The ironies of disclosure
Both LPs and GPs are saying they have no problem with the wave of Freedom of Information requests flooding US public sector institutions that invest in private equity. But do they mean it? David Snow looks at how practitioners really feel about the pressures being brought to bear on the industry in the name of disclosure and transparency.
Pop songs and popular misconceptions notwithstanding, the proper definition of “irony” is this: the use of words to convey a meaning at odds with, or opposite to, their literal meaning. Taken as such, it would appear that there is an epidemic of irony among private equity market participants with regard to the issue of public disclosure in the US.
Thanks largely to the onslaught of Freedom of Information (FOI) requests across the various states, public pension funds and other similar institutional investors are being forced to deal with a new transparency regime by which they must disclose the fund-level performance of the private equity funds to which public money has been committed. All parties involved, from the LPs and GPs to the requestors of information, are publicly declaring the best of intentions.
Unfortunately, in the case of an FOI request, being a good state citizen stands counter to being a good citizen of a limited partnership. Limited partners are forced to give public assurances to their state governments and private assurances to their GPs, and the respective messages are not the same. Likewise, general partners, in dealing with their investors, may say they are understanding of the predicament faced by some of these LPs, but privately they worry about suffering on the fundraising or deal front as a result of too much of their information being exposed.
In fact, because so many different masters must be served, just about every party involved in the public-institution disclosure debate must say one thing while meaning another. A guide to these ironies follows:
What the LPs say: “We will abide by whatever disclosure rules state law or pension policy dictates.”
What the LPs mean: “We are colluding with the GPs to fight this tooth and nail.”
Limited partners who manage public money have been dismayed to see the FOI phenomenon gather as much steam as it has. Not only do these limited partners genuinely see no good relaying interim IRRs or any other information to the pensioners, they are worried that disclosure policies may get them blacklisted from investing in the best funds, which would have a longterm detrimental effect on pensioners. Pension managers in this situation have privately communicated with their own lawyers, with their GPs and with their GPs’ lawyers to see if there are any ways at all to avoid responding to these FOI requests. At the very least, these institutions are pondering what steps they will need to take if a worst-case scenario unfolds – legal support for portfolio-company data disclosure. In that scenario, public-money LPs will be more likely to take drastic steps to protect their portfolios, their GP relationships, and possibly their own jobs.
What the GPs say: “We have no problem with aggregate IRR disclosure.”
What the GPs mean: “This is really embarrassing.”
A talented and eloquent GP can make even the most precarious portfolio seem like a garden of treasures. Just give him a lectern, a PowerPoint presentation and a conference room full of well fed and slightly inebriated investors, and the GP can turn a fund full of challenges into a promising long-term opportunity that LPs should feel proud to be part of.
Now take away the lectern, the slide show, the deep, resonant voice, and simply reduce the entire presentation to a number on a Web site. Thunk – negative 30 per cent IRR. The fund managers to which this unimpressive number is attached are given no opportunity to discuss their valuation methods, to relay to work they’ve done on their portfolio companies, or to expound on the nuanced trajectory of the J-Curve. And for GPs, who generally like to be in control of the flow of information, this is maddening.
Some GPs worry that the worst effect of basic IRR disclosure may go beyond simple embarrassment. Without the ability to control the presentation of historic performance, the fundraising process can be more difficult. The fear is that investors might say: “Don’t bother coming by – we already know your IRR and we’re not interested.” The disclosure, again, can also be seen as the first, irreversible step toward total disclosure, which would send target portfolio companies running for other forms of equity capital that, unlike private equity, remain genuinely private.
What the FOI requestors say: “Transparency benefits everybody.”
What the FOI requestors mean: “Transparency benefits me.”
God bless ’em, but the many parties that are behind demands for public institutions to open up their private equity books are acting out of – brace yourself – self-interest. The various state Freedom of Information Acts were designed to discourage abuse of power by the government. And yet abuse of power is not what these requestors are looking for.
