PrivateEquity07 Reading Material

The first in a series of Wharton Private Equity Reviews
Wharton Private Equity Review

Differentiation in
a Hyper-competitive
Market
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S ponsors
P R I V AT E E Q U I T Y S E R V I C E S
Differentiation in a
Hyper-competitive Market
The race for deals is on in private equity. Gone are the days when firms simply did due diligence, loaded
on leverage and hoped for outsized returns after selling the company a few years down the road. Today,
record-setting bids and unprecedented capital inflows have created an overheated environment in which
firms require new strategies to remain ahead of the pack. In this special report, produced in cooperation
with students from the Wharton Private Equity Club, PE experts highlight the innovative ways firms are
working to source deals, set themselves apart in an auction process and ensure performance once a deal
is done. Also, industry specialists offer a close-up view of the debt markets and the hot energy market,
Student Executive which saw one of the largest-ever private equity proposals earlier this year.
Committee
Executive Editors:
William Hobbs (WG07)
Sarah Hynes (WG07)
David Mars (WG07) C ontents
Marketing Team:
Anirudh Khatri (WG08) Private Equity Bidding Wars: When Capital-rich Funds
Vivian Lubrano (WG08) Compete, Intangibles Win the Deal Page 2
Content Team: Although valuation remains the most important part of any transaction, in todays environment
Wesley Bieligk (WG08)
Scott Weber (WG08) bidders must also come up with other, less tangible ways to differentiate themselves.
Sponsorship Team:
Troy Daniel (WG08) From Star-power to Branding, Firms Look for New Ways to
Court Private Equity Deals Page 5
Advisory Board Faced with stiff competition, deal makers are in a scramble to court potential targets with sourcing
strategies ranging from signing up marquee-name rainmakers like Jack Welch, to hiring brokers,
Karl Beinkampen (WG94), Executive
Director, Morgan Stanley Alternative
to relying on old-fashioned cold calling.
Investment Partners
Andrew Heyer (WG79), Managing Operating Partners Promise Performance and Higher Returns,
Partner, Trimaran Capital but Do They Always Deliver? Page 8
Praveen Jeyarajah (WG95), Managing Industry experts say that installing operating partners in-house senior executives with industry
Director, The Carlyle Group experience at portfolio companies can boost profits and feed higher returns. Others warn that
Michael Kopelman (WG05), Vice the strategy needs to be applied judiciously, and that the right fit can be hard to find.
President, Edison Venture
Esther Lee, Vice President, Apax Private Equity Firms Discover Electricity and Lead the
Partners Charge for Energy Investment Page 11
Andrew Metrick, Associate Professor
of Finance, The Wharton School According to private equity experts, a new regulatory climate and innovative derivatives are
drawing attention to energy. Meanwhile, other firms are making investments throughout the sector,
Dean Miller (WG99), Partner, PA Early including funds established to finance infrastructure and others dabbling in alternative energy.
Stage
Vinay Nair, Assistant Professor of
Finance, The Wharton School
Lender Roundtable: Outlook on Debt Markets Page 14
Stephen Sammut (WG84), Senior Members of the Wharton Private Equity Club coordinated a roundtable discussion between four
Fellow and Lecturer, The Wharton influential lenders to talk about the currently robust debt markets, trends in the sub-debt markets, and
School ways firms can differentiate themselves from the competition, among other topics.
Weijian Shan, Managing Partner,
Newbridge Capital Case Study in Effective Private Equity Differentiation: Arcapitas
Acquisition of Churchs Chicken Page 20
Private Equity Bidding Wars: When Capital-rich Funds Compete, Intangibles
Win the Deal
With so much money pouring into frequently care about that. After [running a business
for] a while, you are concerned about those things.
private equity funds, competitors for deals are
increasingly able to match one another when it For companies eager to sell out completely, or
comes to price. Clearly, valuation remains the most parcel off 100% of a division, price is about all that
important part of any transaction, but in todays matters, insists Kevin Landry, CEO of TA Associates,
capital-soaked private equity environment, bidders a private equity firm in Boston. Yet he argues that a
must also come up with other, less tangible ways deal based solely on price is not likely to generate
to set themselves apart. According to private equity the kinds of returns investors expect from private
experts, timing, sound strategy, operational expertise equity. Returns are driven by a private equity firms
and a track record of successful deals are the new ability to restructure a company and work with man-
currency in a market where money is no object. agement to unlock new value, he says. If a deal is
100% about price, why would you want to be in it?
Capital is now a commodity, so sellers are looking
for anything else that the bidder is going to add,
says Robert Chalfin, a Wharton management lectur- Three Elements of a Deal
er and president of The Chalfin Group, a Metuchen, Bob Frost, a managing director at Piper Jaffray who
N.J., advisory firm specializing in closely held com- specializes in advising clients in middle-market
panies. Price is not the only determinant, especially mergers and acquisition transactions, says bidders
if the sellers are keeping some equity. compete on three elements of every deal: value,
timing and certainty.
Capital is now a commodity, so sellers Value is value, and people have become very
aggressive [about it], particularly for high quality
are looking for anything else that the assets, he says. As for timing and certainty, thats
probably where firms can differentiate themselves at
bidder is going to add. the margin. We certainly are seeing an environment
Robert Chalfin, President, The Chalfin Group where you can differentiate yourself in the auction
process by putting yourself in a position to move
very quickly and create a timeline for the seller that
Chalfin, who is the author of the book, Selling Your fundamentally gets them to a close more quickly.
IT Business: Valuation, Finding the Right Buyer,
To do that, he says, companies need to pull together
and Negotiating the Deal, says even business own-
enough resources to front-load much of the due
ers who are selling out completely are concerned
diligence process. To the seller, that translates into
about picking new owners who will maintain the
greater certainty. Sellers are focused on making
reputation of the company that they may have built
sure they move forward with parties that they are
from the ground up, or at least nurtured for a time.
highly confident will close the deal, says Frost.
They are going to look at the buyers operational
history to see if they will keep the business running He adds that industry expertise and specific experi-
and continue to service the customers. The sellers ence in the sector, or related sectors, along with a

Knowledge@Wharton Wharton Private Equity Review
private equity firms track record, also can lead to Landry of TA Associates notes that while there is
raising a sellers comfort level with an individual room for relationships in a deal, theres not a lot of
bidder. In an auction environment, often its the room. Youve still got to be competitive on price,
case that sellers are looking at values that are com- he emphasizes. They may say, We really like you,
parable, and theyre really trying to pick a partner but what they really like is the check.
based on their understanding of the business and
Private equity firms often bring full teams of up to
their understanding of the risks.
10 people, including lawyers and accountants, to
Luke Duster, director of new business development presentations. Some companies like you to bring
at Harris Williams & Co., an advisory firm special- in a huge team to show how sincere you are, says
izing in middle-market mergers and acquisitions, Landry. TA usually limits its company visits to three.
estimates that about 5% of any deal is determined We tend to bring a smaller, focused team and save
by intangibles beyond price. To set themselves apart the lawyers and accountants for later.
from the pack, private equity firms need to act fast
During the due diligence period, private equity
from the start and identify a convincing strategy that
suitors can also impress managers by seeking the
will stand out among the many bidders proposals,
right information in a courteous manner, even under
says Duster. Its important for the group to find its
tight deadlines, says Duster. You have to balance
angle quickly and communicate that to the banker
demands on the management team and the time
and the potential seller soon and often to stay
allocation, he says. People who are able to bal-
ahead of everybody else.
ance that well build good rapport, and people who
Financial sponsors also need to emphasize their lose sight of that develop a reputation for being
brand, he continues. To stand out, firms need to a difficult partner. If theyre too demanding and
highlight their track record and show they have focused on the wrong areas of diligence and cre-
added value to other companies. They also need to ate mountains of work around the wrong items, it
make clear who exactly will be involved in the deal shows they are missing the mark.
and describe their working styles, as well as outline
what in-house resources they can bring to the firm Sellers Market
going forward.
In addition to record prices, the competition for pri-
vate equity deals is altering the terms for deals in
Prepping, Wining and Dining favor of sellers, says William Parish, Jr., a partner in
The next crucial step in the auction process comes the Houston office of the law firm King & Spalding.
during the management presentation. Duster says He recently represented a buyer who agreed to
in todays super-competitive market, many private acquire a firm with no financing contingency.
equity firms have spread themselves thin chasing Basically, we took all the closing risk, says Parish.
down too many prospects. Some private equity Thats unusual. A couple of years ago, we were not
firms may sit in on 35 to 40 presentations a year. seeing that.
Too often, he says, companies send junior analysts
In addition to disappearing financing contingencies,
who have not had enough time to research the com-
Parish pointed to other trends in deal terms that are
pany and are clearly distracted.
moving in favor of sellers:
Its hard to prepare, especially if youre checking
Reverse break-up fees: Sellers are now able to
your blackberry during a meeting, he says. The first
demand penalties for buyers who fail to complete
impression is key. You need to come prepared to lis-
the transactions. For example, he notes, Bain
ten to the companys story and come prepared with
Capital and Thomas H. Lee Partners agreed to
your own story. You have to really woo management.
include a $500 million break-up fee in their deal to
Duster says that too many private equity teams do acquire Clear Channel Communications.
not take advantage of bonding opportunities, such as
asking management out to dinner the night before the Assumption of industry risk in material adverse
presentation. Groups that dont take that opportunity change conditions: In 80% of private equity deals
end up having a sterile relationship with the manage- announced in 2005 and 2006, the buyer assumed
ment team. Learning who they really are plays a very industry risk in material adverse change closing
important role in managements decisions. conditions, according to King & Spalding.

