Fundraising is still in the doldrums as an estimated 90 funds stopped their fundraising process entirely and many funds have lowered their target amounts. Fundraising fell to a six-year low in Q3 2009. Surely some of the drop in fundraising is private equity managers hesitating to throw their hat in the ring while the economy is still unstable, but investors are not making new commitments–probably for the same reason. In a recent Preqin survey, only 41% of surveyed investors reported making a new fund commitment in the first half of 2009.
Although private equity firms are having trouble raising capital, the survey found that the majority of PE funds are hoping to make new private equity investments in 2009. 54% of firms surveyed said they expect to make new deals this year and 25% plan to invest in 2010.
As the graph below shows, private equity fundraising fell yet again, to its lowest point in six years at $38 billion (45% drop from last quarter).
Considering a Private Equity Fund’s Past Performance
Selecting a private equity fund to partner with or invest in can be difficult. With so many choices and limited information on many buyout firms, investors should be careful in deciding what firm is best suited to their risk appetite and specific needs. This is the second article in a series of four on how to choose a private equity fund. To read the first article, see Sector Specialization. The following is explains how a private equity fund’s past performance and individual deals help in deciding what private equity firm to partner with.
Past Performance
Along with sector specialization, another important factor in selecting a private equity fund is the firm’s past performance. It is worth laboring over all aspects of the private equity firm’s track record, looking at not only each investment and fund, but the overall profits and losses for the firm. The firm’s history will reveal what deal structure they prefer, their use of leverage, minority vs. controlling interest and how their returns match up to their predictions.
When looking at the performance, if the firm has launched multiple generations of funds examine how consistent each fund performs. Is the firm a consistent performer, or do some of its funds produce high returns while others collapse? Investors are often satisfied with a solid private equity firm that has proven less volatile even if it means that you do not receive as high of a ROI as the riskier fund. As the numerous investment frauds this decade show, if a fund is promising unheard of returns there is probably a reason for it–and it’s often illegal or at least unethical practices. (After all, Bernard Madoff promised some investors annual returns as high as 46%).
If a business is looking for a buyout or significant private equity investment, here are some factors to consider:
What percentage of transactions placed under letter of intent are actually closed?
How do past sellers feel about their dealings with the private equity firm? Are they satisfied or do they feel ignored or taken advantage of? It’s important to get a sense of the buyout firm from people who have worked with the firm but are not on the payroll.
Did the firm keep with the original guidelines in the letter of intent? Although the document is usually non-binding, adherence to the core agreements builds a foundation of trust for both parties.
How professional was the transaction process? Especially if you want to be the primary decider in the direction of business, you should examine how past partnerships have succeeded (and failed). Although buyout firms do sometimes takeover a controlling interest of a company–in spite of the owner’s objections–it is not always as dramatic as the owner may suggest. In some cases, the private equity firm and the company have already agreed on terms but the business owner attempts to back out later. Similarly, if a disagreement resulted in litigation, the owner or buyout firm may be bitter and give a less-than-truthful take on the deal. In other words, be sure to get both sides of every deal.
Some of the above factors were partly based on Module IV of Private Equity: History, Governance, and Operations. As always, the preceding article is no way a means of private equity, financial advice or solicitation to sell private equity or investment products. Please seek a qualified financial or legal adviser.
Selecting the Right Private Equity Investment Fund
Selecting a private equity fund to partner with or invest in can be difficult. With so many choices and limited information on many buyout firms, investors should be careful in deciding what firm is best suited to their risk appetite and specific needs. The following is partly based on a section in Private Equity: History, Governance, and Operations. This is the first in a series of articles on how to choose a private equity fund:
Sector Specialization
The first factor to consider is sector specialization. Many funds primarily invest in a small number of sectors and seldom deviate from these areas. This should not be seen as a deficiency or an alarming lack of diversification, rather this approach ensures that the private equity firm is knowledgeable about the industry and will be more likely to predict changes.
A frequent downfall for private equity firms or venture capitalists is that they invest too far from what they understand. A buyout fund that has always invested in technology companies may run into trouble buying out a manufacturing firm. The complexities of the industry will be a major struggle for a fund that has no experience in production and distribution of supplies, competitive pricing, expanding the customer base, keeping the workers satisfied and compensated as well as any number of aspects that are unique to the manufacturing company.
Additionally, less specialized funds may be more likely to invest in volatile sectors that they do not fully understand, thus exposing its investors to significant losses. Perhaps the most dangerous and common trait among less specialized funds is that they will chase whatever industry is currently “hot.” Traditional investors will know that this is a flawed strategy, as the area that is popular and generating big returns is often a bubble on the brink of bursting.
