Wednesday, November 08, 2006

Dimensional Complexity

beyond complex Accolades in Private Equity are granted twice.  First, and most mercurial, for the successful close of a deal.  Second, harder won and more critical, for one's reputation and career, the successful sheparding of the highly illiquid assets through 4-7 years of challenges and macro uncertainty to realize the paper returns it better damn well have accumulated.  Appreciate this, and the difficulty involved, and it becomes easier to see why private equity is an intensely long-term endeavor requiring the same qualities it takes to move large icebergs: constant, even, unrelenting pressure.

Knowing these two career drivers one can gaze upon a representation of the political forces in a private equity firm.  I say "representation" for two reasons.  First, those political forces are possessed of such Byzantine quality and harbored by such secrecy that all that is available even to the astute insider is the woefully insufficient three dimensional projection of an intensely intricate four dimensional object.  Some of the lines of the projection are overt.  Others are quite thinly drawn.  Understanding with something remotely approaching clarity is both difficult and a essential element in preserving one's career, particularly when things start to get dicey.

Recognizing that actually closing a deal is only the short-term part of the career advancement equation, one sees that closing a "good deal" is the long-term component, and far more critical.  This is the mechanism with which the whims of private equity partners with respect to the careers of their minions take root.  Specifically, the selection of deals to which a given minion will be assigned.  Find yourself working on a deal that shows the promise of a 1980s Japanese real estate deal?  Start showing your resume around.

I was somewhat slow to recognize the foibles of deal politics in this fashion.  To some degree I was shielded from this glare by Armin, who looks upon me fondly, but my own naiveté often worked against me early on, let us say, shall we, several months ago:

Armin: "You know, I imagine your fancy would be titillated by a project I have come across this week."  (He meant that my "fancy would be tickled").

Equity Private: (Immediately on guard, fearful of being overloaded) "Well, I'm pretty bogged down with Project LameCashFlow at the moment...."

Armin: "Oh, yes, I know.  I think, however, that you might want to consider shifting your priorities, that is if you aren't set on closing the LameCashFlow deal."

Equity Private: (No bells.  No whistles.)  "I would feel bad jumping mid-ship, that's all."

Armin: "Ah, I understand of course."

Several weeks later and our best bid for Project LameCashFlow is soundly trounced by "Truly Massive Fund, LP" a FAR better resourced hedge fund that shouldn't even be in the space given the size of LameCashFlow.  It occurs to me about a week later that only days before my conversation with Armin, we had dinner at the Estate with "Tom," a rather senior type from Truly Massive Fund, LP just before Armin and Tom retired to the study for 3 hours of after dinner drinks.  I thought nothing of it while being driven home, rather tipsy I might add, in the back of the horribly cliché black Town Car.  This sort of thing was typical at the estate.  What was to worry about?

I am convinced, by the way, that the black Town Car has a calming, even a numbing effect on the brains of young finance professionals.  A kind of subliminal channel to the lizard brain whispering the soft words "sleep... relax... forget... ignore..." like some early John Carpenter social commentary film with Roddy Piper in it.  Armin was trying to steer me clear of a flop, I was too dense to listen.

When, some weeks later, I relayed these events to the Debt Bitch she laughed out loud.  "The old man sure wants in your tight little silk panties, doesn't he?"  This is a not-so-casual but good natured dig at the favor Armin shows me, but for Laura sex is always a factor in this game too.  Still, her own career is on track such that it becomes hard to discount this old standby career builder out of hand.  "Hah!  You'll be lucky if he hits on you again like that.  He hates stupid.  Reminds him of his ex-wife.  Hey, tell Minnie (this is her nickname for Armin) I dumped the guy from Goldman.  If I say something it will be too obvious."  She was kidding, of course.  I think.

I vowed to myself to pay closer attention, and started thinking about what signs I had missed up to now.  These worries lingered shyly in the background of my thoughts for a week before, one dark and rainy early morn around 2:00 am, I bolted upright just before drifting off to sleep and nearly barked outloud: "London."

I have been gently pressured to move to the London office of Sub Rosa for some time now.  I've been gently putting it off, making a show of wanting a raise beyond the cost of living adjustment out of the deal, or a uptick in carry perhaps.  The reality is that I have no desire to move and I feel I would be unhappy with any amount of money in London.  Well, ok, not any amount.  I don't mind confessing that the quandary has had me in tears more than once.