Differentiation in a Hyper-competitive Market
Limited indemnification: Buyers are agreeing to Brian Conway, who heads the Boston technology
shorter indemnification periods, from up to three group for TA Associates, says there has been a con-
years to a year or less. Escrow amounts are now solidation among investment banks in which larger
a smaller percentage of the purchase price, and firms have acquired smaller specialty boutiques.
some buyers are taking on representation and Now, individual bankers are spinning out new
warranty insurance to avoid the escrow support specialty firms that lack services such as trading
requirement completely. and underwriting that exist at the large investment
banking houses, but they offer a sharp focus on
advisory services. As a result, there are very few
To stand out, firms need to highlight good companies that go unbanked, says Conway.
I think theres a right bank for every company. You
their track record and show they have II. Circling the Globe for Real Estate
might find Goldman Sachs selling a middle market
added value to other companies. business, or you might find a middle market firm
doing it.
Conway adds that when TA is on the other side of

Even strategic buyers are stepping up the competi- the equation selling companies in its own portfolio,
tion with favorable terms. Traditionally, financial it looks for the best individual banker with strong
buyers had an advantage over buyers already experience in the industry and deep relationships.
working in the industry because they did not face
anti-trust review. Now strategic buyers are agreeing According to Landry, the rising population of invest-
to so-called Hell or High Water Clauses that guar- ment bankers poses problems for private equity
antee they will make divestitures or take on other firms and drives up fees. Theyre on all sides.
remedies to complete the deal. Theyre running the auctions. Theyre doing the debt
financing and getting fees and sometimes theyre
Compensation is another area in which buyers are competing with you for deals. In addition, he is
eager to sweeten the deal for sellers. Management dubious of investment banks that also have their
compensation is an area in which both financial own captive private equity wing. Youve got to
and strategic buyers can get creative. Many private wonder, if theyre bringing you the deal, why didnt
equity firms find this a good way to differentiate they take it?
themselves, says Duster. Compensation packages
are structured on the needs of the management As prices soar ever higher, Whartons Chalfin says
team and whether they want to continue to be sellers retaining equity need to be especially con-
equity partners or are hoping to sell out completely, cerned about how private equity firms will deliver
he says. outsized results for their investors, particularly when
they are heavily leveraged.
Frost says compensation is closely evaluated by
sellers, but is not a critical factor in differentiating I think everyone is concerned about the large
among buyers. I think most private equity firms amounts of money private equity firms are paying,
understand they need to create an attractive incen- he says. Sellers sometimes find themselves having to
tive structure for management and, for the most think about whether the buyer can really afford to pay
part, people are doing that. what they are offering. Sellers are now asking, Are
they competent stewards? Are they overpaying? v
A Role for Investment Banks
To help sellers choose among their many potential
private equity acquirers investment bankers are
growing increasingly active in the middle market.
The market has become more sophisticated in
terms of the amount of capital going into private
equity firms, but also the number of intermediaries
out there now, says Frost. The market has become
very efficient.

From Star-power to Branding, Firms Look for New Ways to Court
Private Equity Deals
The days when private equity fund dont really build a good relationship with manage-
ment that way, so you tend to not get quite as much
managers pursued proprietary deals at their own
information. Thats a formula for lower returns, as
pace are long gone. As more investment capital
opposed to cultivating people for years and having
flows into the market, deal makers find themselves
them come to you. Its much more harmonious.
in a scramble to court potential targets using sourc-
ing strategies ranging from signing up marquee- Doppelt says that private equity firms need to invest
name rainmakers like Jack Welch, to hiring brokers in cultivating companies for the long-term, even
to relying on old-fashioned cold calling. According before they think they are interested in selling. If
to experts from Wharton and private equity prac- you take whatever business is super-hot today and
titioners, deal sourcing techniques are becoming knock on its door, it has most likely had pitches from
increasingly important as firms look for any kind of 10 investment banks. You need to network early.
lead in the competitive market.
John Cozzi, managing director of AEA Investors,

says only about 20% to 25% of the firms deals are In most cases, private equity firms prefer
proprietary, with another quarter coming from affili-
ated funds and half from bankers. Last year, the
a proprietary deal, but the reality is that
company looked at 600 companies and invested in more and more companies are hiring
three. A year ago, he says, AEA would only have had
to meet with 100 companies to secure three deals. investment bankers to stage auctions.
Relying on relationships and reputation are not
necessarily enough to bring deals through the door,
Todd Millay, executive director of the Wharton
he says. Today, you need a much more process-ori-
Global Family Alliance, says private equity inves-
ented approach.
tors are teaming up with entrepreneurs they have
Industry wide, only a third of respondents to the already financed to find new deals. He gives the
most recent Association for Corporate Growth/ example of an entrepreneur who builds a successful
Thomson Financial DealMakers Survey are able to medical supply business and sells to a private equi-
make half their deals exclusive. In most cases, pri- ty firm. The entrepreneur often goes on to become
vate equity firms prefer a proprietary deal, but the an investor in other medical supply companies.
reality is that more and more companies are hiring The private equity firm would love to come in side-
investment bankers to stage auctions, forcing quick by-side in some of these other investments, because
decisions about transactions which fund managers the entrepreneur knows whats going on. If a private
fear they may ultimately regret. equity firm is smart, it can turn its investments into
future investment partners.
We have historically not been active in auctions,
says Michael Doppelt, managing director at Bear Cozzi notes that networking with managers of poten-
Stearns Merchant Banking (BSMB), where he is tial targets can be difficult. A lot of managers dont
responsible for marketing and deal-sourcing. You want to meet with private equity firms because they

think we will come in there and fire them all. AEA bank to price and evaluate securities as part of a
attempts to engage managers at different levels, from private equity transaction. Doppelt adds that BSMB
the board room to the executive suite and below, as a does deals through Bear Stearns investment bank-
way to get into the company using any entrance that ers, but they do not represent a majority of the
is open. We go out to the company and develop rela- firms transactions. BSMB works with other invest-
tionships with people at multiple levels, says Cozzi. ment banking houses, too, he says. Its a very com-
Just by having dialogue with a person you get a lot petitive environment. If were not paying fees on the
more information. street, we wont get services.
While investment bankers can be useful, compa-

Advisors, Stars and Private Clubs nies can get a better edge on deals with the use of
Increasingly, companies under pressure to find deals corporate executives who sign on as consultants
are turning to investment banking advisors for help. or special advisors. These advisors, like Welch, are
often star-power names who can provide firms with
What an M&A advisor brings is relationships,
deep and rich industry contacts instantaneously.
says Kent Weldon, managing director of Thomas
Doppelt notes that BSMB hires operational partners
H. Lee Partners, who participated on a panel about
with long experience in industry who can bring
mega funds at the 2007 Wharton Private Equity and
credibility to deal sourcing by demonstrating knowl-
Venture Capital Conference. We who work in pri-
edge of the business. We want to show more than
vate equity all have a lot of years doing the same
some Wall Street guy sitting in front of a screen.
thing and we have similar financial training. When
you pick an M&A advisor, youre getting a senior The firm also has created a special fund open for
person with 20 years of relationships for deal flow. high-level executives with whom BSMB would like
That creates a channel for communication with to develop deeper connections. Weve limited it to
people that takes many forms. c-level executives at important companies in our
space as an incentive for them to have a connec-
tion to us. If they come across a deal, we will be an
Developing industry specialization early call, says Doppelt, who was about to meet
with an investment banker representing a company
is another way firms try to position in search of capital to make a retail acquisition. The
themselves for potential deals, former chief executive of the target is in the BSMB
fund. That can be powerful stuff.
promising operational strength that will
Another new trend in deal sourcing is the rise of
boost returns for investors. so-called club deals, in which several large private
equity firms band together to finance a transac-
tion that otherwise would be so large the company
Cozzi from AEA says his firm is often able to attract would need to seek backing from the public markets.
deals because of the nature of its client base. AEA
was an early private equity firm founded in 1968 by Weldon says that many publicly traded companies
the Rockefeller, Mellon, and Harriman family inter- are now open to overtures from private equity. New
ests and S.G. Warburg & Co. Ownership families regulations following the scandals at Enron and
like to sell to us because families are investors in other corporations, such as the Sarbanes-Oxley Act,
the fund, he explains. are making public ownership less attractive, he said.
Doppelt says Bear Stearns maintains a Chinese wall Activist hedge funds demanding change at public
between the private equity fund and its investment companies are also creating new sources of pri-
banking operations. Still, there are some advantages vate equity deals, according to Weldon. A year or
to being part of a sophisticated banking business. two ago, we wondered if the hedge funds would
We work with other investment banks quite a bit, become competitors and leapfrog over us in doing
but our relationship with Bear Stearns is a good private equity deals. In fact, they have been a great
one, he says. Bear Stearns is a vast institution with source of transactions for us. They have a shorter
tremendous resources, and we benefit from that. horizon than we do, and as a result they are putting
a lot of companies into play and forcing companies
For example, private equity executives have been into our hands.
able to tap financial expertise at the investment

