Letter: THL Partners VI Carried Above Cost

NEW YORK (Reuters) – Private equity firm Thomas H. Lee wrote down $524 million of its investments in Univision, Nielsen and Hawkeye in its latest fund, reflecting a decline in the value of the investments, according to a letter obtained by Reuters.

The figures, for the three months to Sept. 30, were in a recent letter to investors known as limited partners (LPs). Private equity firms disclose their performance to LPs each quarter but the letters are not made available publicly.

Private equity firms across the board are having to revalue their investments downwards. THL’s fund is in a better position than some that have put significant amounts into struggling sectors such as retail or automakers.

“While the Fund VI portfolio is certainly affected by the current economic environment, our analysis shows that overall it is in reasonably good shape,” the letter, dated Dec. 16, said.

The fund was valued at $4.02 billion, or 1.1 times the cost of the investments, Boston-based THL said in the letter.

A big hit was taken on its investment in ethanol producer Hawkeye, which was written down to $64 million from $352 million after being hurt by unprecedented volatility and swings in the prices of corn, oil, gasoline and ethanol, which sent earnings tumbling 48 percent.

“Hawkeye is the one company in Fund VI which has suffered a material and likely permanent impairment in the third quarter,” the letter said. The fourth quarter was expected to be even more challenging for the firm, it said.

The fund’s investment in Spanish-language media firm Univision was written down to $373 million, from $497 million, although the letter said that the valuation should be recovered as the advertising environment improves.

Its investment in information firm Nielsen was written down from 1.5 times cost to 1.25 times cost.

THL said, however, that five companies — food service firm Aramark, Nielsen, communication firm West, payment services company MoneyGram and processing firm Ceridian — were performing well.

The fund also includes THL’s investment in Clear Channel, which was not written down or up because it was the radio company’s first inclusion in the fund. The $17.9 billion leveraged buyout of Clear Channel closed in July.

THL’s fund invested $446 million in equity and $238 million to fund senior debt in the radio firm. The letter detailed over $500 million in potential cost savings from Clear Channel — which announced job cuts of 1,850 on Wednesday.

“We continue to believe Clear Channel is an attractive investment and is, as the largest outdoor media and radio company, well-positioned to weather this cyclical downturn with its durable capital structure,” the letter said.

The fund may have to be written down again in the fourth quarter as the economy and markets deteriorated further.

This is the first 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.

“Although we are bearish about the financial outlook for 2009 and believe this cycle will be longer and more painful than prior downturns, we do believe that in the next six to eighteen months there will be some tremendous buying opportunities and have in fact seen an uptick in new deal activity,” the letter said.

But THL stressed it would “rather miss the absolute bottom than jump in too soon”.

(Reporting by Megan Davies; Editing by Gary Hill)