Still, we have been losing more and more auctions.  This, in itself, is not overly concerning.  There are fewer deals worthy of bids, and those that are are being pressed by fierce competition.  Hedge funds, once too large and new at the game to play in the middle market LBO domain that is Sub Rosa's hunting grounds, have begun to creep down to our space and thrash our bids.

To some extent I do not mind this.  Those bids we have lost in which I had enough involvement to speak intelligently about I never regretted.  The prices at which those companies traded hands were so absurdly high to make me quip: "Good luck" to the poor sods who were responsible for the debt service.  I have no doubt that the ability of the leveraged finance VP at the lending hedge fund (we haven't borrowed from an actual bank for any of our last three deals) to throw the obligation off to a CLO somewhere before it blows up plays a big part in the absurd deal terms we have been seeing of late.  Moral hazard at work.

Add to this the present boom in private equity and smaller shops like us have to begin to be worried.  Armin's answer to this has been the European office, where the LBO machine is going like gang busters.  The combination of old family-owned businesses, soft labor practices, weak management and plenty of room for cuts and outsourcing has made Europe the new hunting grounds.  I knew intrinsically that the encroachment of hedge funds was going to spoil things for us in the United States eventually, I've written it here in one form or another many times, but it never seemed quite as real as it suddenly became the last several weeks, and London weighed heavily on my mind.  I remembered suddenly that Armin's wife had been to London several times now and the word "schools" has been tossed around repeatedly on the Estate.  How could I be so blind?

Sometimes, two highly tense structural elements, pressing on each other in something like balance, only break with the introduction of yet another element.  I'm sitting in Chicago just recently when it all comes crashing together with this "third element."

We are quickly getting in over our heads on bidding on "Project Dustbowl," a significant piece of a corporate break-up in Chicago, a city I love to visit- before the winter sets in.

We're downtown after an annoyingly long drafting session with one of our lawyers, "Abe" who I first met in New York with the Debt Bitch.

Abe believes there is a black list for New York restaurants such that if you fail to show up for a reservation you will be shunned ever after.  Accordingly, he never makes reservations in his own name.  The Debt Bitch finds this as silly as I do, but she's more vocal about it than I am.  We're in a little café near our corporate target planning dinner.

"Reservations for four.  Ten o'clock.  Mossberger," Abe is on his cell phone.

The Debt Bitch intones loudly, "Why don't you just use H.E. Pennypacker or Art Vandelay?" 

Abe, covering the mic of his cell phone frantically, and who is probably the only Manhattan attorney never to have seen a single episode of Seinfeld in his life hisses back, "Shhhh! What the hell are you talking about?"

"Look, even if there is a blacklist in Manhattan there isn't one in Chicago."  She has a point here.

Abe is quick with a retort.  "You think these people don't talk?  Think of all the overlap in ownership between successful Chicago and New York restaurants.  I need a Red Bull," and with this he wanders off to the counter.

We drift over to the door rolling our collective eyes at Abe before we meet him out front of the café.  When Abe comes out he drops a handful of change on the sidewalk in front of the café.  It jingles loudly and passers-by, suddenly jarred by a Pavlovian response to the sound of fallen money, halt in their tracks and look to the pavement.  Abe, nonplussed, starts walking on his merry way as if nothing happened.  I am about to call out to him, just intaking the breath to do so when the Debt Bitch grabs my arm and starts pulling me away in Abe's direction.

"He doesn't believe in change," she says, rolling her eyes.  This all sounds very familiar.  I start to say something to the effect of "Who the hell 'doesn't believe in change'?" but Abe cuts me off from 5 paces in front of us.

"The six minutes of time I would have to spend to sort it later is worth far more, $35 to be precise, than the sixty eight cents I just threw away."  I notice he picked six minutes to make the math easy for himself.

Some guy standing next to me butts in with a "Nice friends you got there."  I am frozen by the comment, but the Debt Bitch steps gently to the side, fully in New York mode and ready to eviscerate the guy before I recognize that it is "Sean."  Sean is easily the smartest man I know, an old friend, also a private equity type in New York and a JD/MBA.

"Oh my god," I say stupidly.  "What are you doing here?"  He's grinning at me. 

The Debt Bitch is either alarmed or intrigued.  Sometimes I think they are the same thing for her.  "You know this suit?"  I don't point out that she's wearing a suit also.  She means it affectionately, after all, even if it doesn't sound it.