This was most evident in the late investors in the internet companies in the very end of the 1999 and beginning of 2000. These investors followed the exciting dot-com firms that had been making big returns, but in the first quarter of 2000 the bubble burst. Stock prices plummeted leaving investors with sometimes total losses on their investments and once heavily capitalized companies filed for bankruptcy. A way to prevent this type of exposure is by investing with a fund that invests in a limited number of sectors and is dedicated to improving companies within that area rather than only investing in the popular investments.
Another benefit to investing in a specialized private equity fund is that the fund will have a wealth of industry relationships. This will be useful throughout the investment; in the day-to-day operations of the company, facilitate possible mergers or acquisitions within the industry, access to industry-seasoned executives and other resources that would not be immediately available to non-specialized funds. Perhaps the biggest hazard for selecting a highly-specialized fund is that it could be more susceptible to industry declines. In the current recession, many industries are struggling, such as real estate. Real estate private equity funds were therefore hit hard by the collapse in the housing market and the changing property valuations.
Overall, when selecting a private equity fund, specialization in a limited number of industries offers a number of long-term benefits. The fund’s management will be more likely to anticipate changes in the industry, have helpful contacts in the sector, have an understanding of a portfolio company’s operational needs and problems and avoid chasing the “hot industry.”
Private Equity at the World Economic Forum in Davos
It may be an overstatement to say that this year’s meeting in Davos for the World Economic Forum is the most important in recent years. However, with the financial crisis, a new American president and global economic uncertainty it may be an accurate statement. Significant private equity firms were represented at the World Economic Forum, among those firms are the Carlyle Group and Bain Capital.
David Rubenstein of the Carlyle Group took a few moments for an interview at the World Economic Forum. It’s an interesting interview especially in light of the turbulant global economy.
To begin, Rubenstein is asked about the likelihood of regulating private equity to which he answers that hedge funds are more likely to face important changes in regulation than private equity. While Rubenstein is concerned about the ability to obtain leverage to finance big deals, he seems a bit more optimistic (consistent with his attitude over the last few months). When asked what percentage of the deals executed within the last three years will end in default or restructuring, Rubenstein concludes that very few will default but almost all will face some sort of restructuring or need some form of debt. As other industry commentators have noted, Mr. Rubenstein adds that prices still need to adjust to return to normal and attractive levels. For more information on the Carlyle Group visit the firm’s private equity tracker profile.
Another great video to come from Davos is the interview with Bain Capital’s Managing Director Stephen Pagliuca. This interview focuses primarily on the issue of failing banks in relation to private equity.
Mr. Pagliuca sees the solution to the banking crisis and the return to obtaining loans from banks as clearing the poor loans off the banks books. He also calls for raising the minimum capital requirements for banks because he thinks the banking system has been overleveraged. Like Mr. Rubenstein, he defends private equity from being blamed for the current financial crisis.
Tags: Private equity, private equity firms, private equity david rubenstein, private equity bain capital, private equity carlyle, private equity capital, private equity world economic forum
A brief story of optimism in the private equity market is that of CVC Capital Partners. The private equity firm is noted in the Wall Street Journal for its ability to raise capital while many private equity firms are struggling.
For CVC Capital Partners, finding private investors is not easy but not impossible. Despite the economic hurdles that make fundraising so difficult lately, the European-based firm managed to pull in more than $14 billion in its latest round of raising capital. The most impressive part of CVC’s success in raising investments for the sizable fund, its fifth, is that all the capital was raised in less than a year–after the biggest financial troubles emerged.
After such an impressive round of fundraising, CVC Capital must now look at where to invest the capital raised. This task is exceedingly difficult for CVC, and other private equity firms due to the reluctance of banks to lend debt to finance major deals. However, CVC Chairman Michael Smith is confidant in the fund saying that it is large enough to finance big deals without the help of leverage. Other funds are not so large and are encountering considerable difficulty in the current economic climate. Mr. Smith says of the new fund “It’s about investing in companies for the future and endeavoring to improve them.”
Tags: CVC Capital, CVC Capital Partner, CVC Capital Partners, CVC Capital Partners Fund, Private Equity Fund, Private Equity Tracker Tool, Private Equity Funds, Private equity firms
Protocol Tips When Contacting Private Equity Firms
Private equity firms field a lot of proposals from entrepreneurs and businesses seeking financing, with so many applicants private equity firms have to weed out the non-serious proposals from the professional ones. Even if you are an established company with a great investment opportunity, you could be dismissed because you contacted the private equity firm in an unprofessional or poor manner. Private Equity Info has a great guide to approaching private equity firms, I’ll be following this up with a similar post on finding a private equity contact.
Protocol for Contacting Private Equity Firms
For best results (also the most professional approach), investment bankers first place a phone call to the key contact at the private equity firm for the deal at hand (see prior blog post about how to find the best contact at each firm). This introductory phone call:
provides a brief introduction of the banker and his/her firm (very brief).
gives the private equity professional a “heads up” that the banker intends to send an executive summary.
describes how the opportunity fits within the private equity firm’s stated acquisition criteria or portfolio (or both).
