With notable exceptions -- Energy Future, Caesars and Intelsat SA -- the deals clawed their way back to profitability thanks to a resurgent stock market, debt restructurings and streamlining. But that wasn’t enough to produce buoyant returns. One reason is that big public companies tend to trade at higher multiples than smaller firms.
“The fundamental flaw with large public-to-private deals is you pay the full market rate,” said Scott Sperling, co-president of Thomas H. Lee Partners, which ponied up an above-average 16 times cash flow for Univision Communications Inc. “That decreases the odds you can sell the company later for a higher multiple.” He declined to discuss the performance of his firm’s deals.
PE Playbook
Another problem, said Blackstone’s Baratta, was that many of the big companies were well run, leaving less room for operational improvement -- a key element of the private equity playbook.
“You’ve got to know going in that you can drive up growth and margins,” as Blackstone did with Hilton, said Baratta. With Biomet Inc., by contrast, “there was less we could do to transform the business.”
The companies also were too big to sell for cash. That left a public offering or a sale, paid for in stock, to a publicly traded buyer as the only paths to an exit. But unloading shares takes time, eroding annualized returns.
While buyout titans are exercising caution, whether they remember the lessons is an open question, said Josh Lerner, a Harvard Business School professor who researches the private equity industry.
"Memories often last a decade” after a crash, Lerner said. “Getting them to last two decades may be over-optimistic.”