Ratings agency Moody’s recently issued a report titled “Rating Private Equity Transactions.” Perhaps a more suitable title would have been “Berating Private Equity Transactions,” since much of the report took a critical stance on some of the current LBO marketplace’s defining characteristics—namely the industry’s willingness take out dividends rather than repay the large amounts of debt used to make the acquisition.
Moody’s pointed the finger at specific companies including WideOpenWest (owned by Avista Capital Partners) and San Juan Cable (owned by MidOcean Partners). Moody’s downgraded the debt of both portfolio companies after they completed “unanticipated dividends” within 18 months of acquisition. Avista’s dividend was more than twice the size of the firm’s initial equity investment in WideOpenWest, Moody’s noted.
To Moody’s, buyout firms’ recap proclivity calls into question the oft-chanted industry mantra that LBO shops—compared to public companies—aren’t as focused on short-term results because they invest over a longer time horizon. The ratings agency noted that the lackluster IPO market could be one reason that firms take out these dividends, as a means of ensuring some sort of gracious exit.
Indeed, according to investment bank Freeman & Co., financial sponsors on a global basis saw more than $71 billion in proceeds from dividend recaps last year, a 10 percent increase from 2005’s $64.9 billion. Making those numbers even more meaningful is that 2004 saw dividend recap proceeds of only $41 billion while 2003 only measured in with about $10 billion.
But what happens after the payout? Moody’s expressed concern about the strength of a firm’s commitment to a company once it no longer has an equity investment in it. “The larger the equity investment … the more motivated the private equity firm to insure the overall success of the company,” Moody’s said. After a dividend recap, the company is likely even more encumbered by debt, while the sponsor may no longer have any skin in the game at all.
Of course what Moody’s does not take into account is that simply by owning the company, a buyout firm is on the hook since its name is attached to the company’s performance. If a firm blows up a deal just for a quick payout, limited partners might not be too keen on taking part in that firm’s next fund.
I know firsthand that many general partners refuse to take stock in what ratings agencies have to say about their marketplace, at least when they’re speaking on the record. After all, it seems that every time a company is levered up, the ratings agencies pounce on it with a press release that notes how risky the deal is and how much strain the additional debt puts on the company, even though debt is the very life-blood of the LBO industry.
But one is left to wonder how long the current economy, which has easily shouldered the weight of some heavily levered deals, can last. For Q2 2007, Standard & Poor’s Leveraged Commentary & Data, says the average debt-to-EBITDA ratio for buyouts of companies with more than $50 million of EBITDA was about 7x, while companies with up to $50 million of EBITDA command an average leverage ratio of just more than 6x EBITDA. It’s hard to see how LBO firms can go much higher.
Today’s blog is by Ari Nathanson, Senior Editor of Buyouts Magazine.
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Carlyle, the $58.5 billion global private equity firm, has provided a $2.7 billion exit opportunity for the Alexander family from Sequa Corporation. Gail Binderman, chairman of the board of Sequa and daughter of Norman Alexander who set up the company 50 years ago, has agreed to sell all Class A and B shares of Sequa for $175, a 54% premium on the 6 July 2007 closing price. Coincidentally, the executors of the estate of Norman Alexander representing approximately 54% of the outstanding voting power of the Company have entered into a voting agreement in favour of the transaction. www.sequa.com
Cinven, the European private equity firm with €60 billion in deals under its belt, has made its second acquisition in the hospital sector in a month. The group is acquiring USP Hospitales, the Spanish healthcare provider, from Mercapital for €675 million. In 2007 USP is expected to generate revenues of €280.7 million and an EBITDA of €47 million. Earlier in the month Cinven inked a contract to acquire the UK’s BUPA hospitals for €2.13 billion. It also currently own Partnerships in Care, a UK provider of mental healthcare specialist. Cinven made history in 1997 by combining General Healthcare with Amicus, two UK based private healthcare providers, in Europe’s first £1 billion leveraged buyout. Cinven exited the combined firm in 2000. www.cinven.com
Sun Capital Partners, the Florida-headquartered LBO firm, is to buy 75% of Limited Brands, the clothing chain, from Limited Brands Inc., which wants to focus on its Victoria’s Secret lingerie stores. The company is expecting to post a $42 million on the sale. Limited Brands has also sold 75% of its Express fashion chain to Golden Gate Capital for $602 million. www.limitedbrands.com
Trion World Network, a Redwood City, California-based online game developer, has raised $30 million in a funding round led by Rustic Canyon Partners. Other investors included Time Warner, NBC-Universal, its parent company General Electric, and Bertelsmann. Existing investors DCM and Trinity Ventures returned.