A good script might follow this pattern:
“Hi. My name is Bob. I’m with XYZ Capital in [city]. We currently represent a client operating in the [fill in the blank] market. I noticed that you are active in this sector and think this would fit well with your [fill in the blank] portfolio company. Our client finished the year with $X EBITDA on $Y of revenue and has been growing a Z% per year. I just wanted to give you a heads up that I will be sending you the executive summary.”
While this approach requires more effort, private equity professionals are much more responsive when a banker demonstrates that he or she has done the required homework. The good news – PrivateEquityInfo.com provides the information and research tools to simplify this process for you.
By funneling potential deal flow to private equity firms that is aligned with their investment objectives, and by calling them in advance of sending, you set yourself apart from the crowd… and you will get a good response with this approach.
Private Equity Firms and Portfolio Companies by State
It has been a while since I have been able to post here, but I am now returning updating this blog daily as my schedule has returned to normal. That said, I received some interesting data from Private Equity Info that shows the largest geographical concentration of private equity firms and private equity portfolio companies as well. Private Equity Info sampled over 1,000 private equity firms and more than 10,000 companies held by private equity firms to give an interesting view of where firms are located and where they invest.
Geographical distribution of private equity firms and portfolio companies Private Equity Firms ………… Portfolio Companies
This data shows the high concentration of private equity firms in the industry, with 80% of U.S. private equity firms located in 10 states. The largest concentration of firms are in New York, California and Illinois. The companies held by private equity firms are more widely dispersed by states.
Private equity firms vary in their investment industries, region, size and many other factors but there is a common goal among all private equity firms: to take a company with potential for growth and provide the resources necessary to realize that potential. Private equity firms do this by injecting capital, prescribing a new strategy, restructuring the company or adding new talent to the existing management team. The success of a private equity firm depends on its ability to realize the growth potential of its investments and thereby satisfying investors with profitable returns from the investment.
Private equity firms are always looking for underperforming companies that are not realizing their growth potential either because they do not have the resources necessary for expansion or they are poorly managed. Companies that are underperforming are attractive because private equity talent pride themselves in being able to take the company and turn it into a more efficient and valuable firm, using the resources available through the private equity firm. The private equity firm then hopes to profit from the held company by either holding an initial public offering or selling to another buyer, giving positive returns to the limited partners of the fund.
A key advantage of private equity firms holding a company is that it can focus on long-term needs and changes, unlike many public companies. Investors in public companies may not see the benefit of investing in a company long-term, fearing it would reduce short term investments. But with private equity funds focusing in the long-term, the fund can invest in research and development that may hurt returns in the short-term but create greater returns over time. By utilizing the vast resources available to private equity firms, many companies have profited impressively under private equity ownership. In this way, private equity can be a great way to promote a company’s growth potential.
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.
A private equity firm offers a private placement memorandum to potential investors. The document explains an investment opportunity to potential limited partners, and the firm hopes they will be interested enough to invest capital in the investment.
Private equity firms usually include in the private placement memorandum a wide range of information that a limited partner would like to know when considering the investment. This includes summary terms and conditions proposed by the firm that a limited partner may negotiate if the LP decides to invest. In public capital investment offerings, the Securities and Exchange Commission regulates the document, but a private placement memorandum is not regulated and therefore the material and specifics provided to the limited partners may vary by firm. This article will cover what is most often included in a private placement memorandum, but private equity firms may choose to exclude any of these sections or add one that is not present.
The private placement memorandum is a document for private equity firms hoping to attract investors, and limited partners rely on the PPM to make their decision based on the information presented in it. Here are some general sections of the private placement memorandum:
Executive Summary: Some information usually included here would be the size of the fund, expected close date, and the management team’s experience in past funds. Additionally this section includes a brief description of the General Partner, the investment strategies used, and the opportunities and challenges in the current market.
Firm and Fund Investment Strategies: This is more or less self-explanatory but what you want to present is the firm’s past performance and history; how it has succeeded and what strategies were used. How the firm’s advantages and resources will succeed in the specified market. This section is a detailed overview of the fund’s investment strategy discussing the geographical focus of the fund, stage and relevant factors in its market. This is also an opportunity for the General Partner to present a thorough explanation investment strategy, process, deal sourcing and exit strategy.
Investment Professionals and Committee: This section presents the investment professionals involved in the new fund and explains their role. An especially important detail here is the history and experience of the investment professionals. Principal investors’ records are often included here with current board positions held in portfolio companies of the firm’s past funds. This is important information for the potential Limited Partners to know as it gives them an idea of the firm’s degree of involvement in portfolio companies and the individual partner’s ability to manage a new fund. Second in this section, firms often provide information on the Advisory Board or Investment Committee. This section varies by different firms but often larger Limited Partners will hold seats on the Advisory Board which is of particular importance in for prospective LP’s. This shows the details of the Advisory Board’s members, scheduled meetings, as well as valuation methodology and important factors when considering new investments.
