Stephen’s Posterous

According to The Wall Street Journal, the number of companies filing IPO's has increased as the number of scrapped deals decreasing.

Pete Peterson co-founded Blackstone Group LP. His proceeds from the sale of stock from the IPO was $1.85 billion.  Most of this money will go to Mr. Peterson's Peter G. Peterson Foundation.

Mr. Peterson, the author of prior books, like "On Borrowed Time: How the Growth in Entitlement Spending Threatens America's Future,"  decided to write a book, The Education of an American Dreamer, which was released on June 8, 2009.

Peter Lattman reviews the book in The Wall Street Journal and he calls the book, "an honest and winning account of an eventful life," with "self-deprecating wit."

Mr. Peterson attended Massachusetts Institute of Technology, Northwestern and the University of Chicago's business school. He worked at McCann-Erickson, Bell & Howell, and was President Richard Nixon's Secretary of Commerce. He later worked at Lehman Brothers for a decade before starting Blackstone in 1985.

Mr. Lattman says that Mr. Peterson spends much of the book talking about that went wrong in his life. Two of his marriages ended in divorce, and he wishes he spent more time with his five kids. Mr. Peterson blames his workaholic habits and emotional detachment. However, Mr. Peterson does celebrate his professional success.

One reviewer of the book on Amazon.com wrote:

If you're never picked up an autobiography before and even if you're not really interested in business and politics - try this book anyway. I doubt you will regret it. His life is very compelling and there are many lessons to be learned in The Education of an American Dreamer. If nothing else, you will appreciate the story of a true American dream, of pulling oneself up from meager beginnings to a position of influence and privilege.

Mr. Lattman ends by writing:

It sounds like good advice. In "The Education of an American Dreamer" Mr. Peterson comes off as the good guy who managed to extricate himself from fraught situations and forge ahead -- usually to great success. Dumb luck maybe but, as they say, you make your own luck in life.

The Education of an American Dreamer by Peter G. Peterson

Twelve, 375 pages, $34.99

The Wall Street Journal blog Venture Capital Dispatch interviewed Josh Lerner, a professor at Harvard Business School and a well-known voice in the venture capital industry. Mr. Lerner has signed on as a senior advisor to fund of funds manager Grove Street Advisors LLC.

When asked about the topic of his upcoming book, which addresses the public efforts to boost entrepreneurship and venture capital, Mr. Lerner said that the financial crisis has opened the door to massive public interventions in the West.

Many nations and their governments responded to the threats of illiquidity and insolvency by making huge investments in troubled firms by taking large ownership stakes. There are many concerns can be raised about these investments, from the rushed way in which they were designed by very few people behind closed doors to the design flaws that many experts think will limit their effectiveness.

But one question that should be asked Mr. Lerner says is shouldn't public funds also promote new enterprises and not just prop up troubled entities, especially when the venture industry is on life support, and troubled firms may be beyond salvation.

Silicon Valley, Singapore, and Tel Aviv all bear the marks of government investment, but for every successful public intervention spurring entrepreneurial activity, there are many failed efforts, wasting untold billions in taxpayer dollars.

When Mr. Lerner was asked what one or two changes would provide the biggest boost to venture capitalists, he responded:

There are two sets of changes that could make a big differences. The first is an evolutionary one, which is already underway. Not only have too many groups had mediocre returns for long periods of time, but they have undertaken a lot of "me too" investments that have made it hard for everyone to succeed.

We are now seeing that many second- and third-tier groups are having much greater difficulty raising new capital. While this is of course a frustrating turn of events from an individual perspective, from the point of view of the industry as a while, it cannot help but be seen as a healthy development.

The second relates to public policy. In too many areas, our system has made it hard to be an entrepreneur developing advanced technologies. From a patent system which has been overrun by sham litigation to the many barriers that public companies face, there are a whole variety of policies that create barriers to entrepreneurship.

We need to revisit many of the "reforms" of recent decades—from the strengthening of patent rights to Sarbanes-Oxley—and ask how they could be changed to minimize the harmful effects on entrepreneurs.

