Industry Thoughts | Some More Thoughts On Private Equity's "Use It Or Lose It" Debacle

Last week I put up a post about Dan Primack's response to the 2011 Bain Global Private Equity Report. I agreed with Dan that firms are facing pressure from LPs to spend the last of their funds, which would in turn fuel "bad deals." However, I felt that this trend would not be seen amongst all private equity firm sizes, notably some mid-market and lower-mid-market shops.

Then today, courtesy of Stephanie McAlaine, Executive Director of ACG Philadelphia, I read a piece about how the public market turmoil could be a boon for the private equity industry. I agreed with the general opinion; the industry has diversified itself so well that it's becoming a safer play to look at fund-of-funds investments, and the fact that it will find ways to fight any sort of regulation (unless FINRA comes knocking, as David Snow pointed out in a Privcap post) will help it stay safely diversified.

However, one key statistic came to my attention:

According to Coller Capital Ltd., which tracks the industry, 60 percent of private equity investors, known as Limited Partners, or LPs, plan to increase their rate of new private equity commitments in 2011, and 34 percent intend to increase their target allocation to private equity, compared with 19 percent a year ago. 

Now I know Dan's right that there still is pressure from LPs that private equity firms are facing to use up the cash, but now I'm more convinced (thanks to Coller) that LPs are going to end up being ok with transferring that remaining capital to the next fund/commitment contract. While I'd like to get more details from Coller about the statistic (is this for the overall industry, does it differ significantly when look at PE firms by size, etc.), it's a promising piece of information.

That, plus the fact that my contacts and clients haven't taken a break from deal-making after a VERY busy Q4 2010 (and therefore keeping me busy) helps.

Industry Thoughts | Revisiting Private Equity, Public Relations,and Dividend Recaps

While catching up on some reading, I perused Dan Primack's recent piece on dividend recaps and how private equity firms should be frank about dividend recapitalizations. Dan mentions that at the recent Columbia Business School private equity conference, many executives were complaining that the industry has gotten bad press (see: "strip and flip") and hasn't done much at all in terms of PR. However, many firms continue to perform the ever-controversial dividend recap (create a term loan designed to pay a dividend to the investor or investors) and still state that they're adding value to their portfolio companies.

First off, regarding the PR effort, I have written many posts as messages to the PEGCC and ACG to help out the private equity industry; the ball is in their courts to help generate a good PR effort and show the general public (in some way) that private equity firms are helping portfolio companies and the American industries become better. However, there's been a limited push from both organizations (I can understand ACG's reasoning as I wrote here, but the PEGCC doesn't get let off the hook). Much more CAN be done and the clock is ticking until Congress moves its target from hedge funds and banks to private equity. The upcoming HCA IPO is probably going to quicken the countdown clock.

In terms of dividend recaps, I absolutely agree with Dan. You're NOT adding value by enforcing these loans; in some drastic cases, I've seen private equity firms take a too drastic approach, giving the portfolio company no choice but to file for bankruptcy.
Now while I am not a fan of the strategy, I understand that it is necessary to execute it at times; LPs may be wanting money back, the company may be on the right track to success that they are able to pay up the investors, or the firms want to apply pressure on their portfolio company to improve their performance.

However, like Dan said, private equity firms need to admit why they're executing a dividend recap. Admit your mistakes. Explain how it fits into the main plan for the company you're working on. As frustrating as it may be to admit in the short-term, firms will win support from consumers who will understand that there is a true and heavily successful growth strategy plan in the works and that there's a good chance that the plan will live up to its standards.

Be smart, PE firms. Stop beating around the bush with value-added fluff.

Industry Thoughts | Private Equity, Dry Powder, and "Bad Deals"

Dan Primack of Fortune, a man worried about the results of 2011 private equity deal flow, posted this article today after reading Bain & Company's annual Global Private Equity Report (which was published today). The firm agrees with him in that GPs holding a significant amount of dry powder with an expiration date on it (courtesy of the LPs) feel pressured to invest that capital. This "use it or lose it" feeling is definitely there, and I agree with Dan that it's going to affect 2011 PE deal flow.

But what I think is important to recognize here is if the size of private equity firms matters. For example, many lower mid-market firms I met during the end of 2010 and the beginning of 2011 were being extremely cautious in terms of finding the perfect deal. However, that cautiousness I've seen amongst lower mid-market firms is due to many deals dropping dead in the water as they were working out the terms. That circumspection they are feeling is going to continue along the year, but coming back to the size issue, LPs may not favor firms because of their investment criteria in terms of size and apply the same amount of pressure to everyone.

Rich Lawson of Huntsman Gay Global Capital also raises a good point here: debut funds have it easy, but you could potentially see more growing. Another thing that could happen is that GPs could convince LPs to move that expiring dry powder into new funds. By rolling over the capital into the next fund, you get new terms and the approaching expiration worries off deal teams' backs.

2011 private equity activity is under a very large microscope; if the year's deal flow turns out to be better than expected (and so far it's looking ok), 2012 deal flow is going to exponentially increase. If not, I think the industry will be in a logjam for at least another year.