Investment Performance Record: This section varies by firm because of different sizes and especially the difference between how long a firm has been established. Generally, firms use a table format to present the fund’s investment track record. This table usually includes past fund sizes and IRR performances of the funds (typically stated in terms of gross returns rather than individual LP’s net returns over fees).
General Partners and Limited Partners Terms and Agreements: This is where the firm gives its initial proposal of terms and agreements between the General Partner and the Limited Partners. Most importantly, the management fee, General Partner’s commitment the fund, distribution of the capital call schedules and the fund’s cooperative investment policy. Of interest to the investors is the percentage of profits that the General Partner takes, known as “carry”.
Legal and Tax Concerns: Tax treatment varies by whether the investor is U.S. based or non-U.S. based, and this section will briefly address different tax treatments and how it effects the Limited Partners.
Fund-related Investment Risks: This sectiontypically covers three areas of investment risk: business, management and fund risk. Business concerns would address concerns over the investment’s industry and risks inherent to the industry and possible uncertainty in the business environment. The management concerns are usually relationships to other entities, possibly a parent company. The fund-related risks may include cross-fund investments, principal’s co-investment activities or investments in public equities.
Accounting and Reporting: Included in this section is an explanation of the allocation of returns and losses and accounting for stock options. This section gives a schedule for audited and non-audited financial statements that are delivered by the General Partner. This gives Limited Partners an idea of the valuation of their investment and a way for keeping track of their capital commitment.
Again, this is a general overview of the typical sections of a private placement memorandum which may be subject to change by private equity firm, as it is not regulated by the SEC. In the future I will provide an article on the important factors that Limited Partners consider in a private placement memorandum.
Boston is a center for private equity in the U.S., especially in the private equity boom over the last few years private equity has established itself in the Boston business community. Through big local buyouts like that of Toy’s R Us by a Boston private equity group, Bain Capital, and an expanding Boston market for those bigger buyouts but also smaller venture capital deals, Boston’s private equity market has grown substantially.
While New York remains a relatively unchallenged hub for private equity activity, Boston is certainly among the top private equity cities in the country. Although the major private equity groups in Boston compete amongst themselves, they also work together on large deals. This is evident in the recent acquisition of Warner Music Co that was led by two Boston private equity firms, Bain Capital and Thomas H. Lee Partners.
The growth of private equity in Boston has been largely accelerated by the success of large Boston private equity firms like Bain Capital, Thomas H. Lee Partners, TA Associates, Berkshire Partners and Summit Partners. In addition to the more well-known Boston Private equity firms, here is a list of Boston private equity firms that will be updated in hopes of creating a very comprehensive resource for those interested in Boston private equity.
If you represent a Boston private equity firm and would like to be added to the list or you know of a Boston private equity group that is not listed please send an e-mail to Theo@peoblogger.com
Tags: Boston Private Equity, Boston Private Equity Firms, Boston Private Equity Groups, Private Equity in Boston, Venture Capital Boston, Boston Venture Capital, Private Equity Boston
Private equity firms have certainly felt the adverse effects of the global credit crunch, as the number of buyout deals has fallen considerably to a four-year low.
A buyout deal often relies on a large amount of leverage to purchase a majority stake in a company’s equity. The current financial market has sharply limited the credit necessary to carry out these buyout deals, and private equity firms have suffered as a result. For the year-to-date, global buyout activity fell by 74% to $180 billion, a remarkable decline that signifies a decline in buyouts not only in the struggling U.S. market but globally as well.
No Credit, No Deal The major buyout deals made earlier this decade are no longer feasible with banks increasingly hesitant to loan money for potentially risky leveraged buyouts. Private equity firms seem to have resigned to smaller deals for the most part until credit returns to the market. $2 billion is rumored to be the current limit for financing a deal, according to an anonymous buyout executive. This is a far cry from the type of large leveraged buyouts that took place just last year, like the $17.9 billion acquisition of Clear Channel Communications led by Bain Capital and THL Partners. More Hesitation over Buyouts It appears that private equity firms are exercising greater caution when considering buyouts as they fear that the worst of the financial crisis has yet to come. This is not to say that there have been no private equity deals this year, but there has been a marked decline in the number and size of deals, and the private equity firms have relied on other sources of capital outside of bank debt. Recently, private equity has transformed from a strong reliance on debt for financing deals to more available resources like the recent private equity takeover of the Weather Channel with funding coming from GSO, Blackstone’s hedge fund.
The drop in private equity activity is most prevalent in the United States, where buyout activity has fallen 83.5% to only %61.8 billion year-to-date. Many private equity firms are holding large amounts of capital “waiting on the sidelines” to invest once market conditions stabilize. Some private equity firms see distressed market conditions as a positive, seeking to capitalize on the situation by investing the capital that they accumulated and turn a profit off a seemingly negative economic decline.