They are looking for information for other purposes, and are using a powerful legal lever to get it. To be fair, the lawsuits brought against UTIMCO and CalPERS by local newspapers were, on paper, in response to instances of crony capitalism at the highest state levels involving, unfortunately, private equity funds. But the FOI tablepounding also sold papers and made for interesting copy – one Houston Chronicle editorial called UTIMCO’s handling of the disclosure issue a “delaying tactic worthy of Saddam Hussein.” Many other FOI agitators include data services companies, lawyers, investment advisors and placement agents, all of whom want to sell services based on information heretofore unavailable to them.
In a distrustful, post-Enron world, it is entirely understandable that public institutions would come under pressure to reveal, at the very least, how their private equity funds are doing. However, in the event that pensioners have been gravely underserved by the private equity funds into which public money has flowed, it is unclear what respite will be derived from disclosure. The ultimate beneficiaries of the FOI disclosure trend will not be the pensioners at all, but groups that can harness the resulting flood of information and do something useful with it. Those same pensioners who are explicitly informed of the interim underperformance of their private equity managers may not have access to the best of breed’s follow-on funds, thus lessening their chances of benefiting from a private equity program.
Isn’t that ironic?
Deals & Exits
Riverside backs household appliance franchise MBO
The Riverside Company acquired household appliance and services franchise operator Dwyer Group in a management buyout that values the family owned group at $47.6m. Riverside offered $6.75 per share in cash for the public-to-private deal, a purchase price that represents approximately a 59 per cent premium to the $4.25 per share closing price. Dwyer, based in Waco, Texas, is a public holding company that owns six franchisor corporations. Collectively, the brands currently support over 800 franchisees in the US and Canada and, through their master licensees, approximately 275 more franchisees in 15 other countries.
Wand Partners leads insurance buyout
Wand Partners led the acquisition of The Republic Group of insurance companies from Winterthur, a subsidiary of Credit Suisse Group, in an allcash $127m buyout. The other members of the acquisition group included Banc of America Capital Investors, Greenhill Capital Partners, Brazos Private Equity Partners, 21st Century Group, and Norwest Equity Partners.
Citigroup makes $180m food exit
Citigroup Venture Capital sold portfolio company Zatarain’s, a line of spices and mixes for Louisiana-style food such as jambalaya and gumbo, for $180m in cash to food group McCormick & Co. The purchase price represents a multiple of approximately eight times current year EBITDA. Citigroup’s other food group portfolio companies include American Italian Pasta, California and Hawaii Sugar, Davco Restaurants, Del Monte Foods, and Frozen Specialties.
Leonard Green recaps ladder manufacturer
Leonard Green & Partners agreed to recapitalise ladder manufacturer Werner Co. with a $65m investment that values the company at $625m in a partial exit for Investcorp. Leonard Green is purchasing $65m of newly issued preferred stock from Werner, which will use the $65m, plus funds from a new $230m senior secured credit facility, to redeem $150m of common stock held by Investcorp, Werner family shareholders and management. “This new investment by Leonard Green & Partners underscores the tremendous value the management team and employees of Werner have created over the five-and-a-half years of our partnership,” Christopher Stadler, a member of Investcorp’s management committee, said.
Saratoga makes $52m software technology exit
Saratoga Partners sold portfolio company Datavantage Corp, a developer and supplier of point-of-sale software systems and business intelligence technology, to MICROS Systems in a $52m exit. Saratoga invested $10m to acquire a majority 60 per cent stake in Datavantage in January 2000. Through this exit, the firm has achieved a 43 per cent IRR. “Datavantage has been an outstanding investment for Saratoga and its limited partners, and we are very pleased to have found a home for the company that is totally compatible and complementary. It’s a perfect fit,” Saratoga managing director Chris Oberbeck said.
Ares, Bain, Teachers recap luggage co
Ares Corporate Opportunities Fund, Bain Capital (Europe) and Teachers’ Merchant Bank, the private equity arm of the Ontario Teachers’ Pension Plan – have jointly committed to a $106m recapitalisation of Samsonite, one of the world’s largest manufacturers and distributors of luggage.