Prelude Trust, the investment trust managed by London-based private equity house Esprit Capital Management, has completed its second investment of £620,000 into Xanadu Wireless. The investment was made at the same price per share as the first tranche when Prelude invested around £1.25 million in the company in May 2006. The investment completes the May financing round from Prelude, GIMV and Motorola Ventures. This investment coincides with Xanadu’s acquisition of Ubiwave, a Belgian wireless systems company, following with the Trust has a 21.2% shareholding in the combined company. Alan Duncan, a partner at Esprit said this completes the commitment made last year bur that the group will probably participate in future fundraising rounds as the is just the beginning of a four to five year investment. www.xanadu.com
Origin BioMed secured $3.8 million in a funding round led by Calgary-based Avrio Ventures joined by NSBI Venture Capital. The funding will be used to expand the company’s over-the-counter topical drugs range into the US market. www.originbiomed.com
Retica Systems, a specialist in developing ocular security technology, has taken a step towards raising Series B target of $7.4 million by securing $5.4 million from existing backer Sigma Partners, reports Venture Wire (vw). http://www.retica.com
Researchers at Northumbria University in the UK with £90,000 in financial backing from NorthStar Equity Investors’ North East Proof of Concept Fund, a £10 million fund, have developed a prototype which could help increase the ease and accuracy of laboratory work in crucial fields such as stem cell research. The device is now ready to be marketed for commercial use. http://www.northstarei.com
TheraGenetics, a personalised medicine diagnostics based in London, UK, has raised £3 million ($6 million) in Series A funding round led by new investor Swarraton Partners. New face Tudor Capital also invested, alongside returning VC IP Venture Fund, reports vw. http://www.theragenetics.com
Purcell Systems, a Washington-based wireless tech company, has raised $15 million from Hercules Technology Growth Capital. http://www.purcellsystems.com
Cellumen, a drug discovery specialist based in Pittsburgh, has closed a Series B funding round, raising $8 million from Safeguard Scientifics – which parted with $6 million – and PA Early Stage Partners, reports vw. www.cellumen.com
Nanotron, a German developer of wireless technology, has raised €10 million ($13.6 million) in a round led by Zouk Ventures. www.nanotron.com
InMage Systems, a Santa Clara, California-based provider of data protection software, has received $10 million in series B funding, led by an unnamed strategic investor. Hummer Winblad Venture Partners has returned following leading the company’s first VC round, reports vw. www.inmage.net
ExaDigm, a Santa Ana, California-based developer and manufacturer of wireless credit card terminals, has secured $12 million in a Series B round led by Dunrath Capital Partners and Valhalla Partners. New investors McDonnell & Associates participated alongside returning VCs Meruelo Capital and Sunrise Investments. www.exadigm.com
Emergent Technologies, a Texan VC, has formed AeonClad Coatings, a nanotech company from the University of Texas at Arlington. http://www.emergenttechnologies.com
Celona Technologies, a London-based telecoms company, has raised £7 million ($14.1 million) in a Series B funding round from new investor Caledonia Investment. http://www.celona.com
Yapta, a Seattle-based business that allows users to track airline ticket prices, has landed $2.3 million in a Series A round from, Voyager Capital, Swiftsure Capital and Bay Partners. www.yapta.com
Cerion Energy has secured $1.2 million in Series A funding from Braemar Energy Ventures and Excell Partners Inc. Cerion is a Rochester, N.Y.-based producer of catalytic nanoparticles used in Fuel Borne Additives. www.cerionenergy.com.