Change of Strategy The large private equity firms have reacted to the crisis by following the age-old investment strategy of diversifying. K.K.R is reaching into alternative investment areas such as real estate and mezzanine financing. Blackstone has similarly expanded into other areas by strengthening its hedge fund arm, strong real estate business and its M&A advisory unit.
The credit crisis is having obvious adverse effects on the private equity world, and many industry professionals fear that the worst has not been felt yet. However, many private equity firms have been able to survive, and even profit, through creative investment strategies and diverting their focus from exclusively private equity to alternative areas.
New York City is a major hub for private equity activity so I’ve made the following list of the top private equity firms located in New York. In the near future I will be creating more articles based on private equity in New York.
Top 15 Private Equity Firms in New York
Here is a list I’ve made from a list of the Top Private Equity Firms to only show the Top 15 New York Private Equity Firms by assets raised over last 5 yrs (billions).
Goldman Sachs Principal Investment Area = 49.05 billion
Tags: New York Private Equity, New York Private Equity Firms List, Private Equity In New York, New York City Private Equity, New York City Private Equity Firms
Here is a list of the top private equity funds, ranked by size over the last five years. The top fifty private equity funds in this list account for 75% of the world’s global buyout activity and have a total buyout power of $2.76 trillion, according to IUF.
Top 50 Private Equity Funds
1 The Carlyle Group $32.5 billion 2 Kohlberg Kravis Roberts $31.1 billion 3 Goldman Sachs Principal Investment Area $31 billion 4 The Blackstone Group $28.36 billion 5 TPG $23.5 billion 6 Permira $21.47 billion 7 Apax Partners $18.85 billion 8 Bain Capital $17.3 billion 9 Providence Equity Partners $16.36 billion 10 CVC Capital Partners $15.65 billion 11 Cinven $15.07 billion 12 Apollo Management $13.9 billion 13 3i Group $13.37 billion $ 14 Warburg Pincus $13.3 billion 15 Terra Firma Capital Partners $12.9 billion 16 Hellman & Friedman $12 billion 17 CCMP Capital $11.7 billion 18 General Atlantic $11.4 billion 19 Silver Lake Partners $11 billion 20 Teachers’ Private Capital $10.78 billion 21 EQT Partners $10.28 billion 22 First Reserve Corporation $10.1 billion 23 American Capital $9.57 billion 24 Charterhouse Capital Partners $9 billion 25 Lehman Brothers Private Equity $8.5 billion 26 Candover $8.29 billion 27 Fortress Investment Group $8.26 billion 28 Sun Capital Partners $8 billion 29 BC Partners $7.9 billion 30 Thomas H. Lee Partners $7.5 billion 31 Leonard Green & Partners $7.15 billion 32 Madison Dearborn Partners $6.5 billion 33 Onex $6.3 billion 34 Cerberus Capital Management $6.1 billion 35 PAI Partners $6.05 billion 36 Bridgepoint $6.05 billion 37 Doughty Hanson & Co $5.9 billion 38 AlpInvest Partners $5.4 billion 39 TA Associates $5.2 billion 40 Berkshire Partners $4.8 billion 41 Pacific Equity Partners $4.74 billion 42 Welsh, Carson, Anderson & Stowe $4.7 billion 43 Advent International $4.6 billion 44 GTCR Golder Rauner $4.6 billion 45 Nordic Capital $4.54 billion 46 Oak Investment Partners $4.06 billion 47 Clayton, Dubilier & Rice $4 billion 48 ABN AMRO Capital $3.93 billion 49 Oaktree Capital Management $3.93 billion 50 Summit Partners $3.88 billion
Permanent Link: Top Private Equity Funds
Tags: Top Private Equity Funds, Best Private Equity Funds, Largest Private Equity Funds, List of Private Equity Funds by Size, Biggest Private Equity Funds
The federal reserve has been actively pursuing private equity as a solution to the banking crisis. The latest and most obvious move by the Fed to attract private equity is Monday’s announcement that it will loosen regulation on how much of a bank a private equity firm can own.
The previous rules restricted non-banking entities from purchasing more than 25% stake in a bank. Now, under the new loosened regulation, buyout firms can not only own as much as one third of a bank but also are allowed to have a stronger presence in the boardroom. Previously, the Fed had resisted the idea of opening up banks to outside investors but the credit crisis has forced the Federal Reserve to consider new options in private equity.
The buyout industry possesses a lot of capital and the Fed would like to see that capital invested into the struggling banking industry. The buyout industry is estimated to hold $400 billion in capital that could be invested, according to the research company Preqin. While Monday’s announcement may heighten buyout firms’ interest in the banking sector, it is not likely that the move will fix the banking problem according to Jaret Seiberg, a financial services analyst at the Stanford Group in Washington. In a research note he wrote that “These changes are helpful, but they do not open the floodgates to private equity investments as some investors had hoped. While this could mitigate the current crisis, we see it as unlikely.” One reason that buyout firms may be skeptical about investing in the banking sector is the unsuccessful investments in banks already this year.