Building a Brand articles, but it also sends deal partners to meet with
doctors who may someday become the source of
Developing industry specialization is another way
transactions.
firms try to position themselves for potential deals,
promising operational strength that will boost Berkowitz does not mind sharing information, even
returns for investors. though that commodity is usually closely guarded in
the highly competitive private equity environment.
For example, BSMB, which focuses on private equity
Its a totally different approach. Traditionally, the
in the middle-market, has expertise in branding and
buyout firm has a scintilla of an idea and protects
consumer products, says Doppelt. BSMBs chief
it as if it is the most important piece of information
executive, John Howard, became interested in Seven
there is, he says. Our approach is to leverage our
jeans when the women in his household were all
relationships with the key surgeons, management
Taming Complexity in Services: Stay Close to Your Customer (But Not Too Close)
wearing them. His interest as a passionate consumer
teams, distributors and medical centers to drive the
convinced Sevens management to enter into a pri-
growth of all our companies at once.
vate equity deal with BSMB.
The companys retail and global souring experience The Old-fashioned Way
made also made it an attractive partner for Stuart A final strategy to drum up private equity deals is
Weitzman, the footwear company. According to at least as old as door-to-door encyclopedia sales:
Doppelt, founder Weitzman was not looking for cash cold-calling. Brian Conway, a managing director
but wanted expertise to expand. BSMB bought a 40% at TA Associates who prefers to call the strategy
stake in the business after Weitzman asked: How investment origination, says three-quarters of the
much do you need to invest so this matters to you? investments the firm has closed have been origi-
Tim Berkowitz, president and managing director of nated by TA.
HealthPoint Capital, a private equity firm special- Conway stresses the firm does not exactly knock on
izing in the narrow health care arena of orthopedic doors like a private-equity Fuller Brush man. The
devices, has not only developed a highly specialized firm organizes its staff around industry groups, and
industry focus it has also positioned itself as an within those groups analysts look for sectors that
information broker for the fragmented industry. seem most promising. Within finance, for example,
HealthPoint has its own research staff that writes TA has built expertise in financial technology with
regular news columns and blogs appearing on the two partners and 15 investments in that sector. Then,
companys web site. The site has become a go-to within each sector, TA burrows deeper into specific
location for industry news about everything from segments. For example, within the area of financial
public company earnings, to FDA approvals, to technology there are plays to be made in back-office
changing insurance reimbursement policy to tech- automation, credit derivatives or foreign exchange.
nology developments. We look and find the leaders in each segment,
It is our deal engine. It creates brand recognition, he says. Were well prepared and have a reason
says Berkowitz, adding that the founders of the firm for wanting to call on a company. Often, he says,
took the unusual approach because they did not TA is the first private equity firm that has ever
want to be two more private equity guys eating our approached the company. Many times it takes years
dinner on Park Avenue hoping for the phone to ring. of informal visits to learn about the company before
a deal is done.
Instead, they have developed a brand for the com-
pany among orthopedic surgeons and other key We dont think that makes the relationship propri-
sources of deal flow. Berkowitz notes that many etary, he says, but if a transaction does come up,
companies in the space are small and owned by TA generally has more information about a com-
doctors working at medical centers in far-flung loca- pany than competitors and is better able to make
tions around the world. HealthPoints web site, he an offer that it can live with long-term. I think the
contends, is now their gathering place. There is no [current] market requires [firms to] come in on an
Silicon Valley for orthopedic devices, he points out. investment-banking timetable, learn a business,
understand it and then pay the highest price with
When the industry convenes for conferences, the most certainty of close. I question whether that
HealthPoint sends a research team to compile is a long-term strategy that is sustainable. v

Operating Partners Promise Performance and Higher Returns, but Do They
Always Deliver?
According to a 2007 Association for At one company, profits dont increase,

Samuelson writes. Five years later, it earns $10 mil-
Corporate Growth/Thomson Financial survey, pri-
lion annually, but the profits have been used to
vate equity professionals see lower returns as the
repay $30 million in debt. If the company is then
greatest threat looming over them more so than
resold for the same $100 million, the private equity
competition from other firms and hedge funds. For
firm has doubled its original investment of $30
many, a way to avoid that problem is to install so-
million, he notes. It uses $40 million to repay the
called operating partners senior-level executives
remaining loan and is left with $60 million.
with industry expertise at portfolio companies.
Panelists at the 2007 Wharton Private Equity and At the other company, improvements in operational
Venture Capital Conference and others in the industry performance increased profits to $15 million after
say that operating partners with experience running five years. When that company is sold for 10 times
plants and facilities, and rolodexes full of industry profits, the price is $150 million. After repaying
contacts, can boost profits and feed higher returns. the $70 million loan, the private equity firm has
$80 million nearly triple its original investment,
The financial markets are largely commoditized.
Samuelson explains.
One firm cant get much more debt than any other
firm, notes Scott Nutall, a partner at Kohlberg
Kravis Roberts who was a panelist at the Wharton Skin in the Game
conference. All of us focus on deal sourcing, but According to Nutall of KKR, long-time private equity
the real way to generate returns is to improve the professionals tend to have backgrounds in transac-
business post-purchase. tions and finance. Traditionally, private equity firms
focused on the financial structure of a deal, then
hired outside consultants to orchestrate an opera-
All of us focus on deal sourcing, but tional plan. The consultants would come into the
company, write a report, send a bill and leave.
the real way to generate returns is to
That didnt do a lot for us, Nutall says. They
improve the business post-purchase. didnt have skin in the game. KKR responded by
Scott Nutall, Partner, Kohlberg Kravis Roberts building its own in-house consulting team of senior
executives with operational experience to work with
management in portfolio companies. The opera-
Any improvement in operations that leads to higher tional partners have experience running plants and
profits is magnified through the leverage in private businesses, and receive the same incentives as
equity. In a Newsweek article titled, The Enigma KKRs deal-making partners.
of Private Equity, financial columnist Robert
Peter Clare, managing director of The Carlyle Group
Samuelson cites a hypothetical example of two
and another conference panelist, says that with
companies with $10 million in annual profits that
increased competition for deals bidding up valua-
are bought for 10 times that, or $100 million. The
tions, operational improvements are more impor-
private equity buyer spends $30 million and bor-
tant than ever for companies hoping to continue
rows $70 million.

to deliver above average returns for their private improvement, Quella says. Blackstone keeps about
equity investors. 10 to 15 of these senior-level executives working
with it on industry opportunities and sourcing
Weve developed both in-house and loose networks
including big names such as ONeill and David Verey,
of operations executives who will participate in
former chairman of Lazard Freres in London.
due diligence and may end up running a company
or serving as an executive chairman, Clare says. Bain Capital, founded 23 years ago by former con-
Industry expertise helps us set the plan accurately sultants from Bain & Co., has been using operating
and focuses [us] on what is achievable in the short- partners for more than 15 years and has one of the
est amount of time possible given the competitive- industrys largest stables of dedicated, in-house
ness of our business today. It is fundamental to what operations-oriented professionals to partner with
we all do. Its a big reason for our ability to generate and help portfolio companies. Bain now has 30
returns that are above overall equity markets. operating professionals, double the number from 18
months ago.
No Single Formula
Some large private equity firms have hired mar-
quee names as operating partners and consultants, At KKR, operational executives also
including Louis V. Gerstner Jr., former chairman
of IBM who is now chairman of Carlyle; General
serve on deal teams and can provide
Electrics former chief executive Jack Welch, who is enough understanding of a potential
now at Clayton, Dublier & Rice; and former Treasury
secretary Paul ONeill, who is now a special advisor investment to justify a higher price
to The Blackstone Group. that will give the firm a leg up in the
James Quella, senior managing director and senior bidding wars.
operating partner at Blackstone, notes that there
is no single formula for companies that choose to
use operating partners. Theres diversity among
Bain Capital managing director Steve Barnes says
the models and an absence in some firms of a deep
the firms model is a blend of consultants and oper-
bench of operational people. However, the trend
ating professionals with several years of experi-
overall has been unequivocally in the direction of
ence. In addition, the firm uses outside consultants
bringing in executives and executive consultants
to leverage the time of management and the Bain
who have a lot of experience in operations.
team on strategic issues. Our heritage is deeply
Blackstones model, which is also used in various rooted in a consulting and operating background.
forms at many other firms, is to organize deal teams The original thesis was to have professionals who
around industry sectors to bring a depth of under- understand strategy and what it takes to get things
standing about operations and key players in the done within a company. That way we would do a
industry to transactions. The industry orientation better job of selecting assets and a better job with
helps with deal sourcing, but it also can provide a the assets once we owned them in our portfolio,
better sense of how much potential upside can come says Barnes.
to a transaction through operational improvements.
Deep Capability
At KKR, operational executives also serve on deal
teams and can provide enough understanding of Blackstone has a core group of staff known as the
a potential investment to justify a higher price that portfolio management team. Headed by Quella,
will give the firm a leg up in the bidding wars. Its members of this team have operating specialties
something that will continue whether its within the that are organized not around industry exper-
firm or a consulting approach, and more firms are tise, but around business capabilities that can be
doing it, says Nutall. deployed across all the companies in Blackstones
portfolio. For example, the portfolio management
Blackstone has a network of executives it can call on team has people with expertise in supply chain
to help with the operational issues. What we have issues, pricing, sales force management and rev-
is a bench of partners who have had deep CEO-level enue initiatives. Blackstone even has a full-time per-
experience in running companies in an industry, and son dedicated to the Lean Six Sigma management
they will provide insight and guidance and counsel training program.
not only in industry dynamics but also operational