Upon closing, Samsonite’s existing senior credit facility will also be replaced with a new $60m revolving credit facility. Samsonite’s board of directors will be reconstituted to consist of nine nominees selected by the new investors. Initially, six of the nine directors selected by the new investors will be independent directors.
Carlyle leads auto parts buyout
The Carlyle Group beat out a rival bid from the Cypress Group to acquire the automotive assets of auto parts maker UIS for approximately $800m. Equity for the transaction is being committed from the Carlyle Partners III, fund. Carlyle received debtfinancing commitments from J.P. Morgan and Lehman Brothers. UIS, which has annual revenue in excess of $900m, is to be renamed United Components. “We are very excited to add United Components to Carlyle’s growing automotive portfolio,” Carlyle managing director Leslie Armitage said. Other recent Carlyle acquisitions in the auto parts sector include Breed Technologies and Edscha.
Funds & Buyside
AIG securitises $1bn portfolio with triple-A tranche
Financial services group AIG has securitised $1bn worth of its private equity partnerships portfolio and completed the placement of roughly $250m in triple-A rated bonds backed by the funds, according to several sources close to the transaction.
The deal allows New York-based AIG to reclassify a large portion of its risk-based capital and free up cash for fresh commitments to the private equity asset class. AIG was advised by Morgan Stanley, which placed the notes, and Swiss firm Capital Dynamics, which structured and arranged the transaction. Standard & Poor’s and Moody’s Investors Service did the rating work on the deal.
The AIG securitisation marks the first time a portfolio of private equity partnerships has received the highest credit rating from rating agencies. The triple-A designation was assigned without the benefit of an “insurance wrap,” a capital guarantee on the principal value supplied, at considerable cost, by an insurance company.
The AIG transaction is structured with a senior tranche of $250m in triple-A bonds. All these bonds were successfully sold by Morgan Stanley in the first quarter of 2003 to a range of insurance companies and financial institutions on a global basis, according to sources. The bonds pay a quarterly cash dividend based on an undisclosed rate tied to LIBOR.
The securities are based on an underlying portfolio of between 50 and 100 private equity partnership interests from the AIG inventory. The partnerships represent a diversified range of vintage years, styles and managers. Only US-based partnerships were used in the securitisation.
Charterhouse Group holds first close for Fund IV
New York-based private equity firm Charterhouse Group International has held a first close on its latest fund, Charterhouse Equity Partners IV, rounding up more than 40 per cent of its $750m target, or approximately $300m, according to a source familiar with the situation.
The fund, which has been on the market since November 2002, has a hard cap of $1bn. A final close for the fund is expected to be held by the end of the year. The fund’s investors include the State of Michigan, an existing investor, and Dutch pension manager NIB Capital, a new investor. The target of $750m should be attained, the source added.
In April, Charterhouse Group International invested more than $30m in waste services company Oakleaf Waste Management. The investment was Charterhouse’s first platform investment in 2003, though the firm has announced five add-on acquisitions.
Wind Point closes fifth fund on $476m
Chicago and Michigan-based Wind Point Partners has closed its fifth fund on $476m. Wind Point Partners V had a target of $500m and tops the firm’s fourth fund, which closed in June 2000 on $405m. CP Eaton acted as the fund’s placement agent.
Limited partners in the fund include return investors DaimlerChrysler, Northwestern Mutual Life, the State of Michigan Retirement Systems, and new investors Teachers’ Merchant Bank, Mass Mutual Life Insurance, and the Illinois State Board of Investment.
The firm also announced it raised a side-fund with more than 30 executive advisor partners that will invest alongside Wind Point Partners V. The executive advisors are executives who help the firm identify executives, develop value creation plans for potential portfolio companies, and sit on portfolio company boards.
Bank One backs Hispanic PE fund
Bank One is backing Hispania Capital Partners, a Small Business Investment Corp (SBIC) launched in 2003 that describes itself as the first nationwide Hispanic venturecapital firm.
Hispania will invest $4m to $8m in businesses owned or managed by Hispanics and those serving the Hispanic community. Because the firm is licensed by the Small Business Administration as a SBIC, which entitles it to guaranteed financing of up to twice the amount of private capital it raises, Hispania’s initial private capital of $21m is supported by up to $42m in SBA leverage.