However, private equity firms have expressed some interest after the Federal Reserve’s recent move. But buyout firms are expected to wait until the Federal Reserve and Congress reach an agreement on a bailout plan. If private equity does invest in banks, many believe it will not be in the form of big investments in major banks, but rather smaller and middle-market banks that are less subject to the volatility of the market. It is clear that the future of the financial market will in some way be determined by private equity.
Tags: Private Equity and Banks, Private Equity Credit Crisis, Private Equity and Federal Reserve, Private Equity Firms, Private Equity and Buyouts, Buyouts and Banks
David Rubenstein is personally one of my favorite figures in private equity, as may be evident in past videos. Mr. Rubenstein is the co-founder of the Carlyle Group, since its creation in 1987 the Carlyle Group has grown into a firm that manages more than $87 billion. Rubenstein is a prominent voice in private equity, his name is almost always among the lead speakers at major private equity forums such as the Private Equity Segment of the World Economic Forum. Currently, David Rubenstein holds the position of Managing Director of the Carlyle Group.
The following interview is an interview with Mr. Rubenstein, where he appears a bit more solumn while addressing a serious subject. He offers his take on the current economic crisis, in particular the federal government’s response to the situation. An important note is that David Rubenstein suggests that private equity will have an important role in buying the assets that the government has acquired. Here is the video interview of David Rubenstein discussing the current financial market: Private Equity On Pause
David Rubenstein and President George W. Bush
A little known fact about the Carlyle Group is that President George W. Bush once held a seat on the board of directors on one of the Carlyle Group’s first acquisitions. While President Bush did not seem to be cut out for the private equity industry, he went on to greater success by becoming the governor of Texas almost immediately after leaving the Carlyle Group. David Rubenstein has a great account of President Bush’s time with the Carlyle Group:
Let me talk about a bad deal. At the beginning of Carlyle – early – we didn’t have any funds. We didn’t have any dedicated funds. And we had a deal that seemed like it would be the greatest deal since sliced bread. It was handed to us. Marriott said to us, look, we’re going to sell our airline catering business [Caterair].It’s number one in the world. Management team has been there for 10 years. We dominate all the markets and we’re not going to do an auction. We’re going to sell it to you guys ’cause some of our people [Carlyle co-founders Steve Norris and Dan D'Aniello and Bush crony Fred Malek] used to work at Marriott. You know, what could be better?
So the financing was there. And we thought, this is an easy business. So they’re going to give us a company. Number one in the world. Gold plated. Got all the equipment you need. Good management team.
Well, then the Gulf War came. And all of a sudden people stopped flying. And then those who were flying realized that they weren’t going to be getting the food that they thought they were going to get. . . . So no matter how good you think a company can be something can go wrong. We couldn’t anticipate the Gulf War. So the airline catering business has gone this way.
I mention this because it reminds us all the time we shouldn’t have hubris. You know no matter how smart we think we are or how good we are, something can go wrong. And if something seems too good in life to be true, it usually is. In this case, the only interesting thing about the deal–and we lost all our money in it. Our money and our investors’ money in it. In that deal.
But when we were putting the board together, somebody [Fred Malek] came to me and said, look there is a guy who would like to be on the board. He’s kind of down on his luck a bit. Needs a job. Needs a board position. Needs some board positions. Could you put him on the board? Pay him a salary and he’ll be a good board member and be a loyal vote for the management and so forth.
I said well we’re not usually in that business. But okay, let me meet the guy. I met the guy. I said I don’t think he adds that much value. We’ll put him on the board because – you know – we’ll do a favor for this guy; he’s done a favor for us.
We put him on the board and [he] spent three years. Came to all the meetings. Told a lot of jokes. Not that many clean ones. And after a while I kind of said to him, after about three years – you know, I’m not sure this is really for you. Maybe you should do something else. Because I don’t think you’re adding that much value to the board. You don’t know that much about the company.
He said, well I think I’m getting out of this business anyway. And I don’t really like it that much. So I’m probably going to resign from the board.
And I said, thanks – didn’t think I’d ever see him again. His name is George W. Bush. He became President of the United States. So you know if you said to me, name 25 million people who would maybe be President of the United States, he wouldn’t have been in that category. So you never know. Anyway, I haven’t been invited to the White House for any things. (Source)
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Permanent Link: David Rubenstein Interview
Tags: David Rubenstein, Private Equity Managers, Private Equity, Private Equity Manager David Rubenstein, David Rubenstein Carlyle Group.
The position of Partner at a private equity firm is a coveted one, and with reason. The private equity Partner is rewarded significantly higher compensation than associates (although they are paid very well too). The logic behind the dramatic pay increase is that a Partner has significant abilities in judging deals, managing employees and generating high profits for the firm.
