Random Ramblings

A few additional thoughts on last Thursday's Return of the Corporate Raiders column, and then some additional notes:

*** Some of you wrote in to ask why I was harping on management fee termination agreements, instead of on the management fee agreements themselves. Do I find the former objectionable and the latter appropriate? Nope. Both are ridiculous, and should not be used. “Standard operating procedure” is not an excuse.

The key number here is ten. Private equity funds typically have 10-year lifecycles, and most management fee agreements also are purported to run 10 years (or until terminated due to IPO or acquisition). So if a private equity fund buys a company in its third year of life, how can it even purport to manage a portfolio company for the next 10 years? The simply answer is that it can't, unless it were to request a fund agreement extension from its limited partners (which is unusual). Private equity firms – particularly the big ones – have no intention of holding a portfolio company for 10 years, so the agreement is fixed from the start. It's just written to help line GP pockets.

*** One Friday Feedbacker suggested that the above situation is OK, because private equity firms are the primary pre-IPO shareholders. If public market investors get suckered in, too bad for them. Two points: (1) The PE firms' limited partners are the real shareholders pre-IPO, and certain firms don’t share even a portion of the management fees. So how do the real shareholders benefit? (2) I agree that there is some “buyer beware” here, but private equity firms still hold significant stakes post-IPO, and are short-sighted when they raid the corporate till too early.

*** I wrote that public market investors are becoming wary of LBO-backed IPOs. Some of you asked for evidence. So… Thomson Financial reports that the average aftermarket performance for all 2006 IPOs was -2% as of market close Monday. The average LBO-backed IPO, on the other hand, was down -2.06 percent. Admittedly not much of a difference, but LBO-backed offerings are supposed to outperform the overall public markets, not slightly under-perform.

*** An anonymous tipster suggested the following: “Take a look at IPO stock performance by different funds. Just to pick on one, companies Bain has IPO'd have performed above the average IPO performance. Similar patterns for many other top-tier funds.”

Ok, I looked. And you’re incorrect. Bain Capital has priced ten IPOs since the beginning of 2002 (I picked 2002 because it’s post-bubble). Nine of them are still trading, with one (Shopping.com) having been acquired by eBay. The average aftermarket performance of the nine is 9.6%, or 10.31% if you include the Shopping.com sale price. Overall, however, average aftermarket performance for IPOs over the same time period has been 32.8 percent. And so that you don’t think I’m picking on Bain, the situation is even worse for fellow HCA buyer KKR. Its average IPO aftermarket performance since 2002 has been 5.53%, or 10.3% if you include the sale price of PanAmSat.

*** ITU Ventures is in the midst of being shut down by its limited partners, according to documents obtained by PE Week. The story can be found here.

*** PE Week also is reporting that Bay Partners general partner Chris Noble is leaving the firm. Managing partner Neal Dempsey is denying the departure, while Noble has not returned requests for comment.

*** My open LinkedIn policy is back in effect. If you want me to be your contact -- and vice-versa -- just send an invite. My initial skepticism of the site's value has been completely invalidated.

*** Finally, congrats to Ned Lamont. After a careful analysis of the voting returns, it's clear that the PE Week Wire endorsement pushed him over the top. Let's just call it a warmup for the Warner vs. Romney presidential race in 2008...