Not Private Equity, But Still Important | Quick iPad 2 Thoughts

Yes, this post isn't related to private equity, but after reading the relatively underwhelming iPad 2 release today, I had a few thoughts that I wanted to share:

1. Weight Matters: It's thinner than an iPhone 4. Pretty awesome. But it still weighs more than 1 lb. As a current first-gen iPad owner, trust me; it makes a difference.
2. Incase Must Be Angry: The new Smart Cover designed for the iPad is nice and all, but the folding design is exactly like a case that Apple accessory maker Incase made for the first-gen iPad. By the way, Incase is now backed by Swander Pace Capital, a private equity firm (smart buy for them). 
3. It's All About the Accessories: I currently have the first-gen iPad (thank you ACG CT!) and was more excited to see the new iOS upgrade and HDMI adapter. ANY app or website can share video and audio to an Apple TV with the new AirPlay update on iOS 4.3, and full mirroring is available with the HDMI adapter. I can see that option being BIG for classrooms.
4. Cheaper First-Gen iPads: Don't care about the hardware but excited about the software? Apple's online store is selling new and refurbished (aka basically new, Apple cleans them up really well) first-gen iPads starting at $350. Click here.

That all being said, I'm happy with my first-gen iPad. I think Apple is slowly realizing that it's running out of innovation idea regarding hardware and is going to start focusing on software. 

Moreover, one company was like Apple in its heyday and after a few products where the hardware didn't make sense, that same company focused on making its strongest products better software and specific components-wise.

That company is Sony.

Industry Thoughts | Private Equity Goes Into Reality TV, Thanks to Lynn Tilton

Talk about an interesting story for private equity today: New York Magazine announced that TV network Sundance is launching a "nonfiction" show about Patriarch Partners CEO Lynn Tilton. The show will be called The Diva of Distressed.

Known for her powerfully blonde hair, 6-inch stilettos, and tight-fitting clothing, Lynn is also a tough and demanding head of the distressed-focused private equity firm she named after her father. (More background info about her, including her hilarious "I only strip and flip men" comment, is in this well-written WSJ piece.)

After watching the clip in the link, I realize what Lynn's trying to do, and it's honorable. Private equity firms haven't tried any successful way to show the general public that they are helping the economy by acquiring portfolio companies. If anything, this is a good start for a helpful PR movement for the industry.
Sadly, because of all the rotten programs that fall under the "reality TV" category, I feel that people will initially judge the show more on Lynn's looks versus what she's actually doing with the companies she now owns and is working on.

Still, it's a good start. Best of luck, Lynn! You can follow her on Twitter here.

Industry Thoughts | Private Equity and the Oscars

What a night for the Oscars. James Franco acts like, well, James Franco, Anne Hathaway continues to show why she's awesome and extremely gorgeous, and Inception didn't get Best Original Screenplay (though hats off to The King's Speech for winning it). While watching the show (and switching between it and the awesome Knicks-Heat game), I realized that, like how I mentioned in my Fashion Week post, private equity firms have significant stakes in film studios!
I thought I'd share a few of them, with the help of Pitchbook:

• MGM (through Spyglass Entertainment/Cerberus Capital Management)
• Miramax (through Colony Capital among other firms)
• Spyglass Entertainment (through Cerberus Capital Management)
• Legendary Pictures (through ABRY Partners, Ridgemont Equity Partners, Falcon Investment Group, and a few others)
• Village Roadshow Pictures (through Tailwind Capital, among other firms)
• RealD (formerly through Shamrock Capital) - great piece from WSJ PE Beat here

It's important to note that you'll see private equity firms put stakes into stronger film production studios in general; MGM, Miramax, Spyglass, Legendary, and Village Roadshow all have strong films within their portfolios. I haven't seen PE interested more in the independent film studios, but it's always good to keep an eye there.

Let's end with a hat tip to Kirk Douglas in light of his amazing appearance at yesterday's Oscars.

Industry Thoughts | Private Equity and Fashion Week

Yikes, sorry for the delay in posts, guys. With our clients keeping us ridiculously busy coupled with lots of deal flow, it's been tough to get a chance to put in a post. Luckily, the wonderful week of color, style, and design known as Fashion Week came to New York, but it didn't slow down deals either.

More importantly, during Fashion Week, two fashion houses were acquired by PE firms: Sun Capital Partners (through Kellwood Co.) acquired Rebecca Taylor, and Castanea Partners acquired Donald J. Pliner. It's no surprise which firms ended up buying the storied houses; Sun Capital has a strong consumer division and Castanea happens to own a few other recognizable fashion labels, including Urban Decay, Ippolita, and Betsey Johnson.
Also, take a look at the WSJ's blog Private Equity Beat on a post-deal interview with Castanea partner Troy Stanfield on Donald J. Pliner.