Partners at private equity firms take on a wide range of responsibilities, but the Partner has four primary duties:
Managing the Partnership and Operations: Typically Senior Partners oversee the overall productivity and performance of the firm and its employees and the day-to-day operational tasks are assigned to the other Partners. The degree in which each partner specializes in a certain area varies by the firm’s size and reach.
Sourcing Deals: The majority of deals come from Partners, who use their extensive investment knowledge and experience in the industry, as well as their numerous contacts to find potential investment opportunities. In this way, Partners play a pivotal role in searching out and executing deals for the private equity firm.
Supervising Investments: The degree that Partners are involved in the firm’s investments varies by deal but generally Partners take on at least a small role in monitoring the investment. This could be only a minimal hand in the company, such as a seat on the investment’s board. In other cases, the Partner takes on a very active role in the life of the investment by managing the operational aspects of an acquired company. The Partner’s involvement in the investment is meant to ensure its continued success which hopefully translates to profits for the private equity firm.
Partner Relations: Finding new Limited Partners and maintaining good relationships with existing Limited Partners is another important duty of Partners. This is crucial for Partners because bad relations with investors could translate to a capital drought for the firm’s private equity funds.
While these duties are the most time-consuming and have the highest priority, a Partner must also make time to keep up on industry trends and stay ahead of the competition. Through trade shows, private equity forums and industry publications a Partner is able to keep up with the ever-evolving private equity industry. Another task is the mentoring of the young talent by overseeing their work with helpful criticism and advice, which has a two-fold benefit of increasing the efficiency of the firm through the Associates and grooming future management.
As you can see, Partners have a great deal of influence over the success of a private equity firm and therefore Partners are the top-tier of business professionals. The position is difficult but the compensation makes it well worth the effort for most Partners and the allure of a Senior Partner position makes the Partner role an envied rank in private equity firms.
This question of why private equity firms are not blogging at the same pace as the rest of the business world was originally by Private Equity Database’s Blog and it led to the rather long response that follows:
First, I agree that there is a certain amount of limitation placed on private equity firms because they aren’t promoting or offering a product as well as just how vast private equity investing ranges by industry, size etc. So the nature of the business kind of inhibits blogging.
Second, private equity initially spent a great deal of effort trying to escape the public attention rather than attract it. So opening a blog about a firm is a little counter-intuitive to the industry, especially with so much negative scrutiny by the media and the public in general.
But to that I argue that it would benefit private equity firms to start a blog too, and it may outweigh the aforementioned negatives.
First, to the problem of how private equity is not really designed for blogging, look at the venture capital blogs. As you mentioned, there are a lot of VCs blogging. Many VCs aren’t even blogging strictly on venture capital, they offer tips and strategies or just talk about their life. I remember a news story that talked about venture capital bloggers talking about everything…except venture capital. While I don’t know how that translates to business for the specific VC, I do know that the ones blogging are making contacts and familiarizing the public with venture capital. So while private equity is not automatically geared for blogging there are other avenues that the firm could use that would help draw awareness for the firm and potentially expand their contacts.
This leads to my second argument for the benefits of private equity firms blogging: creating a firm blog enhances the accessibility for the firm to the public. The industry has attracted criticism for its lack of transparency with investors but more so with the public, who want to know more about the firm that is acquiring familiar public companies. Even a small effort like a blog is a step in the right direction for the private equity industry as it works to transform its bad public image.
The biggest problem, I think, is that private equity firms are so large and impersonal by definition, so having a blog would mean either using a willing member of management that is authoritative for the entire firm or hiring an impersonal writer that is limited to press releases and firm/industry data. The first is pretty unlikely, the latter wouldn’t be very popular.
So while I agree that this could strongly benefit whatever private equity firm takes the lead and starts blogging, I don’t see it happening anytime soon.
As I alluded to in today’s earlier post about the state of private equity, many firms are holding a lot of assets and simply waiting through the rough economic conditions for solid investment opportunities.
If you recall about two years earlier, private equity firms were attracting a lot of criticism for the perceived secrecy of the big buyouts they were making and the potential risk in the use of leverage to conduct these buyouts. Now, the economy is in dire need of capital to support the financial giants that have been collapsing recently. Private equity firms possess a large amount of this capital and many people are advocating for increased private equity investment as a sort of stimulus to the economy. This is not to say that private equity firms haven’t felt the effects of the economy’s decline, much to the contrary, but the industry has maintained a fair amount of capital throughout that many hope will revive the economy, at least in a minor way.
Dale Oesterle mentions the irony of this situation in his blog here.