6N Silicon Inc. has secured C$6 million in first round VC financing. The investment was led by Ventures West and Yaletown Venture Partners. 6N Silicon is a Toronto-based developer of solar-grade silicon purification technology. www.6nsilicon.com
Court Square Capital Partners, the New York-based private equity firm, is to acquire CompuCom Systems, a Dallas-headquartered IT solutions business, for $504 million. The company is being sold by Platinum Equity, which bought it in October 2004 for $254 million. http://www.compucom.com
UK private equity house Barclays Private Equity is backing an MBO of Eschenbach Group, a German spectacles maker, from HANNOVER Finanz and the Eschenbach family, for an undisclosed sum. The company, which generated 2006 revenue of around €100 million, will be 70% owned by Barclays PE and 20% by the company’s manager, with the existing shareholders taking up the balance. www.eschenbach.com
WCP Mauritius Holdings, an investment vehicle of former World Bank president James Wolfensohn, is to take a 6% stake in Fabindia, an Indian fashion company. It will cost the fund $11 million. www.fabindia.com
BHP Billiton, the Australian mining giant, is reported to be planning a US$40 billion of aluminum producer Alcoa with the help of private equity firms. Blackstone is said to be BHP’s preferred co-investor, which is also interested in acquiring Alcan, a Canadian rival of the New York-headquartered Alcoa. www.bhpbilliton.com
Emporia Capital Funding, a $2 billion mid-market debt provider, has offered $33.5 million in senior and second lien credit facilities to support the recapitalization of Natural Resource Group by Stone Arch Capital. Minneapolis – based Stone Arch Capital invested in the local biofuels storage company in late May. Emporia Capital Funding, which is an affiliate of the $40 billion CDO powerhouse Cohen & Company, will serve as the administrative agent for the Natural Resources Group investment. www.nrginc.com
Blue Star Print Group, a portfolio company of Castle Harlan, a New York-based private equity firm, has bought McMillan Printing Group, which comprises McMillan print in Sydney and Pirion Printing in Canberra, for A$67.3 million. This acquisition makes Auckland-based Blue Star the largest print group in Australasia. http://www.bspg.co.nz
DBG Eastern Europe II, a fund managed by Central and Eastern European private equity firm DBG, has acquired Tomplast, a Slovenian manufacturer of plastic-moulded components. www.dbgee.com
Westport Capital Partners has joined with Capital Health Group and Kaplan Development Group to buy four assisted and independent living facilities known as the New England Healthcare Portfolio.Terms were not disclosed.
Industri Kapital has signed an agreement with CVC Capital Partners regarding the sale of DYWIDAG-Systems International. DSI is the global market leader in the development, manufacture and supply of post-tensioning and geotechnical systems to the construction and mining industries. The purchase price was not disclosed. The transaction is subject to customary anti-trust approvals.