The impact of having more private equity and venture capital firms that will have to register as investment advisors with the Securities and Exchange Commission will promote some transparency and only impose a modest cost on the industry, Mr. Lerner says, but some of the proposals emendating from Brussels and Strasbourg, in which some members of the European Commission and Parliament are proposing to micro-manage investment decisions of private equity groups, are troubling.

When asked if private equity firms, including venture capital funds, pose systemic risks to the financial system, Mr. Lerner says that the topic is being researched under the umbrella of the World Economic Forum.

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For Endeavour, It's Better To Lever Less Than Fade Away
By Laura Kreutzer and Daniel Hausmann, Dow Jones LBO Wire

There has been a lot of hemorrhaging as funds have reported year-end valuations after a brutal 2008. But not all firms came out on the losing end.

Endeavour Capital Fund IV LP was written up by 20% in 2008, according to co-founder John von Schlegell. It is one of few private equity funds that can make that claim. The fund raised $285 million in 2004 and focuses on lower middle-market buyouts, particularly in the Pacific Northwest. Von Schlegell declined to say where the fund stood at year end, although one Fund IV LP said it was valued at about 42% above cost.

Academics were largely to credit for that. In November 2008, the firm's Grand Canyon Education Inc. broke through the initial public offering ice that ensnared markets after Lehman Brothers Holdings Inc. declared bankruptcy. It raised $116 million, and its stock is currently trading up around 33% from its initial offering price.

Endeavour didn't sell shares in the offering. Endeavour wasn't entirely immune from the market turmoil in the fourth quarter. Von Schlegell said some portfolio companies in the transportation and logistics sector suffered in the period.

Von Schlegell attributed the fund's resilience partly to the firm's modest use of debt, adding that leverage levels in many of the firm's deals average between one and three times cash flow. The practice helps insulate the firm's companies against steep writedowns during difficult economic times, even if it puts returns in a less favorable light during boom years.

"We probably leave some [internal rate of return] on the table during the super hot times," von Schlegell said.

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We Don't Know Enough About Bailout to Start Investing by Eric Bellman, WSJ.com

Private-equity investors need to know how free companies that received government help will be before they start betting their billions of dollars on troubled companies, said Kohlberg Kravis Roberts & Co. founding partner Henry Kravis.

“We do not know enough about the terms” of government bailouts, he told reporters in Mumbai on April 27, 2009. Investors are worried that if they invest in companies that have received help, “Are you now ensnared in government action and going to be called into Congress because you are making money?”

He said he is cautiously optimistic and is starting to see “rays of sunshine” suggesting the credit crises might be receding and global economy could be on the mend.

“I am starting to see signs that that are positive and were not there three four, five months ago,” as it has become easier to raise money this year, he said. “The capital markets have started to open.”

Still, he doesn’t expect the private equity market to come roaring back any time soon. It still is tough to raise money and the availability of money is unlikely to return to the frothy peaks of the past five years. He said the biggest private-equity deals will now be $1 billion to $5 billion transactions. “The world in my view will continue to go through a deleveraging for quite some time,” he said.

Kravis said he expects higher taxes and more regulations for the private-equity industry. Regulations requiring private-equity companies to mark the value of their companies to the price of comparable publicly traded companies are making it tougher to buy and sell companies for KKR. “If you didn’t have to mark to market you could move assets a lot more quickly,” he said.

Mr. Kravis was in India to help start its new office here. He said that while KKR has looked at lots of potential deals in India, it could be more than six months before they find the right fit. So far the deals on offer were either the wrong price, the wrong partners or the wrong industry.

The U.S. firm did make an investment in India last February when it agreed to invest $250 million in Bharti Infratel Ltd. KKR made its first investment in India in 2006, when it agreed to buy the software unit of Flextronics International Ltd. for $900 million.

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Buy me some peanuts and sushi? It doesn’t have quite the ring to it, but that’s what a 21st century ball park will get you. The New York Yankees and their private equity-backed concessionaire have bulked up the food and beverage line-up at the $1.3 billion new Yankee Stadium.

