Silver Lake CEO Predicts Private Equity “Golden Age”

The CEO of Silver Lake, a large private equity firm focused primarily in technology and growth industries, has a rosy prediction for the near future of private equity.  Silver Lake CEO and co-founder, Glenn Hutchins, forecasts “The financial markets may be on the cusp of a new ‘golden age’ for private equity.”

The financial crisis which has brought ruin to many private equity firms and their portfolio companies may now be ending as credit markets open up and the stock markets recover.  Hutchins points out some important and promising indicators but he does not provide a clear explanation for why it will be a “golden age” rather than simply a return to average private equity activity.  After all, even a very modest recovery in the industry will be seen as a significant improvement but it would still fall short of the boom a few years back.

“Now that the sort of panic of ’08 is over and capital markets seem to be returning to some degree of normality … companies will be able to access debt and equity markets like they have in the past. And that is no surprise,” Hutchins said.

But he added that investors needed to be mindful that valuations in 2007 should not be defined as normal. They were an “overshoot in another way,” he said.

“Now risk premiums are at attractive levels. Investors are being paid to take risk again. That means when you look back on this, when you get back to economic recovery, this will have been a good time to invest,” Hutchins said.
 
“If you need financial engineering to enter a deal and multiple expansion to exit a deal, then your business is fundamentally challenged,” Hutchins said.   Source

Read more about Silver Lake at our Private Equity Tracker profile.

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4 More Firms Settle in Placement Agent Pay to Play Scandal

The use of placement agents has come under fire following a public investigation into the practice and investigations into whether a pay-to-play scheme is used in attracting capital from pension funds.  The most recent development is that New York Attorney General Anthony Cuomo’s investigation into pay-to-play arrangements between the state’s pension fund and placement agents for private equity firms has forced four more firms to settle.  Reforming the current system has been met with some resistance especially from firms who argue that outlawing the use of placement agents puts smaller and new private equity firms at a significant disadvantage in raising capital.

The four private equity firms are: Access Capital Partners, Falconhead Capital, HM Capital Partners and Levine Leichtman Capital Partners.  Each has agreed to adopt the rules proposed by Mr. Cuomo barring the use of placement agents to attract funding from pension funds.  Additionally, each firm will pay a total $4.5 million in damages.  Carlyle Group and Riverstone Holdings already settled with the Attorney General. 

“With seven firms now having signed our code of conduct, momentum is building in the industry to make our code the national standard to eliminate pay-to-play in public pension funds across the country,” Cuomo said.

Six people have been indicted so far in the scandal at the New York State Common Retirement Fund. Two have pleaded guilty for their role in the scheme which paid kickbacks to a pair of top aides to former New York Comptroller Alan Hevesi, whose office oversees the Common Retirement Fund.

HM Capital and Falconhead both employed a firm run by a key Hevesi aide indicted in the scandal, Hank Morris, while Access and Levine Leichtman unknowingly hired firms that split fees with Morris. Access had hired Barrett Wissman, who has pleaded guilty for his role in the pay-to-play scheme, who in turn allegedly paid off Morris to win the firm business.  Source

Meanwhile, the SEC’s proposed guidelines that aim to clean up the pay-to-play system may have a very damaging effect on new and smaller private equity firms.  The current system (ethical, or not) enables small and newly launched private equity firms to net capital from investors that it otherwise probably would not have access to.  The big buyout shops are able to use name recognition and a proven track record to entice investors without the need of placement agents, although some big firms use them anyway.

Without using such agents, small and new funds will have a tougher time raising money, critics say. While large, established firms are well known enough to simply contact a pension fund directly, smaller funds without a brand or history have a far tougher job getting heard.  “I think the proposal’s a bit draconian, particularly on banning placement agents,” said Steven Kaplan, a professor of finance at the University of Chicago.

Supporters of the placement agent industry — which includes brand name firms such as Credit Suisse’s (CSGN.VX) placement agent unit and Blackstone Group’s (BX.N) Park Hill Group — argue that their role has no similarity with political fixers, and they should not be tarred with the same brush.  Source

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Private Company Reader’s Digest Files for Bankruptcy

Since 2005, Reader’s Digest has struggled to overcome heavy losses which finally led the company to file for Chapter 11 bankruptcy this week. Reader’s Digest went private in 2007 under private equity backing from Ripplewood Holdings in a transaction valued at $2.8 billion. The firm aims to restructure its debt through the bankruptcy process but plans to continue operations. Through its Chapter 11 filing, Reader’s Digest can trade senior debt for equity (a total of $1.6 billion) and hopefully regain its financial footing. Here is a news video that gives more background to the possible errors made by Ripplewood Holdings when purchasing Reader’s Digest, most notably overpaying in the buyout boom days.