Google has acquired internet security provider Postini of San Carlos, California, for $625 million. The sale represents an exit for a host of VCs, who in total invested $36 million: AltoTech Ventures, August Capital, Bessemer Venture Partners, Mobius Venture Capital, Pacifica Fund, Summit Partners, and Sun Microsystems. Summit Partners has been a Postini investor since 2001. www.postini.com
HireRight, an Irvine, California-based provider of employment-screening services, has filed for an IPO on the Nasdaq Global Market. The IPO will include 4.4 million shares, priced between $15 to $17 a share. The business is backed by Mellon Ventures, Split Rock Partners, Baird Venture Partners and DCM. www.hireright.com
ShoreTel a Sunnyvale, California-based provider of IP telecom systems for enterprises, has completed its IPO on NASDAQ. Lehman Brothers and JP Morgan Securities acted as underwriters on the float, which raised $86.3 million following the exercise of the over-allotment option to purchase an additional 1,185,000 shares of the company’s common stock. It has raised around $107 million in VC funding between 1997 and 2004, from firms like Crosspoint Venture Partners (28.4% pre-IPO stake), Foundation Capital (20.7%), Lehman Brothers Venture Partners (23%), JPMorgan Capital (5.4%), Focus Ventures, Globespan Capital Partners, Matrix Partners and Norwest Venture Partners. www.shoretel.com
Monotype Imaging Holdings, a Woburn, Massachusetts-based provider of text imaging software, is to offer 11 million shares as part of its IPO with an indicative price range of $13 to $15 per share. TA Associates holds an 81.2% pre-IPO ownership position, with D.B. Zwirn holding a 3.9% stake. www.monotypeimaging.com
American Capital Strategies has exited from portfolio company EAG Acquisition LLC and its operating subsidiary Evans Analytical Group LLC, via an IPO on the London Stock Exchange. American Capital recognized $158 million on the exit, generating an 11x equity return.
Firms & Funds
The Riverside Co. has announced the close of its third European fund, topping off at €315 million. Riverside Europe Fund III exceeding the targeted amount of €250 million. Riverside is a New York-based small-cap buyout specialist. www.riversidecompany.com
Nexus India Capital, a venture capital firm based in Menlo Park, California and Mumbai, India, has closed a $100 million fund for investment in the Asian country. It has attracted investors from North America, Europe and Asia following the fund’s launch in December 2006. http://www.nexusindiacap.com
Venture Investors, a Midwest VC, has closed its fifth fund on $115 million. Venture Investors Early Stage Fund V will, as the name suggests, focus on seed and early-stage investments in the Midwest US. http://www.ventureinvestors.com
Energy Investors Funds, a private equity firm focused on the independent power and electric utility industry in the US, has closed a $1.35 billion fund the TheDeal.com has reported. The fund will invest in the development and construction projects as well as buy stakes in existing ones. http://www.eifgroup.com
Aureos Capital has teamed with the World Bank’s International Finance Corp. to form a lending arm to help nurture environmentally sustainable and health-improving businesses in Asia, Africa and Latin America. www.aureos.com
The British Venture Capital Association (BVCA) and the Trade Union Congress (TUC) met this morning in the first of two discussions aimed at easing tension between the private equity industry and UK trade unions. The meeting involved representatives from 3i, Apax Partners, Bridgepoint, BVCA, CBI, CVC, Hermes Private Equity, ISIS Equity Partners, KKR, Lyceum Capital, Permira, ETUC, GMB, TUAC, UNI, Unite – Amicus, Unite – T&G and the Party of European Socialists. In a statement, the BVCA said the tone of the meeting was “positive”, but admitted there is “much ground still to be covered.” www.bvca.co.uk
European Capital, a buyout firm and mezzanine provider, has hired Luis Felipe Castellanos from BNP Paribas to head up its new Madrid office. The new office will concentrate on mezzanine investments and flexible financing solutions for the Spanish market. European Capital, a subsidiary of Nasdaq-listed American Capital, also has offices in London, Paris and Frankfurt. Castellanos was previously managing director and head of leveraged finance of Spain and Portugal at BNP Paribas in Madrid, where he managed LBOs, MBOs, recapitalisations and refinancings. www.thomsonmergernews.com
Avista Capital Partners, a New York private equity firm specializing in investments in the energy, healthcare and media sectors, has recruited Robin Domeniconi, the former president of Time Inc. Media Group, as a consultant to the firm. http://www.avistacap.com
Investment bank RSM EquiCo Capital Markets promoted Brian Boyle to senior managing director. Boyle previously held the title of managing director. www.rsmequico.com