Besides traditional ballpark fare, yes, Cracker Jacks included, concession stands will serve sushi, hot-pressed Cuban sandwiches and garlic fries among other treats. Legends Hospitality, the company founded by CIC Partners, Goldman Sachs, the Yanks and the Dallas Cowboys, led a tour and sampling of the ballpark concessions Wednesday, April 15, 2009.

For Legends it’s all about serving a wide range of ball park fare fresh and hot. The company has spent four months training its staff of about 3,000 in cooking and customer service, according to Senior Vice President Mike Phillips.

Legends should have an opportunity to feast on fans’ appetite for its food. Centerplate, the Yankees’ former concessionaire, took home $70 million in 2007 from its deal with the Bombers. The new stadium features 444 point-of-sale stands, compared with 298 in the old ball park. Phillips declined to comment on projected financial performance but said that, per year, the company expects to sell enough hot dogs that if they were placed end-to-end, they’d stretch 300 miles.

The menu was developed through fan surveys. The Yankees hosted a dress rehearsal two weekends ago with two exhibition games against the Chicago Cubs. Phillips said the garlic fries and cheesesteaks were very popular, and the Farmers Market, where not a single fruit item was deep-fried, also received a lot of attention. Phillips himself couldn’t be pinned down on a favorite item.

“Every single item we serve is excellent,” Phillips said. “We really want to be happy with what we’re selling.”

Carl Provenzano of Carl’s Steaks and Mark Lobel of Lobel’s of New York, said, other than their Stadium offerings, they liked the slider burgers and Wagyu burger, respectively. Right field featured the garlic fries stand, Carl’s and La Esquina Latina. The $6 garlic fries were fairly potent and Carl’s $10.75 cheesesteak was on par with Philadelphia’s Pat’s Steaks.

Left field of the main concourse level offers Johnny Rockets, Brother Jimmy’s BBQ and a Lobel’s of New York butcher stand serving $15 prime beef steak sandwiches.

Brother Jimmy’s served yummy deep-fried pickles with horseradish sauce for $8. Sadly though, the Johnny Rockets staff will not be singing like their diner counterparts for the time being. They did offer up a solid $5 Nathan’s hot dog and $7 milk shake.

Lobel’s sandwiches were made with meat butchered on site behind a glass window for patrons to see. And considering the way last year went, the Yanks have to hope the prime rib is the only thing butchered in the park.

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It could be time for some new generally accepted buyout practices. The number of private equity firms that completed fundraising efforts in the first quarter fell by more than 70% from the first quarter last year. But a record number of them were out trying to raise money. This suggests competition for investors is fierce. They should push for lower fees and better governance.

Fund managers have good reason to raise money now. Most of them invested a lot of cash during the leverage boom, but the deals aren’t looking good. KKR’s publicly traded fund, KKR Private Equity Investors, has a market capitalisation of about $600m, down from $5bn when it first went public. The fund invested in several KKR-led buyouts in 2006 and 2007, including Alliance Boots, TXU, First Data, and HCA.

Buyout barons are looking for a chance to redeem themselves. Blackstone, for example, is in the midst of fundraising. With all kinds of asset prices now much lower, it may be a good time to buy companies. That’s certainly the view many buyout firm bosses have expressed.

But many investors have soured on private equity. Even some of the enthusiasts are cash-strapped, having taken losses on other investments. Private equity firms were seeking to raise nearly $890bn in funds in the first quarter. But funds with an aggregate of just $46bn closed, very modest even though fundraising usually continues over several quarters.

The result: demand for investors’ cash heavily exceeds supply. With their new-found negotiating power, investors could start with fees. Private equity fees are, generally, better tailored for investors than hedge fund fees. Management fees are slightly lower for large funds, often between 1% and 1.5%. And the carried interest or the portion of a fund’s profits the managers keep for themselves, often 20% is taken over a long period and can be clawed back if gains aren’t realised.

