Bain Markdowns Are Bad, But Not THAT Bad

Bain Capital joined the markdown parade this month, according to limited partners in the firm’s past several buyout funds. It goes without saying that the numbers are ugly, but in context they’re just homely. Or, if you like analogies: Bain Capital is to Terra Firma what Jerry Blank is The Wicked Witch of the West. Ok, moving on…

The least ugly markdowns were for Bain Capital X, which is only around 25% invested. For the period ending Q4 2008, it was down approximately 10% quarter-over-quarter and 15% for the year. A bunch of companies in this portfolio are still being carried at cost, including Bright Horizons, Contec, Quintiles and The Weather Channel.

Bain VIII also faired relatively well (continued emphasis on the relativity), down 12.7% quarter-over-quarter and 18.3% for the year.

The firm’s real damage came out of Fund IX, which holds such clunkers as Burlington Coat Factory, Guitar Center and Michael’s Stores (all of which have locations in the exact same strip mall about 2 miles from my house). This fund is down around 30% quarter-over-quarter, and down 46% for the year.

It includes a 50% markdown for Clear Channel (from cost), compared to a 15% markdown in the Q3 report. It also shows a 40% total decline for a related investment in Clear Channel debt, and a further markdown in Outback Steakhouse (now at 30% of cost).

I’ve heard some buyout pros suggest that the recent rash of markdowns is being overplayed by media folks like me, and that they reflect artificial deflation based on FAS 157 (i.e., mark-to-market) compliance. Let me briefly address each complaint:

1. Yes, we’re making a bigger deal of these numbers than we have in years past. That’s partially a media bias toward bad news, but it’s more a reflection of how LPs are more likely to leak confidential data when they’re pissed off than when they’re merry. If I had Bain quarterlies back in Q1 2007, I would have reported on them.

2. It is certainly true that FAS 157 has pushed down the valuations of buyout firm portfolios, since many of the marked-down companies would otherwise have been kept at cost. On the other hand, the markdowns are not universal. For example, Bain kept Weather Channel at cost while severely discounting Clear Channel. Both media companies, but the former is far less dependent on advertising revenue than is the latter (WC has both non-ad website revenue and synergies with co-owner NBC).

What will be interesting is if buyout firms choose to mark up companies for their Q1 reports, given the quarter’s stock market increase. I highly doubt you’ll see firms like Bain do it — it’s fairly conservative with this stuff — but some others might try to push the envelope a bit. Will be worth watching out for.