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Buyouts Under Pressure in Credit Crunch

As the economy falters, several major private equity-backed companies have filed for bankruptcy revealing a grim insight into the recession’s impact on private equity. A new article shows how private equity buyout firms are feeling the squeeze of the credit crunch.

While earlier this week a report showed that salaries and bonuses were staying strong for private equity firms despite the financial crisis, it appears that many companies acquired by private equity firms are now struggling under the amount of debt used for the buyouts. The New York Times has a critical article that points toward private equity as a contributor to the United States’ struggling economy:

Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble uphuge swaths of industries and some of the biggest names — Neiman Marcus, Metro-Goldwyn-Mayer and Toys “R” Us.

Linens ’n Things, a big retailer owned by the private equity firm Apollo Management, filed for bankruptcy protection this year.

The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time.

The piece presents a bleak outlook for those who are working for an acquired firm and those who invested in private equity too, as returns are expected to decrease in the near future:

People who work for companies owned by private equity firms could lose their jobs as firms cut costs to meet their debt obligations. And private equity firms like Apollo Management, which owns Harrah’s and Linens ’n Things, face deep markdowns on the value of their holdings.

Pension funds and college endowments that invested their money into in these funds in recent years hoping for big returns are likely to suffer as well, and many of those investors could face a cash squeeze, as they are forced to hold onto their investments for years until the economy recovers.

To read the full article click here.

Tags: Private Equity Buyouts, Buyout firms, LBO, leveraged buyouts, credit crunch, private equity and the credit crunch, private equity, Buyouts, buyout firms, private equity firms

Alchemy Partners | Private Equity Profile

The following piece on Alchemy Partners, founded in 1997, is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: Founder Jon Moulton Resigns from Alchemy Partners

(9.3.09) Jon Moulton has quit the private equity firm he founded in 1997, Alchemy Partners. However, he did not “go quietly into the night” rather his decision to leave followed a board-room blowup where he was pushed out by other partners. His ire seems primarily directed at managing partner, Dominic Slade, who will succeed Moulton.

Read whole letter…

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Montagu Private Equity | Private Equity Profile

The following piece on Montagu Private Equity is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: Montagu Private Equity is looking to sell British Car Auctions, Europe’s biggest used vehicle auction company, for £600million, according to reports. If true, it would bank a tasty £150million profit on the business that sells over 800,000 vehicles every year. It bought the company three years ago from a consortium of investors, including Lord Ashcroft, current deputy chairman of the Tory Party.

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InterMedia Partners | Private Equity Profile

The following piece on Brookstone Partners is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: Vibe Media Group, publisher of hip-hop magazine Vibe, shut down in June, as the poor economy led to declining advertising revenue. Vibe has since been acquired for an undisclosed price by InterMedia Partners, a private equity firm.

InterMedia said it plans to resume publication of Vibe in November as a quarterly magazine. The operations of Vibe are to be integrated with those of Uptown, another urban lifestyle magazine InterMedia owns. Publishing veteran Jermaine Hall has been named as the new editor-in-chief of Vibe, and the new business will be known as the Vibe Lifestyle Network. Source

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Warburg Pincus LLC | Private Equity Profile

The following piece on Warburg Pincus is being published as part of our Private Equity Tracker Tool, our daily effort to track private equity firms in the industry.

Resource #1: Warburg Pincus is completely exiting its three year old investment in Dainik Bhaskar group flagship DB Corp.

The PE firm will sell out its 7% stake in the company as a part of the initial public offer of DB Corp. DB Corp is coming with an issue of 24.78 million shares of which 12 million shares are on offer for sale from Cliffrose, an investment arm of Warburg.

According to VCCircle estimates the cost of investment for Warburg is around Rs 125/share after taking into account changes in capital structure including bonus issue. Source

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Private Equity Firm’s Ideal Acquisition Strategy

While venture capital firms tend to invest in earlier stage growth companies, private equity groups tend to focus on more mature businesses, often contributing both equity and debt (or some hybrid) to the transaction. Private equity investors (also called financial sponsors or buy-out firms) invest in non-public companies and typically hold their investments with the intent of realizing a return within 3 to 7 years. Generally, investments are realized through an initial public offering, sale, merger or recapitalization.

Written by: Andy Jones, President and Founder of Private Equity Info.com

Tags: Private Equity Acquisition, private equity info, private equity strategy, buyout acquisition, buyouts, private equity buyout