But the industry’s fees are still hefty, especially with many firms posting huge writedowns on funds invested in huge deals during the credit boom. Plus, management fees ballooned during the boom. What was meant to be a fee to keep the lights on now makes managers rich.

Not only that: private equity firms collect fees on the deals they do in addition to management fees and carried interest. A portion of these is credited back to investors. But a large part is often shared among the firms’ partners.

This raises a potential conflict of interest. Fund managers can get rich from these fees alone, encouraging buyout firms to do more deals - and bigger ones. But they add hardly anything to investors’ returns.

Investors should push for lower deal fees or even none at all. There’s a strong case that doing deals is what the management fees and carried interest are supposed to compensate. And since the fees come out of newly acquired, often highly-leveraged portfolio companies, investors might be better served in the long term by leaving the companies with that little bit of extra buffer against unexpected trouble.

Investors could also demand that buyout shops toughen up governance. They often have no say in fund management at all. In extreme cases, private equity investors have even agreed not to sue fund managers under any circumstances. This contrasts with a public company, for example, or even a mutual fund. In both cases, shareholders get to vote on important issues.

Buyout barons may justifiably resist giving investors the right to micromanage every deal. But since investors’ money is tied up for quite a long time, they should have some voice if they feel that their managers aren’t up to snuff.

Finally, private equity investors could ask for more freedom to trade their investments. Sure, they invest for the life of a fund. But if they find a buyer to take over part or all of their investment, that shouldn’t disadvantage a fund manager. Yet managers often have some say in such sales. Aside from this level of control seeming unwarranted, it can make a stake less liquid.

It may be no easy task to change practices that have become entrenched. So they may be hard to change. But investors with cash have something private equity managers badly need. They should seize the moment.

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Not too many citizens are presented with the opportunity to introduce the President before a speech at the White House. So when Paul Holland, a general partner at Foundation Capital, was asked to speak recently at an event in which President Obama would tout the value of renewable energy, he pounced.

Holland’s firm is a big backer of clean technology, and one of his portfolio companies, green construction-materials maker Serious Materials, recently reopened a shuttered manufacturing facility in Pennsylvania that has now brought in more than a hundred jobs.

This story especially appealed to President Obama, who at the event on Monday, March 23, 2009, underscored his commitment of billions of dollars to the renewable energy industry, which he believes has the ability to renew jobs and relieve our country’s dependence on foreign oil.

In his speech before introducing the President, Holland shared this success while emphasizing the value of the federal R&D tax credit. VentureWire followed up with Holland this week for a brief Q&A.

Q. How confident are you that the President and his advisors won’t enforce more regulation on the VC industry as it appears they’re trying to do?

I think it is early days in this administration and because of the contagion on Wall Street there is a tendency to regulate first then ask questions later.  I hope and actually believe that tendency is starting to change.

Q. In your opinion, if carried interest is taxed at as ordinary income, should a special break be included for VCs who are financing innovation?

Venture capitalists hold their investments for an average of 5.5 years. Venture funded companies have created tens of millions of jobs in this country-perhaps the single greatest source of high quality job growth in the last 30 years.  Venture capital carried interest is a capital gain and should be taxed at the prevailing capital gains rate.

Q. It’s clear that many of these cleantech projects will cost more than most VC funds can afford. Is the venture industry depending on the government to fill the gap now that many of the banks and financial institutions that historically funded these projects have been decimated?

Sadly yes. Until private equity recovers, the government will likely be the primary source of scale-up funding for capital intensive projects. That said, at Foundation Capital we are trying very hard to avoid heavy capital intensive projects and so far all of our projects have been funded by venture capital.

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Just when venture capitalists think they’ve safely avoided the crosshairs of regulators, they find themselves lumped together again with hedge funds and the scrutiny that comes with it.

In his testimony today about regulating risk (read the transcript here), U.S. Treasury Secretary Timothy Geithner proposed that hedge funds, private equity firms and venture capital firms should be required to register with the Securities and Exchange Commission.

No further details were provided, but it’s implied that Geithner is aiming to follow the proposals outlined in a recent bill titled, The Hedge Fund Transparency Act, which calls for these investment firms to file with the SEC and publicly divulge the value of their funds and the names of their investors.