Hispania evolved from a 2000 alliance of the US Hispanic Chamber of Commerce and Bank One Corp. The firm is seeking to invest more than $70m in established middle market companies.
Although Verizon Communications is the largest limited partner in the fund, Bank One committed the cornerstone investment – up to $5m – for Hispania, and provided initial financing in the early stages of the fund’s formation. Bank One also assisted in recruiting additional investors.
Wellspring closes third fund on $665m
New York-based private equity firm Wellspring Capital Management closed its third fund on $665m, exceeding an original target of $500m. Limited partners in the fund came from the US, Canada, and Europe. More than 50 per cent of the fund came from investors from the firm’s previous fund. Atlantic Pacific Capital was the fund’s placement agent.
“We take great pride in the fact that our proven approach to value creation is appreciated by our exiting investors and is gaining recognition among an ever-increasing group of highly regarded institutional investors across North America and Europe,” Greg Feldman, a founder and managing partner of Wellspring, said in a statement.
Thomas McNerney closes debut healthcare fund
New York-based healthcare specialist Thomas, McNerney & Partners closed its debut fund on $216m for investment in the medical device, biotechnology, pharmaceutical and related sectors. The firm has a multi-stage investment approach, where it can provide venture capital or growth capital. The firm will also look at recapitalising divisions of larger healthcare companies. The firm typically invests $10m to $20m per company.
The firm received capital from pension funds, university endowments, foundations, and insurance companies, according to a statement. The original target of the fund was $250m.
“The only reason we got it done is our track record,” James Thomas, a managing partner at Thomas, McNerney & Partners, said. The firm’s other managing partners at the firm are Pete McNerney, based in Minneapolis, and Karen Boezi, based in San Francisco.
Fund targets $100m for investment in Iraq
Two US-educated Arab entrepreneurs have launched a fund targeted at $100m for investment in the reconstruction of Iraq. The fund will be managed by a firm named Amwal, which was founded two years ago by Yousef Al-Essa, a Harvard Business School graduate, and Mohamed Sarhan, a graduate from Duke School of Law, who previously practiced corporate law in New York with White & Case.
Amwal emerged from a business plan competition organized by investment bank Morgan Stanley. It is backed by high net worth individuals and institutional investors including TekBanc, the venture capital arm of the Kuwait Fund for Arab Economic Development, and the National Bank of Kuwait.
The firm has so far received commitments of over $50m and hopes to close the fund in another four to six weeks. Most of the money will be invested in Iraq’s tourism, real estate, telecommunications services and in oil and gas infrastructure sectors. The fund will be a co-investor in most projects. The fund is expected to be fully invested within two years and expects to return proceeds to investors in five to seven years.
Merrill Lynch rebuilds placement team
Merrill Lynch has replaced six of the seven placement professionals that left the firm in February to join financial services boutique Lazard Freres & Co. Kevin Albert, who leads the Merrill Lynch placement agency, said the firm is now soliciting new business, which was put on hold after the defections.
Joining Albert in the New York office is Courtney Zierden, a former high-yield finance professional for Merrill Lynch. Other new hires include Lisa Chavez, formerly of Pacific Corporate Group, where she covered the New York City retirement systems. The group also hired David Whitehouse, who formerly worked in Morgan Stanley’s structured products division. Ed Ho, who worked in Merrill Lynch’s fund-offunds placement business, and Juan Jimenez, who worked in the origination department, round out Merrill’s new hires.
In March, Merrill Lynch recruited Christian Dummett, the former head of UK bank Abbey National’s private equity unit, to head up the group’s London office.
Intel VC chief Vadasz steps down
Intel Corp announced the retirement of Leslie Vadasz, executive vice president and president of the computer systems giant’s venture capital arm Intel Capital, effective June 1. Vadasz, who established the division in 1991, will be replaced by Intel vice president John Miner, the unit’s general manager.