It seems all anyone is talking about is the recent collapse of Lehman Brothers and how the financial crises will effect the economy, specifically private equity. While a major decline in the market is potentially harmful to private equity, it is worth noting that private equity often thrives in down markets. This is because the nature of private equity is to buy large firms, which may be selling unusually low in a bad market, and turn enormous profits on the acquisitions. Here is a brief private equity video that talks about the state of private equity under the economic crisis (click the link to watch the video):
If you are searching for qualified private equity recruits for your firm or, on the other side, if you are hoping to connect with a private equity firm then Private Equity Recruitment is a great tool.
Unlike the broad financial recruitment websites, this resource specializes exclusively on the venture capital and private equity industry. One major benefit is the international reach of Private Equity Recruitment Ltd. which spans globally including Asia and the Middle East. Another benefit is the size of the agency, Private Equity Recruitment hosts more jobs on their website than any other private equity recruiter in the UK and Europe. This is a valuable resource for professionals interested in entering the private equity and venture capital industry.
Until I can correct the link problem for e-mail subscribers, here is the URL for Private Equity Recruitment: http://www.perecruit.com/
Lehman Brothers Holdings is a finance giant that has dominated the news this week with speculation that the firm would file for bankruptcy. This rumor was confirmed when Lehman Brothers filed for Chapter 11 bankruptcy protection on the morning of September 15, 2008.
In response, Lehman Brothers’ shares plummeted bringing the Dow Jones to its largest drop since the wake of September 11, 2001. Aside from the broader economic implications, what does this mean for Lehman Brothers’ substantial private equity business?
Since entering private equity in 1984, Lehman Brothers has been a major player in private equity by investing in merchant banking, venture capital, real estate, credit related investments, infrastructure and private fund investments. The private equity department of Lehman Brothers has amassed $30 billion in assets under management, according to the firm’s website. With a dim future for the company, the future of the private equity department is in jeopardy.
The only hope is to seek out potential buyers that would absorb the private equity branch. According to the Street Insider, the top firms that may buy the investment management division are limited to Bain Capital, Hellman & Friedman and Clayton Dubilier & Rice. Lehman Brothers will likely take its time searching out potential buyers and selling off the remaining assets of the company. The fall of Lehman Brothers Holdings is only the latest in a series of major blows to the market, following the government takeover of mortgage giants Freddie Mac and Fannie Mae. Ultimately, the impending purchase of the Lehman Brothers’ investment management division will decide how private equity is directly effected.
Most people have seen Jim Cramer excitedly shouting financial advice on CNBC’s “Mad Money.” In addition to his popular TV show, Jim Cramer is a best-selling author and former hedge fund manager. Today’s post features a video interview of Mr. Cramer discussing private equity and its role in reviving the economy. He suggests loosening the rules limiting the ability of private equity firms to buy large shares in banks. Cramer believes “breaking the private equity rules” will inject some capital into the struggling banking sector. I can’t get the size right, hopefully this looks alright.
Permanent Link: Jim Cramer on Private Equity
Tags: Private Equity Jim Cramer, Jim Cramer, Private Equity Firms, Private Equity Capital, Private Equity and the Economy, Private Equity Videos
Investing in a private equity fund has a lot of advantages compared to other investment areas, here are just five advantages of private equity for not only investors but also the companies that private equity firms acquire:
Companies that are backed or acquired by private equity firms are often made more efficient and produce higher profits, which benefits now only the private equity firm but also the company. Private equity firms use skilled management teams to correct the problems and ineffective parts of the company and many times this intervention prevents the company from further declining or even failing.
The management receives carried interest, a portion of the profits, so managers and their staff are motivated to produce good results to investors. Although carried interest is often criticized for taking money from the investors, it is a very big incentive for managers.
By definition, private equity firms work outside the public eye and do not have to follow the same transparency standards that public firms and funds must adhere to. This allows private equity firms to reform the companies without the constraint of having to report quarterly to the SEC or similar distractions.
Private equity firms generally perform very rigorous due diligence on potential investments. By utilizing a team of researchers the private equity firm is able to identify most risks that would not otherwise be found.
Private equity managers are paid very well and so it is easy to attract high caliber, experienced managers that tend to perform very well. The same goes for lower level employees at private equity firms, they tend to be the top young business school graduates.
Private equity firms along with hedge funds have received a lot of criticism asserting that they receive preferential tax treatment. The charge stems from a “tax loophole” involving the substantial performance fees that private equity managers, which make up a large part of the managers’ income. The performance fees are taxed by only 15% rather than the top income tax of 35%. This has caused some public criticism, especially among politicians who have put forth legislation to correct the tax treatment of management fees.
Private equity and hedge fund managers have protested any changes to the current tax code. Private equity managers argue that they should not be taxed at 35%, claiming that their performance fees are different than general income. They believe that carried interest is a logical reward for their invested time, resources and services, and the risk of loss involved in private equity.
Whether carried interest will be considered as general income is of huge importance to managers, as they stand to lose substantial earnings through this tax reform. Here is a really well done and extensive article that looks at the possibility of increasing tax on private equity carried interest and the possible ramifications of this.
