Life after LBOs
What's a private-equity firm to do when the leveraged-buyout business goes kaput?
Those firms can't make any more big, highly leveraged deals because their bankers have cut them off. They're having a hard time just getting some banks to make good on loans promised before credit markets froze.
Now many of those investment firms are raising new kinds of funds aiming to take advantage of the same credit market problems that are putting the leveraged-buyout business on ice. Private equity is turning into private debt.
Exaggeration alert: Some acquisitions of smaller companies by private-equity firms will still take place and, just this week, Advent International of Boston raised nearly $10 billion for a new international private-equity fund.
But private-equity firms across the country have been raising lots of new debt funds intended to take advantage of chaos in corporate credit markets. The basic idea: Investment firms with an eye for picking out fundamentally solid companies stuck in the distressed debt pool can make a bundle.
Fund-raising started late last year and is running full tilt today. Look no further than New England for plenty of action. As usual, none of the private-equity firms wanted to talk when I called to ask what they were doing. But there is plenty going on.
Thomas H. Lee Partners, the Boston firm that prefers to call itself THL Partners these days, is in the process of raising its first-ever debt fund. It formed THL Credit Group last summer and hired a team of debt managers to run the fund.
Providence Equity Partners is also raising its first-ever debt fund. It hasn't hired new managers who specialize in fixed income but will get some help from high-yield specialists Newport Global Advisors. That fund, which was originally expected to raise $600 million, may end up managing a sum closer to $1 billion.
Providence Equity Partners has made a name for itself by buying companies in the media, technology, and telecommunications industries. The new debt fund is expected to stick to credit issued to companies in those same businesses.
Meanwhile, Summit Partners of Boston is raising a $750 million debt fund. Though the private-equity firm has raised three previous debt funds, the latest would become its largest offering by far. As was the case with the other Summit debt funds, the next one will extend credit only to companies already in the firm's investment portfolio.
Bain Capital also has a long track record managing debt funds through its Sankaty Advisors arm. Now Bain has deployed capital from two of its other private-equity funds and invested in pools of money aimed at debt. I'm not aware of any other firm investing equity fund money in debt securities, a practice that gets mixed reviews from limited partners.
Bain's latest big private-equity fund told limited partners this week it wanted them to cough up capital by April 15 for an investment pool called 111 Capital LP, a reference to Bain's address on Huntington Avenue in Boston.
Limited investors in Bain's previous private-equity fund say it also issued a call for capital so it could be invested in debt securities.
Bain told limited partners in its most recent fund that the debt investments would offer "a return profile like other private-equity investments" thanks to an imbalance in the supply and demand of credit.
Investors that do business with big private-equity firms like Bain tend to be institutions with sophisticated strategies to divide their money between different types of securities. Some aren't happy when funds they earmarked for equity end up in a pool of debt.
One Bain limited partner told me yesterday he considered the latest plan an "inappropriate use of capital." He compared it to another period when venture capital investing was earning unusually big returns and some private-equity firms began chasing similar deals.
But another Bain investor didn't mind. In the case of Bain's latest and relatively new fund, the sooner money can be put to work the better to generate the best investment returns, he said. In an environment that makes it difficult for private-equity firms to buy companies in big transactions, other strategies aiming for similar returns are worthwhile, he said.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
