Slideshow: Legends Of PE Share Greatest Misses

I wrote a piece recently about how the failure of Energy Future Holdings Corp. could be a serious embarrassment for its lead investors and for the private equity industry in general.

(The most recent update on the company came late last week, when a subsidiary hit the bond market as the company frantically tries to push back maturities on its massive debt load).

One thing I didn’t mention is it certainly wouldn’t be the first time KKR and TPG Capital, two of the lead investors in the $45 billion buyout and two of the most respected firms in the industry, caught some serious egg in the face (Regal Cinemas, Washington Mutual, respectfully).

With this in mind, I thought it a good time to trot out the biggest mistakes and missed opportunities from six private equity legends, from a November 2010 Buyouts feature. Here they are, in alphabetical order. 

[slide title=”Steven B. Klinsky, Founder, New Mountain Capital LLC”]

Biggest missed opportunity: Klinsky had a handshake on a deal in the 1980s to acquire the MTV-Nickelodeon family of cable channels for $400 million, but they got sold to somebody else. His firm also had a contract in the 1990s to bring Western Union out of bankruptcy for $300 million. But the bankruptcy court called for an auction, and the firm lost to a higher bidder. Both companies are worth more than $10 billion today.

Biggest investment mistake: His companies have never had a bankruptcy, nor a missed payment. In the 1980s at Forstmann Little, Klinsky was buying more highly leveraged, lower growth companies based on price. The lesson was to go for higher quality companies and go for growth. That was the General Instrument strategy and the strategy at New Mountain.

[slide title=”David Morgenthaler, Founding Partner, Morgenthaler”]

Biggest missed opportunity: One of the firm’s partners argued for an investment in YouTube about six years ago. Other partners talked him out of it. “That was painful,” said Morgenthaler, although he points out it was “after I had gone emeritus.”

[slide title=”Alan Patricof, founder, Apax Partners LP, Greycroft LLC”]

Biggest missed opportunity: Starbucks. “When it was starting [1971] I was living in New York and I couldn’t understand how the world needed another coffee shop since we had them on every corner,” said Patricof.  “Obviously I was wrong.”

[slide title=”Wilbur Ross, Chairman & CEO, WL Ross & Co.”]

Biggest missed opportunity: “Not starting my own fund sooner.”

Biggest investment mistake: “A European auto parts company that liquidated because the banks would not provide any further assistance even though we and the customers were willing to do so,” Ross wrote. “The moral is that when you borrow from weak banks, the decisions are not always made rationally.” (Ross declined to name the company.)

[slide title=”Stephen A. Schwartzman, Chairman, CEO, Co-Founder, The Blackstone Group”]

Biggest missed opportunity: “Not convincing Larry Fink and his team at Blackrock to stay at Blackstone.”

Biggest investment mistake: “It is my experience that you can learn more from your mistakes than your successes if you take the necessary step of analyzing what went wrong,” Schwarzman wrote. “Losing 100 percent of the equity we invested in Edgcomb Corp. in 1989 was an early mistake that led to the transformation of our investment process at Blackstone. That failure caused me to re-evaluate how we made investment decisions and implement a more disciplined process that we have used to evaluate every investment decision since. We have depersonalized the process and added a great deal of rigor around the evaluation of risk.”

[slide title=”Carl Thoma, Managing Partner, Thoma Bravo LLC.”]

Biggest missed opportunity: “Being too conservative in getting out of many companies earlier than I should have because exit multiples continued to go up.”

Biggest investment mistake: “Nerve Wire,” Thoma wrote. “We thought we would out smart the dot-com bubble by focusing on the people that provided infrastructures or the merchants that sold goods to the gold miners. Unfortunately when the dot-com melted down, the meltdown was so severe that even the merchants and infrastructure providers melted down as well.”