This blanket-like proposal infuriates the venture industry, which has largely escaped the regulatory clutches of the SEC and Treasury Department. The National Venture Capital Association, which represents the venture capital industry, has lobbied hard to drive a wedge between it and hedge funds, characterizing venture firms as job generators and innovators, not wealth creators. Venture capital is a long-term business and an engine of the nation’s economy, it argues.

But with legislators pressured to heal a sickly economy and prevent another financial catastrophe, nearly every private pool of capital faces regulatory oversight. It’s why the Obama administration, which has generally befriended the venture capital industry, didn’t exclude VC firms from its plan to tax carried interest at the higher ordinary income rate.

We chatted today with Mark Heesen, the president of the NVCA, to talk about Geithner’s latest proposal. Here’s an edited excerpt of the Q&A:

Q. What is your reaction to Geithner’s testimony?

There are a couple of things that jump out to me in his discussion about “hedge funds and other private pools of capital.” No. 1, he says they’re looking at those types of funds that “individually or collectively pose a threat to financial stability.” As much as we want to talk about how the world revolves around venture capital, the fact is that it’s a very small asset class, relatively speaking.

We’re talking about $30 billion being invested per year. If suddenly you were to lose it all, would that pose a threat to financial stability? No. When you’re seeing buyout funds or hedge funds that raise one fund that is almost the entire amount raised by the entire venture industry, you have to realize these are very different asset classes.

The other thing that jumped out, he says, “…in the wake of the Madoff episode it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage.”

Well, our investors, those that invest on behalf of college endowments and pension funds, are not only highly sophisticated within the bounds of law, there even more sophisticated than the law requires them to be. They aren’t your individual, everyday investors in venture capital. These people aren’t going to get ripped like Madoff’s investors did.

Q. Is this your worst nightmare as the head of a venture capital trade group that venture firms are being wrapped in with hedge funds with regards to regulation?

Absolutely. This is déjà vu. After 9/11, when the Patriot Act came out, the Treasury was going to register a lot of different financial institutions because of the threat that they might be used by foreign entities for illicit purposes, like laundering money.

We were swept into that. So we sat down with the Treasury and Department of Homeland Security, and asked them, “Do you really think a terrorist group would put $5 million into a venture capital fund and sit there for 10 years until they got a return?” They of course said, “That’s not going to happen.” This is kind of the same idea.

Q. Do you think that Congress has enough of an understanding about venture capital to exclude these firms from regulation?

We’re at a point where policy makers have too much on their plate. They are not by and large educated in distinguishing between hedge fund and buyouts and venture. They’re expected to know everything, but they can’t know everything. So a simple solution is to use a broad brush. We have to be there to continue to educate.

History repeats itself, it’s kind of like Sarbanes-Oxley. There was a rush to regulate and then take care of problems that arise from it afterward. You’re seeing that now with a group of policy makers that “want to get something done.”

They have real pressure from their constituents who have lost their jobs or their mortgages. So they’re trying to get something done quickly. This is very much a Washington issue: We’ll deal with it now and clean it up later.

Q. Do you think it’s practical for the SEC to suddenly oversee hundreds of more firms?

I think you need to balance oversight and regulation with the practicality of government bureaucracy. The government can only do so much with the amount of people and money they have. They need to pinpoint the major concerns and work on those as opposed to trying to cover the ocean and do every job simultaneously.

The SEC goes to the hill every year and requests more people and more money. I don’t begrudge them for that. But should they spend time reviewing hundreds of venture capital registrations each year, or more financially questionable issues from other entities out there?

Q: So what happens from here for the NVCA?

We’ll talk to the treasury folks, but Obama has appointed very few people to key positions. You have your career bureaucrats, but they don’t make these policy decisions.

So getting into the Treasury to talk to those who make policy decisions as opposed to technical ones is hard. It’s only going to get more problematic going forward, Geithner can’t keep working for 23 hours a day. He needs help.

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