Yesterday Harvest Partners, a buyout firm based in New York, announced a deal to invest $80 million in listed natural gas services provider Regency Energy Partners LP. The PIPE deal is just another in a line of private investments in public equities-since the credit crunch, private equity firms have been increasingly attracted to the investment style.
And in some cases they may be rewarded handsomely for basically playing the stock market. Leonard Green Partners, for example, could earn roughly twice its investment in Whole Foods Market in a matter of a year or so. Last November, the firm purchased preferred stock which pays an 8% dividend and is convertible into common stock worth 17% of the company. At the time, the stock traded around $10 per share. Today Whole Foods stock closed at $27.40 per share.
Others have been less lucky. Sun Capital Partners’ public equities fund, Sun Capital Securities, has struggled after losing all of its investment in Sharper Image when the company went bankrupt in 2008. And of course there’s TPG’s famous WaMu misstep.
With most stock indexes trading up for the year, it’s easy to speculate that the time for making equity infusions in public companies at cheap valuations has passed. In the Regency Energy Partners deal, Harvest Partners safeguarded against possible future losses with a new security. The firm invested in Series A Convertible Preferred Units, which has equity upside but protects from downside, according to Mike DeFlorio, senior managing director at Harvest. Likewise, the deal is immediately accretive to common shareholders because the company used $63 million of the proceeds it to buy back a stake in its joint venture with GE. The purchase brings Regency’s stake in the JV to 43%. The JV, called Haynesville Joint Venture, owns 320 miles of intrastate pipeline in North Louisiana.
Harvest Partners’ units pay a fixed quarterly distribution of $0.445 per share and are convertible into common units after six months.