73598.qxd:Webvision ready 8/17/12 1:13 PM Page 1 Your Source For Leveraged and ManageMent BuYoutS www.buyoutsnews.com August 13, 2012 • Issue 17 Who Took The 2007 Vintage Gold Medal? Joe Dear Leads CalPERS Rebound From $100B Loss KKR, Stone Point Team On Capital Markets CalPERS Ending $1B In-State Program PRINTED COPY FOR PERSONAL READING ONLY. NOT FOR DISTRIBUTION. Lincolnshire Strikes First Deal In A Year Carlyle Generates Big Payout On Booz Allen Dividend Looking For Market-Beating Returns? Try Debut Funds 73598.qxd:Webvision ready 8/17/12 1:13 PM Page 2 BuYoutS |​August 13, 2012 www.buyoutsnews.com The 2007 Vintage Produces Few Big Winners By david toll, eamon Beltran, angela Sormani ​Sponsors​routinely​promise​their​backers​that​they’ll​at​least​double their​money.​But​you’d​be​hard-pressed​to​find​such​funds​in​the​hard- luck​2007​vintage. Out of 83 2007-vintage domestic buyout spell the end of their fundraising hopes. agency Probitas Partners. funds in our return database that provide “You combine high purchase multiples Just how much impact the performance investment multiples, only three managed going into a recession with lots of debt and of the 2007 vintage has on overall industry the feat. Far more than that, 15 funds, or 18 you’ll likely have problems with the under- returns remains to be seen. U.S. buyout percent, have recently been underwater—a lying portfolio companies,” said Kelly firms raised nearly $300 billion in 2007, result that, if it doesn’t improve, could well DePonte , managing director of placement more than the industry raised from 2001 to Post-Bubble Blues: Domestic Buyout Fund Performance By Vintage Year 35.0% 355 300 26.5% 255 23.5% 23.7% 22.2% 20.8% 200 16.3% 16.0% 15.2% 15.2% 155 13.0% 13.2% 12.1% 12.0% 11.6% 11.5% 11.1% 11.1% 10.6% 10.7% 9.0% 9.0% 100 8.5% 7.0% 6.6% 5.9% 6.2% 5.7% 5.8% 5.5% 5 3.4% 1.5% 1.9 1.4% 2.1 1.9 2.2 1.9 1.1% 1.6 1.9 1.71.6% 1.8 1.9 1.9 1.6 1.6 1.7 1.7 1.6 1.4 1.4 1.3 1.2 1.1 1.31.5 1.4 1.1 1.5 1.5 1.4 1.4 1.5 1.3 1.3 1.2 1.2 .9 1.0 .7% 1.1 1.1 1.0 0PRINTED COPY FOR PERSONAL READING ONLY. NOT FOR DISTRIBUTION. -1.2% -2.1% -2.6% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -55 (13 funds) (20 funds) (26 funds) (46 funds) (37 funds) (47 funds) (34 funds) (25 funds) (26 funds) (46 funds) (62 funds) (77 funds) (92 funds) Bottom Quartile Multiple Median Quartile Multiple Top Quartile Multiple Bottom Quartile IRR Median IRR Top Quartile IRR 73598.qxd:Webvision ready 8/17/12 1:13 PM Page 3 www.buyoutsnews.com August 13, 2012 |​BuYoutS Cover​Story 2004 combined, and more than triple the median 1.40x and top-quartile 1.81x; a bot- the loans they ended up signing lacked the roughly $90 billion that was raised in 2000, tom-quartile IRR of 2.43 percent, median of strong covenants that, in the dire times to a record at the time. The lackluster 2006 9.40 percent, and top-quartile of 16.15 per- come, might otherwise have forced spon- vintage corresponded to another big cent (see chart below). sors into technical defaults. fundraising year, and together 2006 and All told, our return database includes 591 Meantime, the Federal Reserve took a 2007 account for some half a trillion dollars domestic buyout funds spanning vintage variety of actions to reduce interest rates, in fresh capital raised. Their results will like- years 1981 to 2007. The data, most of it cur- an effort to lower the borrowing costs for ly drag on industry returns for years to rent through year-end 2011, comes from businesses and cushion the impact of the come, perhaps discouraging investors from some two dozen public pension funds and recession on workers. As a result, many making a bigger commitment to the asset other institutional investors that make their investors seeking high-yielding fixed- class. results public. (See p. 11 for a more detailed income instruments turned their attention For those looking to benchmark their explanation of our methodology). to the below-investment-grade corporate returns, our set of 2007-vintage funds gener- loan and debt markets. The subsequent, ated a bottom-quartile investment multiple Secrets of Success sudden boom in the credit markets in late of 1.01x, median 1.20x, and top-quartile To be sure, the 2007 vintage faced stiff 2009 and 2010 enabled poor-performing 1.30x; a bottom-quartile IRR of 1.42 percent, headwinds—a credit crunch that started in companies to refinance their obligations median 9.00 percent and top-quartile IRR of mid-2007, a financial crisis that culminated rather than succumb to bankruptcy or 13.22 percent. In very rough terms, the vin- with the fall of Lehman Brothers in other unwelcome outcomes. tage did a little better than 2006 but not September 2008, and an 18-month reces- Luck played a part in the success of some nearly as well as funds that began investing sion that lasted from late 2007 to mid-2009. 