The Worrying Debt Facing 10 Large LBO’s

Buyout deals financed between 2005-2007 are “drowning in debt” and struggling to refinance in this economic climate.  Moody’s Investors Service has tracked the performance and finances of companies owned by the top 14 buyouts firms as well as non-mega buyouts in its report, “$640 Billion & 640 Days Later: How Companies Sponsored by Big Private Equity Have Performed During the U.S. Recession” and found that six are considered distressed and four have defaulted. 

I’ve discussed this mounting pile of debt previously when debating the so-called “comeback” of private equity, and I still believe it is an obstacle facing the industry that must be addressed before the bigger buyout firms can execute new deals consistently at a pre-recession level.  Buyout firms may have been correct to continue to use borrowed capital to keep their failing portfolio companies afloat in the crisis, but Moody’s may be correct in suggesting that several large investments are due to default anyway.  I have a suspicion that the Moody’s estimate may be exaggerated to some extent but there is no denying the debt issue.

It appears these deals were financed with the hopes that the recession would be shorter or that the buyout management would be able to turnaround the company enough to scrape by in the crisis.  However, most of these firms are consistently under-performing and hope for returning to profitability is dwindling.  An important note is that very few of the companies held by private equity firms received capital infusions to reduce their debt, those buyouts injecting capital were likely trying to avoid covenant violations. 

The report found that deals by Cerberus Capital Management LP and Apollo Management Lp have performed the worst among their peers. Four of Cerberus’ six buyouts are in distress or in default, and about two-thirds of Apollo’s companies are in equally dire straits. However, these firms have focused more closely on distressed targets than their peers covered by Moody’s, including Kohlberg Kravis Roberts & Co., Blackstone Group LP (NYSE:BX), Welsh, Carson, Anderson & Stowe and Madison Dearborn Partners. Additionally, the revelation about problems in Apollo’s and Cerberus’ portfolios was already well known thanks to the high-profile bankruptcies of Cerberus’ Chrysler LLC and Apollo’s Linens ‘n Things Inc.

“These mega-deals continue to under-perform,” said John Rogers, Moody’s senior vice president. “As with Harrah’s, the announced debt exchange at the former TXU is only the first step in addressing its over-leveraged capital structure.”

Only three of the biggest 10 LBOs remain above the distress level, according to Moody’s:

• HCA Inc., bought by a private equity consortium for $35.3 billion;
• First Data Corp., another “Large Club” LBO, acquired for $29 billion; and
• Hertz Global Holdings Inc. (NYSE:HTZ), bought out by a private equity consortium led by Carlyle Group for $15 billion in 2005.   Source

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Tags: LBO debt, leveraged buyouts, leverage, buyout, private equity deals, debt, restructuring, refinancing

I recently heard Eben Pagan speak in LA at a marketing conference on how business is typically conducted.  I was reminded of that talk while I was in Boston last week for our Hedge Fund Premium networking event (which was great).

The streets in Boston were actually old cow paths that the city decided to just pave over to create the roads of the city.  The result, is a very complicated maze of one way streets which really only make sense to the most veteran cab drivers.  This is not the cows fault they simply walked typically in the direction of least resistance.  The point here is that nobody stepped back and looked at where the cows had wandered and asked if there was a better way to get the project done…they simply followed where cows had walked in the past.

Pagan’s point in telling this story was that in every business, every form of marketing and even within the hedge fund business there are cow paths everywhere.  Are you and your business wandering around on cow paths of what others have done in the past, or are you building a super highway straight towards your goal?

Areas to examine for hedge fund managers could including hiring, capital raising, employee management, performance reporting, transparency, governance, and investor relations.  Our team now often steps back and looks at competitors, other industries, and steps to the work we are trying to complete to see if there is a more direct or efficient way of completing it.  Hope this story helps.

- Richard Wilson


Tags: hedge fund cow paths, hedge fund processes, business processes of hedge fund managers, hedge fund managers and how they operate their small businesses

I recently heard Eben Pagan speak in LA at a marketing conference on how business is typically conducted.  I was reminded of that talk while I was in Boston last week for our Hedge Fund Premium networking event (which was great).

The streets in Boston were actually old cow paths that the city decided to just pave over to create the roads of the city.  The result, is a very complicated maze of one way streets which really only make sense to the most veteran cab drivers.  This is not the cows fault they simply walked typically in the direction of least resistance.  The point here is that nobody stepped back and looked at where the cows had wandered and asked if there was a better way to get the project done…they simply followed where cows had walked in the past.

Pagan’s point in telling this story was that in every business, every form of marketing and even within the third party marketing business there are cow paths everywhere.  Are you and your business wandering around on cow paths of what others have done in the past, or are you building a super highway straight towards your goal?

Areas to examine for third party marketers could including hiring, capital raising, employee management, performance reporting, transparency, governance, database management, content production, and investor relations.  Our team now often steps back and looks at competitors, other industries, and steps to the work we are trying to complete to see if there is a more direct or efficient way of completing it.  Hope this story helps.

- Richard Wilson


Tags: hedge fund cow paths, hedge fund processes, business processes of hedge fund managers, hedge fund managers and how they operate their small businesses

Capital Raising With Email Marketing Best Practices

I am syndicating the following article from Richard Wilson of Hedge Fund Blogger.  I have worked with Richard for years and he is extremely knowledgeable in capital raising for hedge funds.  The recent poll on this blog has led me to enlist Richard’s help in providing more articles on fund marketing.   The best practices he employs are very applicable to private equity, given that you are targeting the same investors for alternative funds. 

Marketing has evolved to include e-mail marketing in many funds’ capital-raising strategies.  Similarly, businesses and start-ups searching for capital have also successfully implemented email marketing.  While a large amount of marketing remains more personal, either face-to-face meetings or by phone, email has become an accepted and even preferred form of contact.  Therefore it is essential to have experience in copy writing. 