Each of these people has industry experience, but becomes a problem, then its his or her problem.
we also want them to have deep capability along We might bring in some people [from] industry who
what we would say is a functional area, Quella can be helpful on the board, and maybe even active
explains. The team also makes an impact on opera- board members, but were not going to have people
tions by consolidating functions across companies here that we would call operating partners.
in the portfolio. For portfolio companies that want
Landry says that if a target companys management
to participate, Blackstone offers shared purchasing
needs so much help that a financial sponsor needs
of good and services that could boost a portfolio
to bring in an operating partner, he steers clear of
companys performance and provide better returns
that company. Were trying to invest in good com-
for investors.
panies. If a company needs an operating partner,
Blackstone is now in the process of hiring a medical then theres something wrong.
benefits and cost expert to help portfolio companies
Douglas Karp, managing partner of Tailwind Capital
procure health care services, which total more than
Partners, advised the Wharton conference partici-
$3 billion a year. Health care is the fastest-growing
pants to choose operating partners with care. The
cost item for the firms portfolio companies, which in
executive we look for is a unique individual, not
the aggregate have $85 billion in annual revenues.
somebody who is looking for a job. A big name
It may be that we can accomplish things for our coming from a large company is not always the
portfolio companies that they cant accomplish on best choice to run a smaller company or business
their own, says Quella. Its not to take benefits unit for a private equity firm, he points out. Were
away. The goal is to improve the cost efficiency. looking for a committed executive who may have
run a larger business and had success, but also
According to Quella, operating partners can also
understands how to operate in our size of business
contribute to the debate over whether to take on
with fewer resources. We have seen executives who
a deal or not. They add a dimension of insight and
were successful at a big company but didnt make
experience on the scope and implication difficulty of
the transition.
projected operational improvements. Deals other-
wise not affordable can become attractive, he says. John Cozzi, managing director of AEA Investors, is
also cautious about imposing an operating partner
Uber-CEOs and Other Problems on portfolio companies. The concept is enticing,
but its very difficult to get right. Youre asking some-
Quella notes that some operating partner mod-
one who is an all-star player to go in and become a
els can be recipes for disaster. Ive seen models
coach. Weve wrestled with finding the right mix of
where there is an uber-CEO. The private equity firm
people who dont have the ego or the need to have
takes an ex-operations guy and puts him in on top
their hands on the steering wheel. v
of the management team and theres a lot of fric-
tion. Adding operational expertise to management
requires strong people skills on all sides, he says.
Its not just a question of how to do Six Sigma, its
a process of winning hearts and minds. Ive seen
ex-operating executives come in and announce,
Im here, and Im in charge. That doesnt work very
well, particularly if you have a strong management
team. Theres a delicate balance between support,
guidance and learning to add value, versus control,
authority and friction. Thats a balance we take very
seriously.
Kevin Landry, chief executive of TA Associates, is

not a believer in operating partners. We dont have
[them], he says. We expect everyone here to be
a complete player. Partners at TA follow the more
traditional private equity design in which account-
ability for results lies with the partners who find
the deal, conduct the due diligence, structure the
transaction and serve on the board. If a company
10
Private Equity Firms Discover Electricity and Lead the Charge for
Energy Investment
Earlier this year, a consortium of private quadrillion British thermal units (Btu) in 2003 to 563
quadrillion Btu in 2015, and then to 722 quadrillion
equity firms led by Kohlberg Kravis Roberts banded
Btu in 2030 representing a 71% increase.
together to acquire TXU Corp., the Texas utility com-
pany, for $32 billion in one of the largest private
equity deals ever proposed. According to private Now within Reach
equity experts, a new regulatory climate in some When Jonathan Farber, cofounder and managing
energy sectors and innovative derivatives smooth- director of Lime Rock Partners, a private equity firm
ing volatility are drawing attention to energy, along specializing in energy, started the company in 1998,
with a macro-environment in which emerging there were just five or six other private equity firms
economies demand a growing share of the worlds in the energy business with about $2 billion worth
energy resources. Meanwhile, other firms are mak- of capital invested. Now, there are 15 to 20 compet-
ing investments throughout the sector, including ing firms with $30 billion invested in the industry.
funds established to finance infrastructure and oth-
It was very rare, to the point of never happening,
ers dabbling in alternative energy.
that generalist private equity firms would dip their
I would say this has been the most active period toe in the water of the hard-core energy space,
for private equity involvement in energy Ive ever says Farber. Firms didnt look to oil and gas as an
experienced. Theres a lot of competition for deals appropriate place to invest.
that are out there, and there seems to be interest in
just about all sectors of the energy industry, says
Jim Dillavou, who leads the national energy and A survey by the Association for
utilities practice at Deloitte & Touche in Houston, Tex.
Corporate Growth and Thomson
While energy encompasses a range of businesses
with widely varying profiles, a survey by the Financial predicts that energy will be
Association for Corporate Growth and Thomson among the top three sectors for deal-
Financial predicts that energy will be among the top
three sectors for deal-making in the coming year, making in the coming year.
behind health care and life sciences, but ahead of
business services.
Now, some of the biggest names in private equity
Demand for energy is expected to keep grow- Kohlberg Kravis Roberts and Texas Pacific Group
ing. According to the U.S. Energy Information are teaming up to buy TXU. Dillavou says the
Administration, despite world oil prices that are new interest in energy is driven by the volume of
expected to be 35% higher in 2025 than was pro- capital pouring into private equity overall. At the
jected in 2005, world economic growth continues same time, he says, investors are deciding they
to increase at an average annual rate of 3.8% over want to be more involved in this key segment of the
the period through 2030. Total world consumption economy, particularly following the recent rise in
of marketed energy is expected to expand from 421 commodity prices. Meanwhile, capacity shortages in
11
many markets make energy an appealing sector for The private equity firms bidding for TXU have
private equity investors, at least for the near future. already aligned themselves with environmental
groups and have pledged they will not sell the com-
There are a lot of opportunities, and some that
pany for at least five years in an attempt to fend off
didnt look that attractive a few years ago look much
opposition that began to boil up in the Texas state-
different today, says Dillavou.
house within days of the announcement. Change
Wharton professor of business and public policy in corporate control at this level is fraught with reg-
Matthew White says the enormous capital require- ulatory uncertainty and a need to appease a broad
ments of most energy investments have, until now, array of political constituents, says White. Its a
been beyond the reach of private equity firms. Now, daunting prospect.
with so much money pouring into private equity
At the same time, Dillavou notes, the repeal of
funds, deals on the scale of the TXU transaction are
the Public Utility Holding Act in 2005 is expected
possible.
to encourage private equity investment in energy
because it eliminated numerous restrictions on
Regulatory Uncertainty ownership, particularly in electricity. Weve seen
White adds that private equity movement into some activity as a result of the repeal, although
the electricity and gas markets remains difficult maybe not as much as some expected, but a lot of
because these parts of the energy business have people think it could be coming.
a lot of regulatory and political oversight. The
rules of the game are changing substantially over Risky Pipeline
time. Deregulation in electricity and gas continues
White says that it will be interesting to see if pri-
in fits and starts, and a lot of it is at the state level.
vate investment begins to flow into exploration and
Theres a great deal of uncertainty about the reward
oil field service firms. Private equity at that level
to investors, and that will give any set of investors
would be one more source of capital for a fairly
pause during due diligence, says White. One might
risky line of business.
look at this and say there are greener pastures else-
where at least until the regulatory environment Farber of Lime Rock Partners believes the business
becomes a little more transparent. is likely to remain highly volatile because the capital
spending cycles dont match up to the price signals
the market sends out daily. If the market needs more
Whartons Matthew White says capacity, it can take years to find new sources of
energy and construct additional pipelines and pro-
the enormous capital requirements cessing plants. If companies build excess capacity,
of most energy investments have, the price remains low for years, stifling new invest-
ment until an acute shortage drives prices up again.
until now, been beyond the reach The nature of the industry is that it cant remove
of private equity firms. or add capacity on a dime, says Farber. That still
hasnt changed and cant physically change. Indeed,
he argues, industry volatility has grown worse as
Pulling off a change of control in this area is very the easiest exploration targets have been exploited.
difficult given the political approvals that are nec- Now, were moving into areas with greater political
essary, according to White. New Jersey regulators challenges, like Sudan, or technical challenges like
balked when publicly held Exelon, of Chicago, deepwater offshore drilling.
attempted to take control of Public Service & Gas
Bill Macaulay, chairman of First Reserve Corp., a
in their state. Private equity firms have hit similar
25-year-old private equity firm focused on energy,
roadblocks. In 2005, regulators prevented a $1.25
notes that while activity in the sector is up, it still
billion bid for Portland General Electric Co. over
lags behind other industries that are attracting
concerns about potential rate increases and the
record private equity investment. In the U.S. and
short-term nature of TPGs investments. Arizona reg-
Europe, private equity activity as a percentage of all
ulators refused to sanction a buyout of UniSource
merger and acquisition transactions is around 20%,
Energy Corp. in 2004 by a group of investors that
while in the energy sector it remains below 5%.
included KKR, J.P. Morgan Partners and Wachovia
It is still difficult to put leverage on [companies] in
Capital Partners.
12
the energy business given the volatility of the com- Alternative Energy
modity prices, he says.
Another potential area for private equity investment
in energy is alternative technologies, although this
Opportunities for Entry area remains highly speculative and difficult for
Over the long term that may change, and already most private equity firms.
new mechanisms to hedge against swings in com-
modity prices have made leveraged investment in There is tremendous potential there, but in our view
energy easier over the past five years. Macaulay to date most alternative energy investments
notes that, in particular, hedging in electrical power need to either have a government mandate, such
has made that piece of the energy business more as tax subsidies, or other government assistance if
attractive to private equity firms. youre going to have a significant change in the tech-
nology to make it truly economic, says Farber.
The spectacular collapse of Enron has also had an
impact on private equity involvement in energy, Macaulay explains that alternative energy invest-
says Dillavou. After Enron, energy investment dried ments may be attractive for smaller firms or venture
up for a while, and everyones stock price was hurt. capitalists, but they are unlikely to attract classic
That opened up opportunities for private equity to buyout artists because there is often little, if any,
step in and we saw some spectacular returns on cash flow to pay down debt. The other important
investment for people who were able to pick things thing to remember is that alternative energy is
up on the cheap. In 2004 a consortium of TPG, KKR, extremely price sensitive, he says. You need high
The Blackstone Group, and Hellman & Friedman prices to justify almost any alternative.
bought Texas Genco, a power generation company, When it comes to energy, some of the concerns
for $3.7 billion. A little more than a year later, they about too much capital driving private equity invest-
sold it to NRG Energy for $5.7 billion. ment are dampened because the sector has, at least
According to Dillavou, the rise in infrastructure so far, been less attractive than other industries. But
funds also gives private equity investors a way to for firms focused on the energy space, there is a
participate in the energy industry. The Macquarie larger force to be reckoned with, says Macaulay.
Bank, Goldman Sachs and JP Morgan all have We still have competition from the major oil com-
created infrastructure funds, he notes. That is a panies, and if you roll forward, the national oil com-
different profile than thehistorical private equity panies are a much bigger new competitor to [a firm]
investmentbecause of the long-term horizon for like First Reserve than the leverage buyout con-
the investment, he adds. The investoris trying to cerns, he says. Macaulay points to Saudi, Russian
takeassets that historically have earned asteady and, more recently, Indian national champions as
but sleepy return, andincrease the returnfrom major competitors, desperate to tie up resources to
additional leveragewith relatively low-cost, long- meet demand at home. Those companies are much
term debtand add-on investments. The return is more of a factor in our industry in competing for
enhancedby the management fees and the ability deals than the buyout shops. v
to profitably sell downits ownershipinterests in the
fund over time.
Dillavou also points out master limited partner-

