The new era of private equity is proving treacherous for some old hands. The collapse of Washington Mutual highlights the point. The demise of the...
The new era of private equity is proving treacherous for some old hands. The collapse of Washington Mutual highlights the point.
The demise of the nation’s largest savings and loan handed TPG, one of the buyout world’s kingpins, the kind of body blow that has laid similar firms low in the past.
The bursting of the credit bubble brought an end to the easy money that allowed TPG to take big public companies private, including Harrah’s Entertainment, MGM and Neiman Marcus.
This drought led many buyout firms to pursue smaller stakes, not financed by debt, in public companies, where they hoped to negotiate terms that would give them an investment edge.
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Among the biggest of these deals was TPG’s injection of $2 billion into WaMu in April. TPG, led by David Bonderman, dived in with a flotilla of other top WaMu investors to collectively pour $7 billion into the struggling thrift.
In return for precious capital, TPG received an array of advantages over WaMu’s other common shareholders that made it a sweetheart deal.
This helped sustain the argument that private-equity firms — despite the implosion of their leveraged-buyout businesses — were still worth the huge fees their investors paid.
After all, if private equity firms like TPG were just taking minority stakes in public companies, what would be the logic of paying them the industry standard 20 percent of any profits they make, as well as an annual retainer of up to 2 percent of the money they were given to manage?
That logic, however, now looks specious. On Thursday, regulators declared WaMu insolvent and sold its carcass to JPMorgan Chase for $1.9 billion, vaporizing TPG’s investment.
But TPG was not alone among private equity firms that, once the buyout boom turned, decided to take stakes in public companies. Nor was it alone among its peers in mistiming the financial turmoil.
Warburg Pincus, for example, is still under water on its infusion of $800 million into the bond insurer MBIA. The buyout group reached twice into its $8 billion fund — first in December and then in February. This brought Warburg’s average price paid down to around $19.59 a share. MBIA stock closed Friday at $13.74.
And Corsair Partners has taken a hit from its $985 million stake in Cleveland banking company National City. The bank’s shares slid almost 26 percent Friday on concerns it might follow WaMu.
But TPG’s loss is the biggest of this vintage and the first to crystallize a major loss for investors. So all eyes in the industry will be on Bonderman, a University of Washington graduate.
They will want to see how he tries to convince his limited partners — the providers of TPG’s $50 billion of funds under management — that WaMu was a one-time event, perhaps a learning experience that will not be repeated.
Judging by the history of the relatively young private-equity industry, this will not be a cinch to pull off.
During the dot-com bust, two other pioneers of the buyout business — Forstmann Little and Hicks Muse — strayed from their usual discipline of taking full control of their quarry. Both lost lots of money for investors.
Like TPG, Forstmann Little must have believed it was investing near the market’s bottom when it plowed $1.5 billion into XO Communications in 2001. XO went bankrupt a year later, prompting a lawsuit by the Connecticut state employees’ pension fund.
The WaMu debacle may be easier for TPG’s investors to forgive. The investment amounted to less than 5 percent of TPG’s managed assets.
But for buyout barons trying to adjust to life without unfettered access to cheap capital, it will be a lesson they hope to learn vicariously.