John Lehman is chairman and a founding partner of J.F. Lehman & Co., a mid-market private equity firm focused on the aerospace, defense and maritime industries. He also is the former Secretary of the U.S. Navy, and recently completed service as a member of the National Commission on Terrorist Attacks Upon the United States (a.k.a. The 9/11 Commission). J.F. Lehman just closed its latest fund with $335.1 million, so we’ve got 5 Questions for John.
1. We’re seeing a number of new defense and infrastructure-focused funds, both large and small. Is this a reflection of growing opportunity, or just folks trying to cash in quick?
We’ve sold some of our companies to those groups, so we welcome the additional capital. I think it’s part of the overall growing private equity market, and the fact that people always are looking for inefficiencies in the market. While there have been very strong returns in our sector, it’s not an easy sector to invest in compared to other industrial sectors. The defense business, for example, has so many different subsets. A lot of people on the outside view the Pentagon as the customer, which would mean that there is limited opportunity because the potential customer base is so concentrated. But that isn’t the case, because DoD has more than 300 different authorities and agencies – each with its own budget, bureaucracy and way of doing business.
You also have to understand the international market. We’ve done about one-third of our acquisitions in Europe, and also have had success taking American companies into Europe or other foreign markets. To do that we’ve used a very hands-on approach, where we don’t close on a deal until we have a detailed growth plan for the company, and invariably it involves active value-add by the partners and operating executive board of J.F. Lehman & Co.
There are obviously generalists with no expertise who’ve made good investments in the sector, but there are a lot more who’ve done unsuccessful of mediocre deals.
2. Speaking of that, how important is it for a firm in this space to have professionals who have first-hand governmental experience? Particularly people who understand the procurement process?
I think it’s essential, and not just as hired guns. We obviously use a wide range of consultants, but our GPs have more than 100 years of combined experience owning and operating these types of companies and working in government. It’s not so much about door-opening, but really about understanding how the funding process works, what the peculiarities of a particular contract is and what questions need to be asked. Just hiring a few retired generals – which is what some firms do – doesn’t do the job.
3. Do you expect a major influx of ex-government into private equity, as the Bush Administration winds down?
Private equity in general will continue to grow, because it’s taking advantage of the increasing frictions or barnacles that have attached to public investing. But I don’t think that we’ll see a disproportionate increase as opposed to other sectors of the economy… Most good senior government refugees find that they can best utilize their experience in advisory roles rather than in principal investing roles. Unless they actually come out of the investment world originally – the learning curve is often too steep.
In general, however, an infusion of good intelligent people into the industry with fresh government experience will continue to be valuable for firms like ours. But more than 50% of our portfolio is commercial…
4. Unfortunately, I’m going to turn it back to government and, in particular, your experience serving on the 9/11 Commission. I know that your firm doesn’t explicitly focus on homeland security and the Commission obviously wasn’t focused on private equity opportunities, but did that experience at all impact – or perhaps better inform – your investment decisions?
I would say that marginally, yes. What I learned in the course of that investigation would help me understand certain opportunities, but it’s very minor. We’ve never chased trends of the month or the year, because we’re really value investors instead of momentum investors…
I don’t think my time on the Commission helped us do any particular deal, but it has helped us better articulate what we’re doing. In the Hawaii Superferry deal, for example, there is a major homeland security piece. When airports were locked down after 9/11, it was ferries that helped New York stay connected, and in Hawaii it was only the barges that would have been able to move crisis management infrastructure to the islands. After the big tsunami two years ago, it was the sister ship to the first of our Hawaii Superferries – the Westpac Express, leased by the Marines – that was immediately put into service in the South Pacific, and was the first on scene with ambulances, medical equipment and field hospitals. I think we’ve been able to help the Hawaiian legislature and people understand how critical the superferries can be to their security.
5. Given how much money is flowing into private equity – and how large some of the deals are getting — were you tempted to throw out the original PPM and significantly increase the fund target?
We had to turn away a lot of investors, and could have gone to $400 million or $500 million without throwing the PPM away – but in consultation with our LPs we decided we had to cut it off. We’re just not tempted to go after the mega-deals. In our judgment, 90% of the interesting opportunities are in the $50 million to $300 million transaction size, because that’s where most of the inefficiencies are in this market.