are used in the financial services, healthcare, telecommunications and government sectors. The company was set up by PricewaterhouseCoopers in 2000.
Quadrangle acquires infomercial producer for $250m
New York-based media specialist Quadrangle Capital Partners acquired “infomercial” marketing company GoodTimes Entertainment. Quadrangle is acquiring GoodTimes, which will be renamed GT Brands, from the Cayre family of New York. Quadrangle had been in exclusive negotiations with Cayre for more than a year prior to the culmination of the transaction. The company has annual revenues of approximately $300m. Its main business is the marketing of products to the fitness, weight-loss, skincare, hair care, houseware, inspirational and family entertainment markets.
Leeds Weld leads $145M deal for Sagus
New York-based educationfocused private equity firm Leeds, Weld & Co. has teamed with Key Principal Partners and Jesse.Hansen to acquire school furniture manufacturer Sagus International for $145m. BNP Paribas SA raised senior and subordinated debt for the deal. Sagus, based in Texas, manufactures furniture for schools. The organisation is a family of companies and brands including Artco-Bell, American Desk, and Texwood Furniture.
Arlington funds $20m buyout of NBC Indiana affiliate
Washington DC-based private equity firm Arlington Capital Partners has funded portfolio company New Vision Group's acquisition of WKJG, the NBC affiliate in Fort Wayne, Indiana. WKJG's price tag was $20m.
Arlington has committed at least $75m in equity financing to station acquisitions via New Vision Group, and plans to build a portfolio of up to 10 network-affiliated TV stations. WKJG represents the third television station acquisition for New Vision in the past four months. New Vision Group's debut deal took place last September, when it acquired KSBY, the NBC affiliate serving the Santa Barbara, California market, in a $39.5m buyout.
Two deals for ICV Capital
New York-based private equity firm ICV Capital Partners, which focuses on minority-owned or inner-city companies, has acquired Las Vegas-based speciality retail companies Marshall Management and AAMP of America, both of them manufacturers of products and accessories designed to enhance car audio and security systems. Marshall Management is the largest independent specialty retail operation in Las Vegas with 40 stores that cater primarily to visitors to the resorts and casinos.
AmericasFunds & Buyside
Credit Lyonnais retains 24.9 per cent take in Hamilton Lane
Credit Lyonnais, the French financial services group, will not sell its 24.9 per cent stake in private equity fund manager and advisor Hamilton Lane Advisors after the two parties failed to reach agreement on the terms of sale. Credit Lyonnais, which acquired its stake in 2000, agreed to retain its 4.9 per cent voting and 20 per cent non-voting ownership, Hamilton Lane chairman Les Brun and chief executive officer Mario Giannini said in a letter to Hamilton Lane clients.
“There is no imminent or contemplated sale of Hamilton Lane,” Brun and Giannini said in the letter. “We have concluded, with Credit Lyonnais, that there is not a transaction that meets our objectives.”
Hamilton Lane management, which owns a majority of the company, will work to increase its stake, Brun and Giannini said in the letter. The decision ends a six-month marketing process managed by Morgan Stanley, including talks about the sale of the entire firm, according to an eightparagraph letter. Rumours have also been circulating that Swiss funds of funds company Partners Group had been interested in buying the firm.
Mobius returns $250m from fund VI
The Mountain View, California venture capital firm is the latest to retrench, having reduced the size of its $1.5bn sixth fund by $250m, or approximately 17 per cent.
Mobius Venture Capital, originally named Softbank Venture Capital, was launched as the venture capital arm of the Japanese firm in 1996 by Gary Rieschel, Ron Fisher, and Softbank Corp's founder, Masayoshi Son.
Mobius focuses primarily on the communications, infrastructure, professional services, enterprise applications, emerging technologies, components and healthcare informatics sectors.
Texas Pacific readying $4bn buyout fund
Texas Pacific Group has told current and potential investors it plans to raise a $4bn-plus buyout fund later this year.
The Fort Worth-based firm told institutional investors, including Hamilton Lane Advisors, Los Angeles County Employees' Retirement Association and the Canada Pension Plan Investment Board, that it may raise as much as it did in 2000, when it took in $4.5bn for a buyout fund and affiliate technology fund.
Less is Mohr, Davidow: firm again returns capital, closes Seattle office
The Menlo Park, California venture firm has started 2003 in the same fashion it started 2002 – by returning a huge chunk of its most recent fund to its limited partners. The firm has cut the fund another $200m from Fund VII, reducing it to $450m.
The firm is also closing its Seattle office. Mohr, Davidow general partner Bill Ericson, who has been the firm's managing director in Seattle since the office opened in April 2000, is moving to Menlo Park.
In January last year, Mohr, Davidow became one of the first major venture capital firms to make a serious cut and return money to its investors when it reduced its $843m Fund VII almost 25 per cent to $652m.