2007-vintage funds. Those that began invest- in the early to mid-2000s (see chart on p. 2). It could have been worse. In the run-up ing their funds rapidly at the beginning of By comparison, our entire database of to the downturn the markets were so inun- 2007, especially in cyclical businesses, got domestic buyout funds has produced a bot- dated with credit that lenders had lost hit the hardest. Those that got started late tom-quartile investment multiple of 1.10x, much of their negotiating power; many of in the year benefited from their ability to Turnaround Funds Are Tops: Performance By Investment Strategy 25 (All Vintage Years Through 2007) 22.4% 21.8% 20.1% 20 18.6% 16.2% 15 11.9% 12.2% 11.2% 10.6% 9.4% 9.5% 10 9.1% 8.4% 7.5% 6.0% 5.1% 5 3.5% 2.4% 3.3% 1.9 1.8 1.7 1.9 1.5 1.8 1.4 1.2 1.3 1.3% 1.4 1.3 1.6 1.2 1.3 1.3 1.5 1.2 1.5 1.1 .9 1.0 .8 1.1 .9 0 0% -.5% -2.8% -5 PRINTED COPY FOR PERSONAL READING-.5.8% ONLY. NOT FOR DISTRIBUTION. International Venture Domestic Turnaround/ Debut Domestic Domestic Buyout/ Domestic Growth International Buyout/ Domestic Venture Domestic Capital Distressed Debt Buyout/Corporate Corporate Finance Equity Corporate Finance Capital Mezzanine (57 funds) (68 funds) Finance (591 funds) (31 funds) (176 funds) (422 funds) (56 funds) -10-10 120 funds Bottom Quartile Multiple Median Quartile Multiple Top Quartile Multiple Bottom Quartile IRR Median IRR Top Quartile IRR Source: The limited partners; not all funds provided both IRR and investment multiple 73598.qxd:Webvision ready 8/17/12 1:13 PM Page 4 BuYoutS |​August 13, 2012 www.buyoutsnews.com Cover​Story adjust their strategies to new economic real- large amounts of [turnaround] capital chas- est deals at cost, the firm through dividend ities and not to have to care for sick portfo- ing falling knives and being incinerated recaps has returned all invested capital plus lio companies purchased in healthier times. contemporaneously with their invest- a profit in three portfolio companies, Some firms enjoyed far more than luck. ments,” said Psaros. among other distributions. They were patient. “One thing we learned The firm, which closed a $2 billion fund As of year-end, the KPS Special Situations is that in the first 12 months of a downturn in November 2007, deployed its capital very Fund III LP had generated a 1.70x invest- you don’t invest,” said Michael Psaros, selectively until 2011, when finally condi- ment multiple and a net IRR of 22.50 per- managing partner and co-founder of New tions turned to its liking. In the last 12 cent for backer California Public Employees’ York turnaround shop KPS Capital months the firm has seen a burst of activity, Retirement System (after a premium carried Partners, pointing to the 20 years of expe- investing 35 percent of the fund’s capital, interest of 25 percent) . That makes it one of rience he and his partners have investing and launching five platform companies, out the best-performing in our collection of together, through four down cycles. In fact, of the 10 in the fund; its latest is Waupaca 2007 vintage funds. prices looked too high to KPS Capital in Foundry, one of the world’s largest iron Vista Equity Partners Fund III takes the both 2008 and 2010, while the year in foundry companies. The firm still has 25 gold medal for the top-performing 2007 between saw many turnaround firms percent of the fund left to deploy before domestic buyout fund in our database for invest heavily only to realize the economy November 2013, when its six-year invest- which we have IRRs (see table, p. 6). Through still had a ways to fall before rebounding ment period ends. While yet to exit any of March 31 the fund, earmarked for invest- only feebly.