Veteran private equity firm Thomas H Lee Partners stayed on the sidelines for most of 2009. Now cautiously back in deal-mode, THL last month agreed a $1.1bn take-private for inVentiv Health, a life sciences and pharmaceutical service provider. PEI recently asked co-president Scott Sperling to share his views on the state of the private equity industry and developments at THL.
Has debt availability improved?
The financial markets – particularly the credit markets – have improved dramatically over the past 12 months. The high-yield market is about as robust as we’ve seen it and the bank market is approaching more normalised levels. As a result, we’re seeing overall deal leverage ratios in what I would call the long-term normalised range of 5x to 6.5x [debt to equity] and over the course of the last 90 days, almost everything has been tilted toward the higher end of that range. That puts us back into a situation where the availability of debt is at or slightly above the long-term averages for private equity leveraged deals.
Does that mean more deals on the horizon?
I think the anticipation was that we would be in an environment like one of the ones we saw coming out of the ’91 and ’01 recessions, in which we would be able to buy companies at multiples ranging from 5 to 8 times EBITDA – that didn’t happen this time, partly because of the enormous jump in the public equities markets. As a result, most of the few transactions that you’ve seen happen in the last months are at well above 8x… the result is a reasonably wide gap between sellers and buyers. We’re probably going to be in this period for a while; therefore there’s not going to be the great deluge of transactions that you might have expected.
Has THL expanded its franchise in light of changed opportunity sets?
We’ve had a credit business for the last few years, which recently added a public BDC [Business Development Company] as one of their arms. It’s a business that has been focused largely on mezzanine lending to small to middle-market companies. They’ve done a really outstanding job for us and now with the BDC, they also have access to some additional capital to deploy in their strategy.
How has THL confronted industry-wide pressure from LPs to reduce fees?
We haven’t had much in the way of that pressure. We’ve had good relationships with our LPs. The 2006 fund we raised, we were very judicious in putting it to work in the ‘07/’08 period – we only did one deal in each of those years, so we have the bulk of the money left. I think there has been more pressure on the firms that put their ‘06 funds to work really quickly and then raised another big fund right away. In those situations, the LPs are looking at the aggregation of the management fees and deciding it may be too much.
THL’s stewardship of Simmons Bedding, which filed for bankruptcy in late 2009, was a key focus of a series of extremely negative articles on the LBO industry published last year by the New York Times. Did LPs find this concerning?
No, I think LPs look at the nature of the headlines and do their own evaluations as to the substance. Whatever the headlines are, the fact is, [LPs] felt, based on a detailed knowledge of the facts, that we did what was in the best interest of the fund and that it was done appropriately. The company, during our ownership, increased its investment level, built numerous new plants and took market share from its competitors. If you run a company well like that, it generally allows you to do recaps, and when the recaps were done, nobody complained about them. S&P and Moody’s didn’t complain at the time; they noted the company’s strong operating and financial performance.
In retrospect, when you have the worst housing crunch ever and the entire industry sees a sharp, record drop-off in demand, and your plants are running at relatively low utilisation because of that, you are going to make adjustments in employment levels like any other company would. Even with that, Simmons was still taking market share during that period – so it was outperforming its competitors. Our LPs did make a small profit on the investment and Simmons continues to be an industry leader largely because of the actions taken under our period of ownership.
What is your biggest concern for the private equity industry going forward?
Maintaining investment discipline is going to continue to be important as we go forward. We did go through a period where there was some level of excess in the industry, particularly in the first half of ’07. When leverage levels get too high, all the value from that leverage is transferred to the sellers, which is not a smart thing. I think the industry will work hard to avoid doing that again.