Turn and Burn or Passing the Torch?
Are recent changes at PE firms natural evolution or a sign of trouble?
While no one wanted to admit that the market at the time was in a state of recession, the consensus among speakers and attendees at DeSilva + Phillipsâ annual Dealmakers Summit earlier this year in New York was that the economy would get worse before it got better. They were right.
Since the conference in February, stocks have plummeted due in part to the slumping housing market and to skyrocketing crude oil prices. Possibly more telling (and more worrisome) are the dwindling workforces at financial powerhouses like Goldman Sachs Group and Morgan Stanley. The worst is ailing Bear Stearns, which reportedly reduced its workforce by about 66 percent (Stearns in March agreed to be bought by rival JP Morgan Chase & Co. for $240 millionâor just $2 per share, a 90 percent loss to what the company was worth a week before the agreement).
âWhat we need to worry about are the credit markets,â says CCMP Capital Advisors managing director Michael Hannon. âIf the credit markets shut down then magazine deals just wonât go through. There was a time when youâd get 8x leverage on a magazine deal. Now, itâs more like 5x. In fact, there was a point when creditors didnât want to lend even at 5x. In the credit system, thatâs the equivalent to a heart attack.â
A Changing Private Equity Landscape
As 2008 nears the fiscal halfway mark, eyes around the magazine publishing industry are looking toward the health of its private equity firms. Over the last couple of years, a number of groupsâincluding Boston Ventures, the Wicks Group and Alta Partnersâhave seen dramatic changes in the make-up of their private partnerships, as their founding partners have departed and associates and principles have moved up to partners and managing partners. Do these shake-ups represent inner turmoil at these firms, or are the founding partners simply passing the torch?
âIt is common that the composition of private equity partnerships change over time,â says VSS Secured Capital partner Hal Greenberg. âThis was the case years ago at GTCR, Hallman & Friedman and Tommy Lee, and is the same today. If partnerships like Boston Ventures, Wicks or Alta Partners are now changing, it isnât worrisome.â
Boston Ventures was founded in 1983 and today is headed by a team of four partners and principles but the firmâs senior partnership departed within the last couple of years.
âBoston Ventures had, all at once, some of their senior partners depart,â one knowledgeable source tells Folio:. âWhen you have institutions looking to invest their dollars, they still like to have grey hair at the table. They just do. Itâs not necessarily a significant challenge for them since they raised their fund and will put it to work rapidly to produce returns that are attributable to the new partners.â
Some, however, see the changeover as reflective of poorly performing deals from Boston Ventureâs previous fund. âGenerally, there were some funds that were put to work in 1998, 1999 and 2000 that, frankly, because of 9/11 and the recession, didnât turn out so great,â says another source. âIn the case of Boston Ventures, the new fund that they have raised (about $400 million), which closed about six months ago, is about half the value of the previous fund due to that fundâs poor performance. When you have a smaller fund, you need to reduce the partnership proportionally.â One of Boston Venturesâ better deals was the sale of its minority stake in World Publications to the Bonnier Group in May 2006. In 2001, observers questioned its acquisition of Northstar Travel Media, which Boston Ventures put back on the block this spring.
The fact that private equity founders are looking to move on can sometimes be a positive thing, according to Oakstreet Media CEO and former VSS managing partner Tom Kemp. âPrivate equity is a relatively new business, having started 20 to 25 years ago,â he explains. âThe guys who started some of the original groups like Boston Ventures were 45 years old or so at the time and now are 65, 70 years old. Whatâs happening with private equity partnerships right now is the natural progression and transition from one generation of partners to the next.â
Whether itâs because of poorly performing funds or personal decisions, some private equity groups falter and break up. New York City-based Seaport Capital is said to be breaking up as a partnership. Seaport invests in private companies with market capitalizations between $20 and $100 million and equity needs of $10 to $35 million. In February, Seaport sold Virgo Publishing to Arlington Capital Partners for an estimated $100 million.
âThese things happen, especially to relatively small partnerships,â one source says. âFor whatever reason, partners decide to go their separate ways and start their own funds and new companies.â Seaport Capital did not return requests for comment.
âGenerally speaking, private equity founders are entrepreneurial by nature,â says Greenberg. âThe fact that they move on after a successful run is common.â
Growth Prospects Will Drive Market
As private equity firms navigate their partnership transitions and begin managing smaller funds, industry players and observers are left wondering how magazine M&A will play out over the next year.
âThese partnership changes will have a negligible impact on media M&A,â says Seth Rosenfield, a director at BMO Capital Markets. âWhat will drive the market for the PE investor is leverage and growth prospects. The media business has proven that you can invest in companies below $10 million of EBITDA, between $10 and $30 million EBITDA, and north of $30 million EBITDA. Whether they have big funds or small funds I donât think it will have an impact.â
According to Kemp, private equity firms may start to hunker down, holding onto properties longer (at least in the short term) and manage their portfolios hoping that the cycle will change. âThe basic business private equity model is still very attractive and returns overall have been good,â he says. âWeâll see lower- to mid-market funds continue to be most active. While you can finance a $100 million now, the real trouble is with the $1 billion deals. Theyâre just not happening.â