Teachers' Merchant Bank leads restructuring of Toronto Sports Teams
Teachers' Merchant Bank, the private equity arm of the Ontario Teachers' Pension Plan, has led the reorganisation of Maple Leaf Sports & Entertainment, the organisation that owns the Toronto Maple Leafs hockey franchise, the Toronto Raptors basketball franchise, and the Air Canada Centre. The Teachers' Merchant Bank's stake in the company increases to 58 per cent from 49 per cent.
The reorganisation, which includes Bell Globemedia, and private equity firms TD Capital Group and Kilmer Capital Partners, allows Steve Stavro, chairman of the board of Maple Leaf Sports & Entertainment, to sell his 15 per cent stake in the company and step down as chairman.
Radius Ventures closes second healthcare fund on $73.5m
New York-based venture capital firm Radius Ventures has closed its second fund on $73.5m. The firm now has nearly $100m in capital under management. The new fund will follow the firm's investment pattern of investing across the healthcare space. The new fund will invest largely in early stage companies in the medical devices, pharmaceutical, biotechnology, and healthcare information technology and services sectors. The fund will invest up to $5m in portfolio companies.
Sevin Rosen slices $275m off fund VIII
Austin, Texas-based Sevin Rosen Funds has reduced the size of its eighth fund by nearly a third, to $600m from $875m. Sevin Rosen still anticipates investing in 15 new companies annually through the life of the fund, which is expected to wrap up in mid 2004.
The firm now believes it will only need to invest $10m through the life of each portfolio company, rather than the $15m it anticipated when the fund closed. The firm's previous fund was $480m.
CalSTRS appoints Cambridge
The California State Teachers' Retirement System (CalSTRS), the third largest public pension fund in the US, has selected Cambridge Associates as its advisor for its domestic alternative investment programme.
Cambridge will recommend US partnerships, perform due diligence and assist and advise CalSTRS staff on investment opportunities. The selection of Cambridge Associates, done through a competitive process, completes a restructuring of the portfolio's consulting services begun last year.
Last July, CalSTRS appointed Altius Associates its advisor for its international alternative investment allocation program. McKinsey serves as overall alternative investment portfolio advisor to CalSTRS.
Intersouth closes $205m fund VI
North Carolina-based Intersouth Partners has held the final close of its Intersouth Partners VI fund on $205m.
Intersouth, already the largest venture capital fund in North Carolina, is now the largest early stage venture capital firm in the Southeast. Since 1985, it has raised more than $500m and invested in more than 70 companies.
Intersouth will continue its historical investment strategy, focusing on seed and early stage investments, primarily in the life sciences and information technology sectors in the Southeast and Mid-Atlantic regions, with an emphasis on the Research Triangle area of North Carolina and Washington DC Intersouth has historically invested 70 per cent of its funds in North Carolina.
Merrill loses nine placement pros to Lazard
Nine placement agents have defected from Merrill Lynch to join financial services boutique Lazard Freres, leaving the once-dominant Merrill fund-raising business without any senior sales professionals. Managing directors Ben Sullivan, William Riddle, Mike Sutka, Scott Church and Tim O'Gara have joined the exodus, bringing with them Greg Myers, Robert White, Mark Christopher and Fran Lolli. According to sources, the moves indicate a big push at Lazard to build a third-party private equity placement business. Since 1998, more than 20 professionals have left Merrill's placement group, which now has only a handful of junior professionals on the distribution side and Kevin Albert at the helm.
Carlyle promotes ten
The Carlyle Group promoted ten investment professionals, three to managing director and seven to principal/director. Ted Hobart was promoted from principal of Carlyle Asset Management Group to managing director and Robert Easton and Franck Falézan were both promoted from director of Carlyle Europe Partners to managing director.
Former CSFB MD named at Accel-KKR
Former CSFB managing director Ben Bisconti has joined technology specialist Accel-KKR as a managing director. Bisconti was previously a managing director in the Credit Suisse First Boston Technology Group, where he was head of the global communications equipment practice.
MMC promotes Garrett Moran to president
MMC Capital, the private equity arm of Marsh & McLennan, promoted Garrett Moran, the former head CSFB Private Equity who joined the firm in April last year, to president. Moran spent 19 years at Donaldson, Lufkin & Jenrette (DLJ), where he held several executive positions including co-head of the investment banking group.
Following DLJ's acquisition by CSFB in 2000, he was co-head of the investment banking integration effort and was briefly the head of CSFB's private equity division before abruptly resigning, some sources say because of clashes over direction with his successor, Larry Schloss. For the past nine months, Moran has been working with MMC Capital as a senior advisor.
Morgenthaler names ICG Commerce CEO operating partner
Cleveland-based Morgenthaler Partners has announced the appointment of Alfred Festa an operating partner with responsibility for sourcing deals with particular emphasis on corporate divestitures. Festa joins the firm from ICG Commerce, an online procurement service, where he was president and chief executive officer.
Festa previously worked for AlliedSignal as a vice president and general manager of its chemical intermediaries business. While there, he led the divestment of half of the business to Sunoco in 1997. Morgenthaler Partners concentrates on investments in manufacturing, business services, communications, and healthcare. The firm focuses on the middle market with a typical transaction size of $50m to $250m. The firm also has a particular focus on corporate divestitures.