"Oh yes, I know him."  I repeat myself, "What are you doing here?"

"Oh, top secret.  Hush, hush."  His expression tells me it is exactly the same reason we are here.

Abe is itching to get to the hotel, but the Debt Bitch is suddenly not in a very big hurry.

"Who are you with?" demands the Debt Bitch.

"Adjuvant Capital," he smiles back.  This silences the Debt Bitch, which is unusual.  It silences her because they won an auction from us a few months back and Laura later found out they got better financing terms than we did.  "Do you have time to catch up," he asks me.  I am anxious to talk with him.

"Sure.  We're doing dinner at ten, but it is informal."  Abe is now stopped but standing seven paces away and glaring at us impatiently.  I can see that the prospect of adding another person to the reservation is already stressing him out.

"Let's go for a drink then," he suggests.

"Sounds good," this is Laura inviting herself.

"The Four Seasons is not far.  Nice bar there."  Abe shakes his head and starts walking back to the hotel.

And so the Debt Bitch, Sean and I end up at the Four Seasons drinking vodka.  Sean's perspective on the middle-market of LBOs is about the same as ours.  Things are getting tight.  People are getting squeezed.  He wonders if bidders are using the Yen carry trade to finance things, the bids are getting so high.  The Debt Bitch is unusually quiet on this topic.  Sean's solution, move over to The Dark Side.  Sean is job searching at hedge funds.

"If you can't beat them, and I'm having a hard time beating them lately, then join them," he comments.  "Plus, why in the world would I want to be illiquid right now when I can move over to the buy side in public equities."

The entire conversation leaves a sour taste in my mouth.  Are those my options?  London or hedge funds?  What in the world would I do in a hedge fund?  Seems bizarre to work for a LBO group in a hedge fund.  Nothing about the compensation structure is long-term oriented.  None of the advantages one gets from those structures can be used to extract value from the portfolios.  But Sean is convinced the future is elsewhere.  "Get out of LBOs.  Their time is passing."

The night passes pleasantly enough other than that.  Sean heads back to his hotel before we stalk off to dinner.  I can see that the Debt Bitch wants to ask him for his number or something but she can't figure out a classy way to do it.  I've never seen anyone disarm the Debt Bitch before.

My amusement is dimmed by the dark seed that Sean has planted in my head.  "Send me your resume," was his parting line.  "I'll pass it on to some people."

I'm brooding on it on the flight home sitting next to the Debt Bitch who pisses me off thoroughly when she asks, "Hey, how do you know Sean exactly?"  Never mind that I told her three times already.  "Is he single?"

All I can think about is his parting shot.  "Send me your resume."  It is a measure of how mixed up I am that, once back in New York, I do.

Yesterday, after lunch, I called in for my voice mail and my blood ran cold.

"Ms. Private, this is Linda Plotkin at Hedge Row, LP in New York.  I'd like to schedule a thirty minute phone call with you and our manager of recruiting, Sara Grace.  Please give me a call back at your convenience and we can try to find a suitable time."

Oh what, dear reader, am I to do?

Friday, June 15, 2007

Death by Dogmatic Documentation

paper process Project Dustbowl has required quite a bit of documentation review both in the pre- and post-acquisition process.  Part of my job for Dustbowl, after being effectively removed from the personnel review team, was to go through much of the miscellaneous documentation that wasn't deemed important or was discarded as irrelevant during the initial due diligence and distill these down to a summary for the transformation team.  Often you find interesting things in these "miscellaneous" sections after an acquisition.  Other times it gives you a picture of how dysfunctional the organization really is.  (This would imply, of course, that these documents should not have been discarded by the due diligence team in the first place, as evidence of dysfunction should bear on price, but that's another story).

Project Dustbowl's miscellaneous section contained this document (that I have redacted but is otherwise totally original):

Parking Garage Process Flow.pdf

My Photo

Offering Memorandum

- New? Start Here -
(Updated 03/13/08)

Earnings Calendar for: February 2009

Sun Mon Tue Wed Thu Fri Sat
1 2 3 4 5 6 7
8 9 10 11 12 13 14
15 16 17 18 19 20 21
22 23 24 25 26 27 28

Wall Street Journal: Market Headlines

Investor Relations


powered by typepadListed on BlogSharesthe world's leading business publicationthe deal

rss 1.0rss 2.0

Link to going private:
going private

© 2006, 2007
Rights to other works/marks are
reserved by their respective creators.