Fashion and luxury apparel are popular sectors with PE. Margins are very high, brand reputation is getting stronger, and it's not difficult to grow a label if you have the right team behind the brand. Many fashion labels have been PE-owned before, including:

• Stuart Weitzman (Irving Place Capital at one point)
• Jimmy Choo (TowerBrook Capital Partners)
• Harry Winston (Fenway Partners at one point)
• Rafaella (Cerberus at one point)
• J. Mendel (The Gores Group)

It's always exciting to me when a recognizable consumer goods company is acquired by a private equity firm, as brand strength and reputation are powerful keys to a company's growth. It'll be interesting to see if more fashion houses are on the way to going to buyout shops.

Industry Thoughts | The PEGCC's Report On Buyout Activity...And Why I'm Worried

The PEGCC (Private Equity Growth Capital Council) released their 2010 buyout activity report today, and the title says it all: Buyout Activity Returns to 2008 Levels.

This is scary.

I remember at the ACT CT PE Expo late last year that multiples for many deals were going between 9x and 12x, scaring away many of the mid-market private equity firms. Did firms forget what happened a few years ago? I'm hoping that the leverage ratios that buyout shops are using involve a significantly more amount of equity, because this data will not help PE, both with regards to setting the industry up for another dip down as well as how the industry looks in the eyes of Congress.

The link to the article is here (get a free subscription to read it), but here are the key passages below:

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Private equity-based buyout volume for all of 2010 reached $221 billion, according to the report, the highest figure since 2008. The 96 private equity-backed initial public offerings that took place over the course of the year raised over $35 billion globally, up from 32 IPOs that raised $12.7 billion in 2009, the PEGCC said. Exits in the US during 2010 totaled in excess of $110 billion, more than double the value of exits in 2009.

Total fundraising in 2010 reached roughly $104.4  billion, compared to $100.3 billion in 2009 and $99.8 billion in 2004. As of January 2010, buyout dry powder stood at an estimated $446 billion globally.

The PEGCC’s index measures global private equity activity based on total direct investment, buyout transaction volume, fundraising and the dollar value of private equity exits. The index reaches 100 when all four components are at their 10-year moving average. As of the end of 2010, the index stood at 115.3, its highest level since the fourth quarter of 2007.
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Let me know what you guys think in the comments!

Industry Thoughts | ACG And Lobbying, Part II

Back in December, I wrote a post (which also got on The Term Sheet) curiously questioning why ACG (the Association for Corporate Growth) does not have a lobbying arm within the organization. I went to yesterday's ACG NY Healthcare Conference and got to meet with some heads. I asked about the lobbying movement and I got these answers:

• The lobbying movement will strictly be informational; the organization voted to not make a more aggressive move but to continue sharing information about private equity industries and how PE has been beneficial through job creation, production efficiency, etc.
• The reason why there also hasn't been an aggressive move is because members of ACG aren't only execs from private equity firms. You have C-level executives, service providers, and people from other random areas, so you can't entirely say that ACG can solely lobby for private equity.
• There also has been a movement within ACG to its members to connect with Congress; members should be contacting Senators and Representatives to give them a lesson in how private equity has been helping the state. In other words, there are companies that have key facilities in the represented states that are a) partly or majority owned by private equity firms and b) have brought a significant number of jobs to the state itself.

It was a good answer from the execs I talked with. I hope that the "talk to your Senator" movement gets stronger because, well, all we have going on now is some mid-market PE execs trying to fight the SEC registration requirement in new legislation.

Good luck, ACG!

Industry Thoughts | The Hooters Story

UPDATE: Dan Primack wrote the article about Wellspring's bid for Hooters of America. The link has been added below.

One of the great things about consumer goods-focused private equity deals is that many recognizable companies and brands get involved. The latest one is with the famous beer, wings, and attractive servers chain Hooters of America (HOA).
To break it down, Wellspring Capital Management had made a bid for the chain last year, but the chain was then sued by one of its franchisees, a South Africa-based firm named Chanticleer Holdings, for violating the right of first refusal deal it had with a 2006 loan provided to HOA. Now, with 2 private equity firms as co-investors (KarpReilly and HIG Capital, as I found out yesterday thanks to The Deal Pipeline), Chanticleer made a $250MM bid for HOA, and Wellspring is suing for breach of contract.
PEHub has covered the deal here, and Dan Primack has covered it here. Here are my thoughts:

• I'm not surprised that HIG Capital is involved here. They aren't slowing down in terms of deals from 2010. Continue keeping an eye on them, as the Miami-based firm is slowly expanding too.
• I'm surprised that (according to Dan) HIG did the deal through its New York affiliate Bayside Capital. I wonder if their New York office was involved at all...(I know a few of the execs there)
• Dan mentioned that Hooter's is supposed to make over $1 billion in revenue while Chanticleer has a market cap of only $7MM. I believe PEHub or the WSJ PE Beat Dan wrote about the initial deal by Wellspring a few months ago, and they mentioned that many of the chains now are run by a bunch of different franchisees. By buying HOA, HIG/KR/Chanticleer is probably only getting a few chains and will have to deal with those franchisees to get more.

Regarding that last point, I wouldn't be surprised if the consortium works to get as many chains as possible. It just comes to show that private equity firms aren't afraid of some stereotypes.
After all, the great Chris Rock said in his song No Sex in the Champagne Room: "Nobody goes to Hooters for the wings..."