ships provide an exit strategy for private equity
investments that is unique to the energy sector. The
master limited partnership allows earnings to flow
to investors in a partnership form in a public envi-
ronment and only be taxed once. We have seen
private equity firms come in and make investments
in companies they believe would have a future exis-
tence as a master limited partnership, he says.
13
Lender Roundtable: Outlook on Debt Markets
In March, members of the Wharton based revolvers, mezzanine financing, and equity
co-investments. CapitalSource targets middle-mar-
Private Equity Club (WPEC) coordinated a round-
ket companies that generate EBITDA between $5
table discussion between four influential lenders
million and $35 million on an annual basis. It can
to talk about the currently robust debt markets,
arrange transactions up to $200 million.
the impact of hedge funds and other new entrants,
trends in the sub-debt markets, as well as advice for WPEC: In your opinion, what are the primary factors
firms looking to differentiate themselves from the that have led to todays robust debt markets?
competition, among other topics.
JK: The robust debt markets are being driven, in
Jerome Egan (WG01) is a senior vice president at my opinion, by one primary factor: market liquid-
TCW/Crescent Mezzanine, a Los Angeles-based mez- ity. There is a glut of capital in the market today
zanine provider with approximately $4.7 billion of from CLOs (Collateralized Loan Obligations), BDCs
capital under management. TCW typically invests (Business Development Corporations), Hedge Funds,
in senior subordinated notes with equity upside new Commercial Finance companies and Regional
(obtained through warrants or equity co-invest- Banks, not to mention significant capital from PEGs
ments) in connection with sponsored LBO transac- (Private Equity Groups) anxious to deploy capital as
tions. Its typical investment size is approximately $80 they seek their next round of fund raising. From a
million, but it can commit up to $400 million for any debt perspective, some of these new or alternative
given transaction. TCW invests across industries. sources of capital did not even exist 5 to 10 years
ago. From an equity perspective, the opportunity for
Jeff Foley (WG 99) is a director in Wachovia
higher returns generated by PEGs has increased the
Securities Leveraged Finance Group, a leading
dollars committed to this sector from endowments,
provider of leveraged finance solutions, including
pension funds and other investors, which also has
senior debt, second lien, mezzanine, and high yield
contributed to the debt markets.
products serving both financial sponsors and tradi-
tional large and middle market corporate clients. JE: I think todays debt markets have been largely
driven by the interest rate environment as well as
J. Gardner Horan is a senior vice president
the enormous amounts of capital that have been
in GE Commercial Finances Global Media &
raised by buyout firms. Just as equity sponsors
Communications Group. With over $7 billion in
have pushed the envelope on purchase price mul-
assets under management, GEs Global Media &
tiples, so have lenders done with leverage and the
Communications Group offers a wide range of
pricing on that leverage. In our space and with the
financing solutions to middle market and large cap
investment sizes we deal with, the high yield market
media, communications and entertainment com-
is our primary competitor. Spreads are tighter now
panies ranging from $20 million to over $1 billion.
than ever, making mezzanine a less competitive
These include senior secured debt, mezzanine and
option. However, many sponsors still prefer large
high yield, second lien, and equity co-investments.
private high yield issues because mezzanine pro-
Jeff Kilrea serves as the co-president of viders can be more flexible on call protection and
CapitalSource, Inc. CapitalSource (NYSE: CSE) other features, making it a more flexible security
offers a wide range of financing solutions, includ- from the sponsors point of view.
ing senior term loans (first and second lien), asset-
14
GH: Low default rates have been a key factor. I out firms will realize that their capital structures are
dont have the exact numbers on hand, but I believe made up largely of hedge funds with a loan-to-
they are approaching 45-year lows. This has kept own mentality.
losses off of the books, which has made it easier for
JF: While we have seen some volatility in the high
institutional investors to raise money. This, in turn,
yield market over the past few weeks following the
has increased liquidity and pushed yields down.
pull back in equities, we believe that the favorable
Companies are less likely to default with lower
outlook for the economy coupled with the strong
rates. Its a cycle.
market technicals should result in a continuation
JF: The primary factor driving the robust market of the robust financing market in the near term. I
conditions, particularly in the leveraged loan mar- would agree with others that the key driver to a pull
ket, is the market liquidity from the continued fund back in the debt market over the long-term will be
raising by CLOs and other institutional investors. a material increase in default rates. Additionally,
Despite record M&A activity, the demand for new a continued correction in the equity market would
paper continues to outstrip supply, resulting in likely result in a debt market correction.
favorable pricing and structures from an issuer per-
WPEC: A lot has been written about how the private
spective. As previously mentioned, low default rates
equity industry has become more competitive over
are another important factor driving the current
the last few years, but the debt markets have also
environment.
become more competitive how have new entrants
WPEC: The question on everybodys mind how long (BDCs, hedge funds, etc.) changed the market?
are the good times going to last? What external fac-
JE: The vast amounts of capital raised by hedge funds
tors do you believe will lead to an eventual softening?
and second lien funds have fundamentally changed
GH: We think the debt markets will start to tighten the financing landscape. As long as there is such a
towards the end of this year or the beginning of significant amount of available capital, therell be
2008. Eventually housing and manufacturing weak- intense competition. Financing sources need to figure
ness will take its toll on the economy and filter out a way to distinguish themselves. Relationships
down to the credit markets. However, several fac- with the sponsors become extremely important.
tors such as covenant-lite deals could delay this
tightening. As always, industry specific issues will
also come into play. For instance, in the media The primary factor driving the robust
space, advertising dollars from the 2008 presidential
election may offset weakness in the broader adver-
market conditions, particularly in the
tising markets. leveraged loan market, is the market
JK: It is difficult to predict how long the good times liquidity from the continued fund
will last, but some type of underlying market cor-
rection will be necessary to curb the current enthu- raising by CLOs and other institutional
siasm. The correction could come in the form of an
increase in the interest rate environment, which will
investors.
impact debt service capabilities and debt leverage Jeff Foley, Director, Wachovia Securities
of borrowers interested in making acquisitions. The Leveraged Finance Group
correction could also result from material credit
agreement defaults by borrowers in the credit mar-
kets, which should lead certain lenders, either tem- JK: The competition from new entrants has certainly
porarily or permanently, to exit the business. Many fueled an aggressive pricing and leverage environ-
of the new competitors have not experienced the ment. Over the past year we have experienced tight-
inevitable cycling of the credit markets so it will be er credit spreads, increasing leverage multiples, and
interesting to witness their behavior in a challenging reduced fees for lenders. Typically, I would say this
credit market. movement is contradictory, but competitive forces,
market liquidity and the desire for asset growth con-
JE: If or when the defaults start to occur, then well
tinues to drive this phenomenon.
see discipline re-enter the market. There are also
many questions regarding what rights holders GH: In addition to hedge funds entering the mar-
of second lien paper will have in a default. I also ket, weve seen the larger banks (JP Morgan,
believe that if or when default rates increase, buy- CSFB) move down into the middle market. This has
15
increased competition and changed the structure of get pitched covenant-lite deals. That EBITDA thresh-
some of the middle market deals they are start- old is decreasing on a regular basis.
ing to resemble large cap deals in terms of covenant
JF: After only $5.9 billion of covenant-lite transac-
restrictions, acquisition baskets, etc.
tions in 2005 and $27.5 billion in 2006, 2007 has
JF: With the new entrants to the market, deals con- seen an explosion in the volume of covenant-lite
tinue to be structured more aggressively in terms transactions, with over $32.0 billion issued year to
of higher leverage, less restrictive covenants and date. Over the past month, almost every meeting I
lower pricing. Additionally, we have seen more have had with a client has included a discussion of
mezzanine investors working directly with sponsors covenant-lite structures. Not only has the current
to arrange a syndicate of mezzanine financing and market resulted in these structures with one or no
eliminate the need for an arranger. Delivering real maintenance financial covenants, we have also seen
time updates on the financing markets combined significant loosening in many other covenants, such
with proprietary acquisition and financing ideas are as acquisition baskets, debt incurrence baskets and
important points of differentiation among firms. restricted payment capacity.
WPEC: What current trends are you seeing in the

