The Way of the VC 风险投资之道: The Week In Private Equity: Give Me My Money Back

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The Week In Private Equity: Give Me My Money Back

via WSJ.com: Private Equity Beat on 6/26/09

This week in private equity, we felt a little bypassed by events, as attention focused first on Iran, then on gubernatorial shenanigans, and finally, of course, on Michael Jackson. Nonetheless, it was a fairly eventful week for the industry. Herewith:

As the world bid farewell to Farrah Fawcett and Michael Jackson, the private equity industry said a smaller goodbye of its own to the last remnant of the last big buyout of the boom era: the Huntsman Corp./Hexion Specialty Chemicals deal. Huntsman settled its lawsuit with the banks that had agreed to finance the deal when it was originally announced. The banks agreed to pay $1.7 billion, which is not chump change - unless you compare it with the $4 billion and change in damages that Huntsman sought, or the $15 billion and change in debt the two banks had originally agreed to provide for this deal. See the Deal Professor for an interesting theory on the timing of the settlement.

Kohlberg Kravis Roberts & Co. simultaneously and paradoxically desisted and persisted in its plans to go public this week, scrapping an offering on the New York Stock Exchange for now, but instead shifting its focus to the Euronext exchange, where its KKR Private Equity Investors affiliate already resides. Pundits far and wide scratched their heads and rolled their eyes over why KKR wants to go public at all, but we think our colleagues at Private Equity News summed it up fairly well with their analogy to frogs' behavior in cold water versus boiling water.

Boeing Co.

TPG Capital LP looks to be subject to a pretty serious flight delay when it comes to the IRR on its fifth fund. The firm this week managed to exit its Midwest Airlines investment, but the return looks less than sky-high. TPG took a 53% stake in Midwest alongside Northwest Airlines in January 2008 for $452 million. The sale price, in contrast, consists of $6 million cash and a $25 million note convertible into Republic stock. For a hint of TPG's return, one need only look at Northwest, which wrote down its entire $213 million share of the investment in the second quarter of last year. The Midwest deal was done from TPG Partners V LP, which also contains/contained Washington Mutual Inc. and Aleris International Inc. LBO Wire previously reported the fund was held at 35% below cost as of March 31.

Exit of the week: Business development company Allied Capital has said it doesn't want to engage in fire sales, even as it has struggled with liquidity issues. But this week, it provided fertile stomping grounds for fellow buyout firms as it sold two companies. Insight Pharmaceuticals Corp. went to Swander Pace Capital, while certain assets of MHF Logistics Solutions Inc. were sold to Relativity Capital. Both had been held on Allied Capital's balance sheet at subtantial discounts to cost.

Office Depot

Deal of the week: The less charitable among us might give BC Partners' PIPE investment in Office Depot the style drift award of the week, since it's not only a PIPE but also a deal in the U.S., where BC Partners hasn't been active lately. But because BC Partners has been exceedingly cautious in setting up its U.S. operations, and because it is getting a 10% coupon on its preferred stock, we are going to affix a sheet of shiny incentive stickers to this deal and leave it at that.

Quote of the week: There were a number of candidates this week, thanks to our LP Summit conference, at which colorful anecdotes flew fast and furious. There was GrandBanks Capital Managing General Partner Charles Lax, who said, "You have the venture industry trying to look like David Ortiz in his heyday, trying to hit only home runs." Then there was Douglas Wurth, global head of alternative investments for JPMorgan Private Bank, who said that charging fees on annex funds is "a little bit like putting your client in jail and then charging them rent." Or what about Donna Smolens, managing director of Portfolio Advisors, who said of GPs behaving badly: "The arrogance I've seen develop over the past decade has to stop. There's nothing to be arrogant about any more."

But our favorite comment of the conference was made by AXA Private Equity Managing Director Vincent Gombault, who when asked what fund managers need to do if they want to get more money from him, said simply, "They need to give me my money back."

Have a great weekend.