I worked as a risk consultant and capital raiser for 7 years before starting my own firm.  During the last few years of those positions I was responsible for raising most assets on an email and phone-based system and I have slowly picked up some tips for capital raising since then.  I started my own firm 2 years ago and since then I have sent and received over 800,000 emails.  Our business is so email-based that we have been forced to study best practices within this space to improve our efficiency at connecting with potential clients.

Most CEO’s don’t invest their time or put much importance on managing email communications.  One of my favorite quotes by Brian Tracy is that if you don’t what others won’t you will get what other’s don’t.  If you invest your time in increasing your effectiveness at email marketing you will have an edge over others.

Tonight I’m speaking on email marketing for capital raising.  I will be sharing best practices in reaching out to potential and current investors through writing copy and using email marketing best practices.  While 99% of those reading this blog will not be able to attend the event we will be posting a recorded video of this discussion to Hedge Fund Premium and sharing some of the tips below within this post:

Email Marketing Best Practices

1. Understanding Importance of Copy:  What is the difference between a $1 and a $100 bill? The message on the paper.  The message on your email, the message on your investor letters, the message on everything you write makes the difference between it being worth $1,000 and $100,000.  I think that sales copy writing is consistently under-valued and overlooked by business and investment professionals of all types.  One of my best tips for email marketing would be to simply not overlook the power of a carefully constructed email marketing campaign or well written piece of communication.  
2. Use the professionals first name within the subject of emails to them – Marketing Sherpa 2008 study showed this increased open rates by 30%, using both the first and last name increased open rates by 22%. 
3. Focus on the Headline:  The most important part of any piece of copy is the headline.  Often times over email the headline of the email is a slight variation of the subject line, perhaps the subject line minus the person’s first name.  Focus on fitting a benefit and then the chain reaction of that benefit into the headline if possible.  ”Double Your Capital Raising Resources to Cultivate More Investors Each Day”  We have found that putting the benefit after your firm name is most effective.  Just be careful not to promise benefits that are odds with your compliance department.  
4. Focus on the Start:  Hook the reader within the first paragraph.  Make sure the first paragraph is no longer than 2 sentences and provides a very concise summary as to what will be discussed within the following message. If possible try to fit in both what the benefits will be of hearing this information and what the dangers are of not paying attention to this information.  Psychology studies consistently show that professionals are almost twice as likely to listen more closely and take action on information related to a fear or some negative result rather than some potential benefit or positive outcome.  This does not mean you should scare clients into working with you, but you should hook readers using framing which mentions the positive as well as negative consequences of not taking action.  The recent use of email browsers which let you preview the first 50-150 words of email messages make the start of your email even more important.
5. Use Professional Email Distribution Services: Use a professional email distribution services such as Aweber, this costs $10/month or less to start using.  By using this service your emails will be delivered more often, your campaigns will be more organized and the service will more than pay for itself through saving you and your time valuable time.  Make sure that whatever service you use, you consider opt-in confirmation and enable an unsubscription link at the bottom of each email you send. 
6. Automate Relationship Development: Use automated follow up emails.  Write a series of 20 educational emails covering industry white papers, industry findings, commonly misunderstood terms, and information about your fund.  Once you have qualified an investor, ask for their permission to opt into an email list which will automatically email these professionals once a month for the next 20 months. If you deliver value within each of these 20 emails your further inquiries will be well received.  We currently use Aweber to send out automated emails to over 50,000 professionals each month. 
7. Use Stories:  Whenever you are writing an email or sales letter try to incorporate a story of some type. How was this product created? How did your career and experience evolve and bring yourself to this point where you have gained this knowledge?  If you scroll up to the beginning of this post you will see that I have a short story about my own experience with email marketing which led me to write this article.
8. Picture & Signature:  End your communication with a picture of the professional on your team which is held out as the communicator or leader.  Make sure that a real scanned signature and professional picture are included to help readers connect with your team.  

I hope these tips help you improve your email marketing campaigns!

To learn more on fund marketing read Private Equity Fund Marketing

Also read how to create a Private Equity Pitch Book

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Tags:  private equity, private equity management, fund marketing, best practices, email marketing, fundraising, capital raising by email, fund raising by email

Debt-Heavy Portfolio Companies Taken Over By Lenders

Private equity firms are struggling to protect their portfolio companies from bankruptcy.  As the recession continues, several private equity-backed companies have been taken over by lenders causing the private equity investors to lose their stakes.

Recent examples include CPI Group (Europe’s biggest book printer), Linpac (maker of the plastic packaging for McDonald’s), and Navimo (producer of yachting accessories).  The private equity buyers–such as CVC Capital Partners and Montagu–have lost control of these companies in the recession and there are fears that other debt-laden companies may fail as well. 

What do the maker of McDonald’s fast food cartons, Europe’s biggest book printer, and a French yachting accessories group have in common?
They are all companies bought by UK-based private equity groups before the credit crunch, which have run into trouble because of excessive debts and been taken over by their lenders in the past few weeks.

The next wave could include Hit Entertainment, the Apax Partners-owned media group behind Bob the Builder and Thomas the Tank Engine; Gala Coral, the betting and bingo group owned by Cinven, Candover and Permira; and Foxtons, the London estate agents owned by BC Partners.
The growing list of credit crunch victims illustrates how hard private equity groups are having to fight to protect investments.

The latest example is Linpac, the Birmingham-based maker of plastic packaging for McDonald’s and Tesco, which has been taken over by lenders led by Lloyds Banking Group in a restructuring that halves its debts to about £320m ($526m).  Source

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Tags: Private equity, private equity firms, private equity companies, company lenders, buyout financing, restructuring, private equity assets, buyouts