Vadasz joined Intel in July 1968, to oversee the development of semiconductor products. He had previously worked at Fairchild Semiconductor International, the company Gordon Moore and Robert Noyce departed to found Intel. Vadasz was hired by fellow Hungarian émigré Andy Grove, who is now Intel’s chairman.
In October 1970, Vadasz’s team introduced Intel’s first successful product, the 1103 dynamic random access memory chip. Vadasz also led the team that designed the world’s first erasable, programmable read-only memory program and the 4004, the world’s first commercial microprocessor that was introduced in November 1971.
Hamilton Lane hires four execs
Private equity advisory firm Hamilton Lane Advisors has hired four executives, including a new research chief, after its previous research head and five other executives left to form a new firm.
In April, a group led by Hamilton Lane principal Bradley Adkins departed to found Franklin Investment. The defectors included Hamilton Lane vice presidents Michael Bacine, Karl Hartmann and James McGovern and former Hamilton Lane associates Neil Mowery and Ryan Chowdhury.
Hamilton Lane has appointed Alexander Cheung, a former college economics instructor who has managed technology and science hedge and mutual funds, to succeed Adkins. Cheung was previously head of research for Long Bow Capital Management, overseeing science and technology hedge funds.
Richard Hoff and Joseph Pavalone have been named associates. Hoff, a former Merrill Lynch executive, worked for General Motors’ asset-management business for four years. Pavalone was a partner at merchant bank Konquer Capital in Philadelphia and spent six years as an economist at the US Department of Labor, where he helped compute the Consumer Price Index.
Hamilton Lane also added Janet Bauman, an attorney with Sidley Austin Brown & Wood in Chicago since 1996, to its legal staff, replacing Hartmann.
NVCA names Warburg Pincus pro Jeffrey Harris as chairman
The board of directors of the National Venture Capital Association (NVCA) announced at its 2003 annual meeting it unanimously elected Warburg Pincus managing director Jeffrey Harris to serve as its chairman for the coming year.
In his role as NVCA chairman Harris will be responsible for setting the public policy agenda and overall strategic direction for the association, which represents 470 venture capital and private equity organizations. He joined the NVCA board in 1998 and served as treasurer, as a member of the executive committee, and also chaired the 2001 NVCA annual meeting. Harris succeeds Howard Cox of Greylock, who has completed his one-year term.
I look forward to serving the venture capital community as chairman of our industry’s leading organisation,” Harris said in a statement. “The NVCA plays a very important role advancing the interests of the venture capital and entrepreneurial communities.”
The NVCA board also announced seven new directors who will each serve four year terms: Guy de Chazal, Morgan Stanley Venture Partners; Dennis Dougherty, Intersouth Partners; Ansbert Gadicke, MPM Capital; Walter Kortschak, Summit Partners; Heidi Roizen, Mobius Venture Capital; Salem Shuchman, Apax Partners; and Lip Bu Tan, Walden International.
Vestar co-founder Melwani arrives at Blackstone
New York-based The Blacktsone Group announced Prakash Melwani, a founding partner of buyout firm Vestar Capital Partners, will join Blackstone’s private equity group as a senior partner.
Melwani, who co-founded Vestar in 1988, was that firm’s chief investment officer. Previous to that, he was with the management buyout group at First Boston Corp and with NM Rothschild in Hong Kong and London.
According to Blackstone Group’s vice chairman Hamilton James, Melwani will not focus on a specific sector. “He’s got a lot of experience in consumer products, where we don’t have a great deal of operational depth, so that will certainly be one area where he takes the lead,” James said. “But given his seniority, I expect he’ll be able to help us on several fronts.”
Carl Eibl joins Enterprise Partners as MD
San Diego-based venture capital firm Enterprise Partners has appointed Carl Eibl as a managing director and chief operating officer. Eibl was previously president and chief executive officer of Maxwell Technologies, a publicly held manufacturer of electronic components and systems, from December 1999 to April 2003.
Enterprise Partners is the largest venture capital firm in Southern California, with more than $1bn in assets. The firm targets investment opportunities in emerging growth companies in the networking and telecommunications, enterprise software, semiconductors and computing, and life sciences sectors.