It is difficult to predict how long sub-debt markets? Is the pendulum swinging back
towards mezzanine from second lien as a result of
the good times will last, but some the higher interest rates in the past few years?
type of underlying market correction JE: The mezzanine market has definitely experi-
will be necessary to curb the current enced a resurgence in the past year, largely due to
second lien financing becoming less competitive as
enthusiasm. interest rates have risen. I also think some sponsors
are realizing the positive economic times cant last
Jeff Kilrea, Co-President, CapitalSource, Inc.
forever and so are becoming more sensitive to who
is in their capital structure a highly syndicated
second lien group or one mezzanine provider with
WPEC: As mentioned, it seems that covenants have
whom they have a good relationship. This is par-
gotten much less restrictive, particularly at the high
ticularly true in the case of highly leveraged deals
end of the market. Have you had to become more
where the first one or even two years are forecasted
competitive on covenants?
to be extremely tight on a free cash flow basis.
JK: Covenants are just another dynamic in this
JK: For a period of time earlier this year, credit
aggressive marketplace. Covenant-lite deals
spreads for second lien and mezzanine financing
(limited to incurrence tests) are popular for larger
were sizable: possibly 200/300 bps. With an increase
market transactions. In the middle market lenders
in LIBOR and tightening of the second lien market,
have gotten much more aggressive on covenants.
we have seen an increase in mezzanine debt in trans-
Transactions are typically limited to two or three
action structures. This has also been driven by an
financial covenants (fixed charge, leverage and
increasing leverage marketplace where we have seen
interest coverage). A lot depends on the deal,
more aggressive structuring, 4x/6x/6.5x with HoldCo
whether earlier stage or mature, how the covenant
PIK Notes, necessary to help PEGs finance LBOs.
package will be structured.
GH: Weve also seen mezzanine providers get more
JE: Covenant-lite deals have become quite common.
active over the past year by lowering their pricing to
We have a couple key covenants we insist on, but
the low to mid-teens. Theyve also shown a willing-
otherwise we usually go with the market and trust
ness to take larger tranches as a way to differentiate
the sponsor to act appropriately, even if theyre not
themselves. Much of this is generated by the type
contractually required to do so.
of investor taking the mezzanine debt. Hedge funds
GH: We think that covenant-lite deals are a tempo- that are typically in second lien tranches are open
rary market offering. Im not sure they are going to to unsecured sub-debt to obtain enhanced yields
be around in nine months. They are definitely hot (generally by 2% or 3%). These deals are structured
right now though. Issuers who generate greater similarly to second lien financings, excluding the
than $50 million in EBITDA who are looking to come security. More traditional mezzanine investors will
to market over the next few months will most likely generally have higher yield requirements and more
restrictive terms (i.e., non-call periods, etc.).
16
JF: The mezzanine market has been very attractive for a new transaction or working out a difficult situa-
for issuers over the past year as alternative to both tion with an existing company?
second lien and high yield tranches. As compared
JK: In middle market transactions, I am not sure that
to second lien, issuers frequently view mezzanine
either proprietary deal flow or sponsor preferences
as more patient capital and as mezzanine coupons
exist. A PEGs brand name may add some cache
have trended lower and LIBOR has trended up, pric-
to the process, but with so much PEG money chas-
ing is more competitive. Also, as mentioned by
ing middle market deals, and recognizing that most
others, with the increase in tranche sizes for mezza-
PEGs are well banked, I-Bankers and intermediaries
nine, we have seen mezzanine with bond-like cov-
can afford to widen the net when representing com-
enants and favorable call structures replace some
panies in the sale process. From a debt perspective,
volume in the high yield market.
I think relationships are important when PEGs are
WPEC: To follow up on Jeromes comment have looking to secure financing for their acquisitions.
private equity firms become more adamant about This relationship may be worth 25 bps or a last look
who ultimately holds their debt? Furthermore, has at a transaction, which certainly is representative of
this changed the amount of paper you are looking the increased competition for deals. Relationships
to hold? are built at the front end, but solidified and main-
tained based on certainty of execution and delivery.
JK: Balance sheet management is always something
Credibility is key, and that includes behavior from
of interest from a lenders perspective. Even in this
a portfolio perspective. Not all deals go as we all
frothy market our hold sizes continue to be in the
hope and there will inevitably be difficult discus-
$20 to $30 million range, depending on deal size
sions at some point. Rational thinking is part of
and PEG preference. PEGs are more interested in
relationship building, and PEGs value lenders that
who is holding their paper, and it certainly has bear-
act as true partners.
ing on who is awarded debt mandates. PEGs want
to see their relationship lenders hold more mean-
ingful positions and bank groups dont want to see
one or two lenders of a syndicate (for a middle mar-
The best advice I can give [to
ket transaction) control voting. Most PEGs, unless sponsors] is to understand the investor
necessary, dont want to see hedge funds leading
their deals because of the portfolio management base and communicate.
uncertainty or loan to own reputation. J. Gardner Horan, Senior Vice President,
GH: I think the general trend has been for relation- GE Commercial Finances Global Media &
ship banks to hold less, but we try to hold more to Communications Group
further develop the relationship with the sponsor.
Who ultimately holds the debt has become more of
an issue in the middle market. Issuers can get good
JE: I dont think the middle market gets anywhere
terms from a wide range of institutions so many of
near the terms that the mega-funds get. We defi-
them dont want to take the risk of having hedge
nitely go into a deal with a middle-market sponsor
funds in their syndication group.
with different expectations than when we invest
JF: The answer varies by private equity group, but with a mega-fund.
if I were to try and generalize, for broadly syndi-
GH: Relationships and reputations are important
cated transactions we have seen less focus on the
in the middle market a well known operator in
final hold positions for the lead arrangers and more
the space certainly helps syndication. Lenders will
focus on allocations to second lien and mezzanine
stretch further for groups who have a demonstrated
markets. Also, for mezzanine financing, most pri-
track record in a certain industry.
vate equity firms have strong preferences on who is
approached for mezzanine opportunities. WPEC: Have any of you participated in the growing
buyout markets outside the United States? What are
WPEC: An industry perception exists that the
the primary differences that lenders must consider
mega funds receive premium terms on their deals
in these transactions?
because of their brand name and relationships.
Does such a premium exist in the middle market? JE: We invest globally, mainly in Europe and
How much does a firms brand name and your rela- Australia. The primary differences with the U.S.
tionship with that firm matter when securing debt relate to creditors rights if things go badly for the
17
company. The bankruptcy rules are significantly dif- ship with the companys creditors, or even handing
ferent in other parts of the world, most of which fol- over the keys to the company its those sponsors
low strict priority, which greatly lessens the ability that maintain their reputation for acting properly
of subordinated lenders to have their voices heard that keep financing sources interested in doing their
in a restructuring. deals.
JK: Last year we opened an office in London and are JF: I agree with all the points made. Open and hon-
looking to capitalize on the growing European LBO est communication is critical.
marketplace. The European marketplace is different
WPEC: Have your views on dividend recaps
from the States and we have encountered numer-
changed in the current environment?
ous legal challenges. Given the flow of dollars from
U.S. PEGs into Europe, we view this as a tremen- JK: We have done our fair share of dividend recaps
dous opportunity, but recognize this effort is still and will continue to evaluate them, but pushing the
early stage. We have been primarily a participant leverage envelope in order to pay dividends is not
in other peoples deals to date, but believe we have necessarily something that interests us. Dividend
our first agency role locked up. recaps can be a means of retaining solid perform-
ing assets in the portfolio. I do like to see PEGs with
WPEC: Do you have any general advice for sponsors
some level of monetary commitment post recap.
when they are dealing with a company that has not
While there is still risk, it offers a little added com-
performed well and may need to restructure? What
fort knowing the PEG still has principal exposure.
can a sponsor do to improve its chances of a suc-
cessful outcome? JE: We will not finance a dividend recap. We believe
strongly that the equity sponsor needs to have risk
capital in the deal. Weve passed on many dividend
The vast amounts of capital raised by recaps that have done very well the past few years,
hedge funds and second lien funds but our belief hasnt changed that its a fundamen-
tally bad investment.
have fundamentally changed the
GH: Dividend recaps have grown dramatically
financing landscape. over the past three to six months. With so many
Jerome Egan, Senior Vice President, TCW/ sponsors currently raising new funds, the need for
monetization or partial monetization has increased.
Crescent Mezzanine
Generally, the debt markets will go a bit deeper in
the capital structure on an acquisition vs. a recap
of the same business. This is due to the validation
GH: The best advice I can give is to understand of value that is provided with an acquisition. In a
the investor base and communicate. Issuers and recap, market value of a business is more subjec-
sponsors who fail to communicate can leave a bad tive. That being said, this is still a great time for
taste in investors mouths, which will ultimately sponsors to pursue a recap.
affect their willingness to bend on certain issues.
Be responsive to information requests. Sponsors JF: Another sign of the robust financing markets has
who keep the lender group informed fair better than been the volume of dividend recaps over the past
those who do not. year. The leveraged loan market (first and second
lien) has been very receptive to dividend transac-
JK: I agree. The best advice I have for PEGs that tions with very little, if any, discount to the compa-
have troubled situations is maintain an open and rable LBO leverage multiples, especially for known
honest dialogue with your lender. No one wants to issuers with proven track records. We have also
be surprised. Dont limit communication to good seen a significant surge in volumes in the high yield
news. Communication of bad news and a clear plan and mezzanine markets for holding company divi-
to seeking a solution is the best course of action. dend transactions. Many of these have been issued
This does not insure a positive outcome, but work- with favorable call structures and used to pre-fund a
ing together with your lender and keeping all parties dividend ahead of an IPO or other exit opportunity.
apprised is the favored approach.
WPEC: Finally, do you have any advice for private
JE: A sponsor needs to do the right thing. Whether equity groups trying to differentiate themselves in
thats putting in new money or working in partner- an increasingly competitive industry?
18
JK: Knowing your particular sectors of expertise
cold is an important step when it comes to differen-
tiation. This will help with the sourcing of deal flow
and raising of capital. Whether the PEG is sector
specific or has certain Partner specialists in a more
generalist setting, it is my opinion that these groups
are the most productive and spend time on deals
they have a higher percentage of winning. It also
makes the debt raise somewhat easier as well.
JE: I agree. Sponsors need to stick to their areas

