Bain Capital’s Q3 Report: Writedowns, Writedowns

NEW YORK (Reuters) – Private equity firm Bain Capital wrote down third-quarter values for investments in media, retail, and restaurant firms such as Clear Channel, Michaels Stores and Outback Steakhouse, according to a letter obtained by Reuters. 

The figures, as of Sept. 30, were in a recent letter to investors known as limited partners (LPs) and relate to Bain Capital’s Fund IX. Private equity firms disclose their performance to LPs each quarter but the letters are not made available publicly. 

Firms across the board are having to cut the value of their investments as the economy sinks. 

The letter, dated Nov. 25, said radio operator Clear Channel’s business “has declined due to softness in advertising spend” and as a result it marked down the equity portion of its investment to $428 million, or 0.85 times cost — meaning the fair market value is 85 percent of the original investment. 

Its investment in wholesale distribution business HD Supply is valued at $617 million, or 0.65 times cost, according to the letter, as it was impacted by the housing slowdown. 

Its investment in crafts retailer Michaels Stores was written down to $377 million, or 0.65 times cost. 

The fund’s investment in music retailer Guitar Center was reduced to $279 million, or 0.6 times cost and Burlington Coat Factory was written down to $157 million, or 0.6 times cost. 

Boston-based Bain’s investment in NXP was reduced to $246 million, or 0.4 times cost as the semiconductor industry continued to face a severe contraction, the letter said. 

Its investment in Outback Steakhouse was written down to $189 million, or 0.35 times cost to reflect “continued weakness in traffic and increasing costs,” it said. 

Most dramatically, it marked down the value of yacht maker Bavaria Yacht to zero. “While we still believe this is an important company in its industry, Bavaria is suffering from exceedingly weak sales as a result of low consumer confidence and scarce consumer credit,” the letter said. 

Including investments sold or liquidated, Fund IX’s investments are valued at $6.3 billion, compared with the $7.6 billion total invested, a table in the document indicated.

“As we look toward fourth quarter valuations, we would note that the economic environment has continued to deteriorate which may imply further write-downs at year end,” the letter said. “While we are naturally disappointed by these interim write-downs, we believe in the strength and intrinsic value of the fund’s portfolio, and are not under any pressure to sell.”

The letter said it was working to “anticipate and address any liquidity or covenant problems, should they arise.”

“The silver lining in this type of environment is that nimble companies can capitalize upon industry weakness to improve their positioning for the future. We will consider further investments where there are real advantages to gain.”

This is the first full year that private equity firms are obliged to value their companies as if they were to sell them today. The accounting rule known as FAS 157 came into effect for financial years beginning after Nov. 15, 2007. 

In a separate letter giving an update on Bain Capital Fund X, it said that cable network The Weather Channel, which it bought with Blackstone <BX.N> and GE’s <GE.N> NBC Universal in September, was experiencing “softness in advertising spend.” The investment was not written down or up, and was valued at $626 million. 

Fund X, with approximately 73 percent undrawn capital — i.e. capital still to be invested — was well-positioned to benefit from the dislocation in the credit markets, it said. 

By Megan Davies
(Editing by Phil Berlowitz)