Clayton, Dubilier & Rice this week sent out its annual letter to limited partners, and peHUB has gotten itself a copy. You can read it here.
The first few pages lay out the private equity market’s dire straights, and how CD&R can capitalize on the environment. Self-serving, to be sure, but standard for such letters. Then there also are a dfew newsworthy nuggets, including that partner Edward Liddy is expected to return once he’s “completed his work” running AIG (a moving target to be sure).
What did surprise, me however, was they way in which CD&R has been valuing its portfolio companies. All private equity firms are required to use mark-to-market for the Q4 period, and about half of them began doing so by Q3. CD&R was one of the early adopters, according to a source (the letter itself is a bit vague).
The surprise, however, was that CD&R did not make a single Q3 mark-down. This includes HD Supply, a wholesale distributor that relies on the residential construction market for a large percentage of its total revenue. Maybe the company will benefit from Barack Obama’s stimulus package — particularly the new infrastructure piece — but that’s hypothetical. What we do know is that the residential and commerical construction markets have been at virtual standstills for months. How could HD Supply not have been written down yet? How could none of its other companies, given that we’re in the midst of a recession? Sure Lehman collapsed with just two weeks to go in Q3, but those were some weeks where the public markets (to which CD&R was marking) plummeted to dizzying depths.
According to its letter, only HD Supply (from Fund VII) and Italian telecom company Itatel (Fund VI) will be Q4 writedowns (CD&R is still raising Fund VIII). It’s entirely possible that the quarterly financial statements include additional writedowns, or perhaps CD&R has somehow managed to create a magic portfolio that has avoided the carnage being experienced by most everyone else. I’m obviously skeptical of the latter, but we’ll have to wait for the Q4 letters to be leaked, before we know for sure…