of expertise. Some are very good at retail, some at
Case Study in Operations: Eldorado Stone
financial services, etc. Today, many buyout shops
who find themselves with so much capital invest in
industries they have no experience in.
Knowing your particular sectors of

expertise cold is an important step
when it comes to differentiation.
Jeff Kilrea, CapitalSource
GH: Tough question. I agree that in-depth knowledge

of a sector goes a long way towards differentiating
a group. This knowledge can stem from either past
deals in the space or from an operating partner or
advisor who used to work in the industry. These fac-
tors help create a sense of camaraderie and show a
commitment to getting the deal done. When acquir-
ing a division of a larger company, it is important to
be considerate of the public relations issues that are
present for the sellers in such a transaction.
JF: Develop key areas of knowledge and expertise and

then develop relationships with management teams
and bankers in the sector. Work with these bankers
and management teams to deliver proprietary, value
added acquisition ideas for new platform companies
and add-ons to existing portfolio companies. v
19
Case Study in Effective Private Equity Differentiation: Arcapitas Acquisition of
Churchs Chicken
Editors Note: The following case study was Since these two businesses competed with each
researched and written by members of the Wharton other in many markets, one of AFCs first strate-
Private Equity Club. gic decisions was to sell Churchs and center its
efforts on opportunities with the Popeyes busi-
Developing competitive advantage in ness. Because the business would be competing
private equity often takes time. Some firms might directly with Popeyes, however, there were inher-
patiently study a market niche for a number of years, ent conflicts in the sales process, and many of
for example, before a great potential investment Churchs strengths were downplayed in the selling
comes along. Meanwhile, the edge theyve gained memorandum. The marketing pitch did not convey
puts them in the best position to capitalize on the clear opportunities for operational improvement or
opportunity, while others are left scratching their growth and, as a result, market reaction to the deal
heads. A close look at Arcapitas 2004 acquisition was not positive.
of Churchs Chicken provides insight into how firms
can develop a competitive advantage, and how that A Value Leader
advantage can be exploited when all the right pieces Founded in 1952 by George Church Sr. in San
fall into place. Antonio, Tex., Churchs is the fourth-largest operator
and franchisor of chicken Quick Service Restaurants
(QSRs), with more than 1,600 restaurants in 30
There was very little sponsor interest states and 16 countries. Churchs is a highly recog-
in the restaurant space at the nized brand name in the QSR sector, with a repu-
tation for being the value leader in the chicken
time Churchs entered the market. category. With over $1 billion in annual system-wide
sales, Churchs serves traditional Southern fried
chicken in a simple, no-frills setting with a focus on
In mid-summer 2004, when AFC Enterprises (AFC), providing complete meals at low prices for value-
a franchisor and operator of various restaurant conscious consumers.
concepts, publicly announced that it had hired Bear Approximately 20% of Churchs domestic stores
Stearns to help it explore strategic alternatives as are company operated, with the balance franchised
part of an ongoing effort to enhance shareholder across 29 states. International locations are all
value, little attention was paid by the private equity franchised. Within the United States, the majority
community. AFC shareholders were unhappy with of Churchs locations are positioned as neighbor-
the companys performance and management hood restaurants located in urban areas within easy
felt that the company needed to refocus its con- reach of the companys lower-income, value-seeking
cept portfolio. At the time, AFC owned restaurant customer base. Customer demographic research
concepts as broad as Cinnabon and Seattles Best indicates that Churchs restaurants are dispropor-
Coffee, in addition to two different chicken concepts tionately popular with minorities.
Popeyes and Churchs Chicken.
20
Above-average unit economics, simple operating heavy companies such as Churchs that could be
systems, quality menu offerings, and an expanding purchased for low multiples once a sale-leaseback
customer base make Churchs an attractive fran- transaction was considered.
chise opportunity. The restaurants have a distinctive
At the time Churchs hit the market, Harsha Agadi,
appearance and feature bright colors, promotional
a foodservice industry veteran with more than 20
window clings and a unique logo that can be spot-
years of experience at various restaurant and food-
ted from far away. Flexible square footage require-
service companies, was working as an Industrial
ments enable Churchs restaurants to fit into a
Partner with Ripplewood Holdings, LLC, a $4 bil-
variety of traditional and alternative venues, thereby
lion private equity firm. Agadi had significant
expanding the breadth of channels to access cus-
management experience at restaurant/foodservice
tomers. Restaurants range in size from 650 to 3,000
companies such as Dominos Pizza, Tricon Global
square feet and service dine-in, carry-out, and drive-
Restaurants, Kraft General Foods and Little Caesar
through segments.
Enterprises. Over a ten-year period, Agadi was
responsible for opening over 2,000 stores for two
Industry Know-how competing brands in over 50 countries. He also had
The commercial foodservice industry is one of the specific experience in launching U.S. restaurant
largest sectors of the nations economy, generating brands in overseas markets with repeated success,
over $400 billion in annual sales and representing as well as leadership experience in restructuring
nearly 4% of U.S. GDP. In addition to its size, how- and repositioning companies for rapid growth. His
ever, the industry is highly competitive, operation- most relevant experience for the Churchs deal came
ally intense and faces fickle consumer demand as a from his employment with Little Caesar Enterprises
result of changing taste patterns and dietary trends. from 1996 to 2000, where he served as president
Consequently, most private equity firms had histori- and chief operating 0fficer. In this capacity, Agadi
cally shied away from the restaurant space in search was responsible for the $2 billion Little Caesars res-
of higher margin, more dependable businesses taurant chain with 4,500 locations across 22 coun-
that could be more easily leveraged. Despite AFCs tries, which catered to a similar demographic base
preference for a financial buyer, there was very little as Churchs.
sponsor interest in the space at the time Churchs
entered the market.
While there was little broad market interest,

Atlanta-based Arcapita was intrigued by
Arcapita, an Atlanta-based private equity firm, was the companys simple concept, limited
intrigued by the companys simple concept, limited
menu, and international footprint. Stockton Croft, menu, and international footprint.
a director at Arcapita, had participated in a suc-
cessful investment in the restaurant sector a few
years earlier and had built a strong base of industry At Ripplewood, Agadi had looked at 30 or 40 differ-
knowledge and contacts from which to draw. As a ent restaurant deals. He was particularly interested
result, he was able to spot several specific issues in finding a regional player that he could eventually
within the operations of Churchs that could likely grow into a national brand. He also wanted a com-
be addressed to enhance value. In addition, he pany with a burgeoning overseas footprint whose
had developed some experience with sale-lease- concept was easily transferable to other countries.
back deals as a means of averaging down acquisi- Importantly, the concept also needed scale, with at
tion multiples in an effort to enhance returns and least 1,000 locations that had proven successful in
was impressed by the real estate portfolio held by a number of different markets. Although Churchs
Churchs. (A sale leaseback is a transaction in which fit this criteria, Ripplewood had begun to expand
the owner of a property sells that property and then its deal size, and Churchs was unfortunately too
leases it back from the buyer. The purpose of the small an investment for Ripplewoods portfolio. With
leaseback is to free up the original owners capital Ripplewoods blessing, Agadi began to seek another
at a high multiple relative to the overall acquisition, private equity firm that might be interested in part-
while allowing the owner to retain possession and nering with him to pursue a deal with Churchs. As
use of the property.) Given the favorable prop- luck would have it, he came across an article about
erty values in the real estate market, Croft saw the Arcapita in a Duke University alumni newsletter, and
opportunity to take advantage of certain real estate- cold called the firm to strike up a relationship.
21
Founded in 1997 and based in Atlanta, Arcapita is sandwich. More importantly, Churchs was the only
a private equity firm that invests in middle-market chicken-focused QSR that served only one style
companies with strong management teams, innova- of chicken. Because of its ownership of Popeyes
tive products, and leading market positions. Current (which is focused on spicy chicken), AFC intention-
and past investments span a range of industries ally prevented Churchs from launching a spicy
including consumer products, foodservice, manufac- chicken product in deference to the Popeyes busi-
turing, health care, specialty retail, and technology- ness. Agadi viewed these menu deficiencies as a sil-
enabled products. Since 1997, Arcapita has invested ver bullet. While the benefits of adding spicy chicken
over $800 million of equity in 13 transactions, which and sandwiches to the menu might be difficult to
had a combined total transaction value in excess of quantify, he believed that these changes could be a
$1.4 billion. tremendous boost to sales.
Churchs was not trying to be all things to all people,

and both Arcapita and Agadi liked its focused,
It was clear that numerous, subtle simple concept and limited menu. Based on his own
changes would have a large impact on experience with restaurant concepts, Agadi was also
impressed with Churchs ability to sustain its brand.
the companys business. Despite how unforgiving and fickle the American
consumer can be, and how even the mightiest
brands can fall out of favor over time, Churchs had
A week after his initial call, Agadi found himself in managed to survive for over 52 years, which spoke
Arcapitas offices discussing the potential acquisi- to the power of the brand and to the sustainability
tion of Churchs. From Arcapitas standpoint, it of the fried chicken product in general.
was clear that Agadi brought a lot to the table.
After an initial meeting with Churchs manage-
His experience in the restaurant business, particu-
ment, other necessary changes became evident.
larly in multi-national companies that targeted a
Management had unfortunately been operating in
similar demographic as Churchs, would perfectly
an ownership structure that had kept their hands
complement Arcapitas vision for the future growth
tied. Because Churchs was part of a larger public
prospects of Churchs, both within its current core
company, management had not been allowed to
customer base as well as in international markets.
make the big, structural changes sometimes neces-
Agadi and Arcapita agreed to work together in
sary to thrive as an independent company. In addi-
executing a plan for due diligence and vetting the
tion, AFC had transferred much of Churchs cash
investment thesis.
flow to Popeyes, reinvesting very little in the busi-
ness. As a result, AFCs ownership in Popeyes was
Clear Opportunities handicapping Churchs growth and preventing stra-
After reading through the Churchs material, it was tegic decisions that would have maximized value. In
clear to Agadi that there were numerous, subtle response to these restrictions, managements strat-
changes that could be made to the company that egy had focused on growing Churchs light users by
would have a large impact on its business. Agadi offering salads and wraps, as opposed to catering
and Arcapita shared the idea that good private equi- to heavy users who preferred the traditional chicken
ty investments require a clear set of fundamental products. This strategy was so ingrained among
objectives for the long term as well as a number of Churchs management that Arcapita felt new leader-
operational improvements that could be pre-deter- ship would be necessary in order to reinvigorate the
mined from the outset. In this sense, both parties company with a fresh perspective. As far as Agadi
saw a significant amount of low-hanging fruit as was concerned, the management teams passion
well as opportunities to enhance long-term strategic for the Churchs concept was much less than he had
value within Churchs business. seen at other successful brands.
Certain opportunities were obvious to Agadi. For Another important benefit that both Agadi and
example, Churchs was the only fast food chain he Arcapita saw was the strength and loyalty of its
had ever seen that had free-standing restaurants well-defined customer base. Interestingly, Churchs
but did not have sandwiches on the menu. This has demonstrated particular appeal among several
was a obvious omission to him; people like to walk high-growth ethnic groups within the U.S. African
into a quick service restaurant and walk out with a Americans and Hispanics show the highest loyalty
22
to the brand and are the most frequent consumers be implemented over the next 365 days. He also
of the companys products. The Hispanic population, determined which stores were inefficient and need-
which already represents the largest minority group ed to be cut. Throughout the due diligence process,
in the U.S., is projected to reach approximately 48 he felt that Churchs expense structure was severely
million by 2010, an increase of 23% from 2002. The bloated and he aimed to immediately reduce costs.
African American population is projected to grow This was especially important because of the inher-
by 5.6% to approximately 41 million by 2010. As the ently low margins in the value chicken segment.
brand of choice for these two high-growth ethnic When selling two pieces of chicken for $.99, every
demographic groups, Churchs had a tremendous penny counts. One of the more noticeable expense
potential for expanding its customer base and driv- improvements concerned Churchs pre-existing
ing sales growth in both new and existing markets corporate outsourcing contracts. By switching to
in the U.S., while continuing to focus on interna- new providers and outsourcing the entire IT infra-
tional expansion abroad. structure to a firm in India, Churchs saw 50% annual
cost savings for IT. Agadi also outsourced the firms
Improving Operations and Management internal accounting effort to India, saving the firm
an additional 50% in accounting-related administra-
Convinced of the low hanging fruit, Arcapita and
tive expenses.
Agadi wrapped up their due diligence process and
developed a strategic plan that they could imple-
ment from day one. Arcapita would name Agadi A Competitive Franchise Model
CEO of Churchs, and together they outlined their Churchs also made a demonstrated effort to
management vision. In an effort to strengthen and improve its franchise model. Because the companys
grow the Churchs concept, Arcapita developed a growth largely depended on selling franchises to
targeted list of key business strategies on which expand, it was necessary for Churchs model to be
they would focus. The vision for Churchs was to at least competitive with the other options avail-
become the consumers first choice for high quality, able to potential franchisees. Upon studying the
great tasting chicken and the potential franchisees model in place, Agadi and Arcapita found that the
first choice among QSR concepts. Among other economics for franchisees simply were not working.
efforts, they planned to focus on improving opera- Franchisees look to the parent to provide great prod-
tional efficiencies, strengthening management, ucts and effective marketing and expect to leverage
expanding internationally via the franchise network, the larger supply chain to decrease costs; otherwise
and increasing domestic market penetration. they would open as an independent store. In addi-
tion, franchisees must be able to justify the initial
In December of 2004, Arcapita purchased Churchs
investment it takes to open a store by comparing
from AFC for $390 million. In addition to the equity
the growth potential and cash-on-cash returns to
provided by Arcapita, the deal was financed with
other franchise opportunities.
$155 million of private high yield notes led by
SunTrust, a $161.5 million sale leaseback of real
estate by Fortress Investment Group, and a $7 million
subordinated seller note. Crofts initial hunch about
A store opening in Mexico was
Churchs real estate proved true, and most company- one-third the cost of a store opening
owned locations were sold and leased back to effec-
tively average down the purchase multiple.
less than 200 miles away in California.
Immediately after closing the deal, Agadi began
changing the management team and reworking the
By studying franchisee costs, Arcapita found that
culture of firm. The top seven executives were all
a store opening in Mexico was one-third the cost
replaced. The prior management team had been
of a store opening less than 200 miles away in
scattered across the country, with many commuting
California. As a result, Churchs standardized the
great distances to headquarters in Atlanta. Agadi
best opening model for franchisees and brought
stressed the importance of a local, dedicated man-
the costs of opening a store down significantly by
agement team, and insisted that all new hires live in
reducing necessary square footage and lot size. The
Atlanta and work at headquarters.
net effect of these changes has been more efficient
Due to the depth of Arcapitas due diligence pro- pre-assembled stores, lower franchisee capital
cess, Agadi started with a clear plan of changes to investment, and ultimately higher cash on cash
23
returns. The average payback period for a Churchs significant free cash flow to pay down debt, the lack
franchisee today is less than three years. The prin- of required amortization under the companys debt
ciple behind most of these changes was the realiza- structure has allowed Churchs to reinvest most of its
tion that Churchs customers do not care about the cash flow to continue its aggressive store build out
size of the lot or having extra seats in the restau- and to keep the existing stores clean and up-to-date.
rants as long as the service is quick and the product According to Agadi, Churchs has spent more on
is cheap and flavorful. As a result of the store recon- capital expenditures in the past two years than they
figuration, Churchs now has the highest sales per had in the prior ten. Over the next few years, the
square foot in the QSR chicken segment. company plans to continue its focus on improving
margins and effectively reinvesting in the business.
Over the next few years, the company While serendipity played a part, there is little doubt
that the competitive advantage created through
plans to continue its focus on Arcapitas local knowledge of the Churchs brand,
Crofts experience in the restaurant sector and with
improving margins and effectively sale-leaseback transactions, and Agadis in-depth
reinvesting in the business. operational experience in the restaurant industry
allowed Arcapita to identify an opportunity that
other financial buyers overlooked. v
In addition to the structural and cultural changes put
in place, Churchs also made the menu changes that
Agadi felt were necessary. The spicy chicken product
quickly proved to be a runaway success. In fact, the
product was so successful that it now accounts for
over 20% of sales, further highlighting the restraint
that Churchs management was experiencing under
its prior owner.
Enhanced Performance
Agadi doesnt view Arcapitas investment in Churchs
as a turnaround. As he puts it, the transition was
simply carefully orchestrated enhanced perfor-
mance. The changes put in place to date have had a
positive impact on Churchs operations, culture, mar-
keting and sales efforts. Stores are now operating
at an increased speed of service, with an improved
menu, enhanced food cost reporting systems, and
more effective guest feedback mechanisms which
have fostered the creation of a performance score-
card for each store. As far as culture is concerned,
employees report feeling liberated from a controlling
parent and no longer feel second tier to Popeyes.
Franchise owners are happy with new standardized
systems and best practices, high ROIC from new res-
taurants, and Churchs re-image program.
Moving forward, Arcapita does not expect a lot of

structural changes. With a healthy domestic fran-
chise market, the firm is aiming to continue to push
for aggressive restaurant growth around core mar-
kets. Internationally, Churchs is looking to continue
its growth in current country markets, while also
pushing into China, Russia, and India. In fact, growth
today is balanced evenly between domestic and
international markets. Although Churchs generates
24
Differentiation in
a Hyper-competitive
Market

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The first in a series of Wharton Private Equity Reviews

Wharton Private Equity Review

Conway adds that when TA is on the other side of

John Cozzi, managing director of AEA Investors,

While investment bankers can be useful, compa-

According to a 2007 Association for At one company, profits dont increase,

Kevin Landry, chief executive of TA Associates, is

Dillavou also points out master limited partner-

WPEC: What current trends are you seeing in the

JE: I agree. Sponsors need to stick to their areas

Knowing your particular sectors of

GH: Tough question. I agree that in-depth knowledge

JF: Develop key areas of knowledge and expertise and

While there was little broad market interest,

Churchs was not trying to be all things to all people,

Moving forward, Arcapita does not expect a lot of

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