Article

The new masters of the universe

With buyout funds expected to raise $200 billion world-wide this year, and the top firms tripling their cash returns, it may feel like the 1980s "Masters of the Universe" are back.

著者：Hugh MacArthur and Geoff Cullinan

First published on 7月 27, 2005
min read


Sixteen years after Kohlberg Kravis Roberts made its storied $25 billion bid for RJR Nabisco, private equity firms are again big news. A consortium including KKR snapped up Toys "R" Us, and PE firm Ripplewood is lead contender in a high-profile battle for Maytag. In Europe, Cinven and BC Partners paid 4.3 billion euros for Amadeus Global Travel in Spain; and EQT teamed up with Goldman Sachs Capital Partners to acquire ISS, the Denmark-based cleaning services firm, for $3.8 billion. With buyout funds expected to raise about $200 billion world-wide this year, and the top firms tripling their cash returns, it may feel like the 1980s "Masters of the Universe" are back. But it's different today: The top players' masterful abilities now entail running corporations, not just breaking them up and selling them off. What's their approach? Our experience with more than 2,000 private equity transactions reveals a four-part formula that starts with a clear hypothesis of how to make money. Once owners, the private equity masters flesh out their thesis with a detailed strategic and operational "blueprint" with time limits on results, hire managers who act like owners, and establish a few key measures of success that all employees can understand. Finally, they make their capital work hard, redeploying underperforming assets quickly. Blueprint the path to value: Buyout firms are masters at spotting hidden value. To unlock it, they create a three- to five-year "blueprint" once the deal's ink is dry. Consider Berkshire Partners' 2001 purchase of The William Carter Company. Berkshire bought the children's clothier for $6 a share with the certainty that to grow profits, Carter needed to sell more clothes and expand into mass-market channels. The blueprint showed how: by placing its products in Wal-Mart and Target, cutting costs, streamlining distribution and developing new apparel. By 2003, when the company went public at $24 a share, Carter's earnings had tripled. Its stock now at $57, Carter's recently acquired OshKosh B'Gosh, creating a $1.3 billion giant. Our analysis shows that dealmakers who use a blueprinting process in the first year outperform others by a two-to-one margin, measured on cash return. Hire hungry managers: Private equity firms hire managers with a relentless will to succeed. After Perseus LLC and Infinity Associates paid $117 million for ailing sneaker maker Converse in 2001, they brought in Jack Boys, who had made The North Face into an outdoor-gear phenomenon. Mr. Boys and other North Face alums did such a good job that Nike bought Converse two years later for $305 million. Measure what matters: Buyout firms zero in on a few key metrics, focusing on cash and tailoring measurements to the business. Thus, when Texas Pacific Group bought Beringer Wine Estates from Nestle in 1996, it revamped the winery's performance metrics to focus on its cash flows, not return on assets and economic value added. The latter penalized Beringer for hanging on to assets like vineyards and aging wine, which were actually increasing in value over time. Once banks realized Beringer's strong cash position, TPG was able to finance Beringer's assets with bank debt and reduce the amount of equity it put into the company. This maximized TPG's return on capital—and led to a ninefold return on TPG's initial investment in five years. Make equity sweat: The average firm finances about 60% of its assets with debt, versus 40% at a typical public company. Scarce cash forces managers to redeploy underperforming capital. DLJ Merchant Banking, Credit Suisse First Boston's private equity arm, squeezed costs when it purchased Mueller Water Products, an old-line maker of high-pressure valves, in 1999 from Tyco International Ltd. for $938 million. Closing uncompetitive foundries and innovating leaner manufacturing methods freed up cash for acquisitions that helped boost revenue from $865 million in 2001 to $1.05 billion in 2004. Last month, Walter Industries agreed to buy Mueller for $1.91 billion. A few companies, such as General Electric, manage their businesses with the rigor of private equity firms. Former General Electric CEO Jack Welch's exhortation—to be "No. 1 or No. 2, or fix, sell or close"—could have come right out of a fund's game plan. Maybe that's why Mr. Welch has begun a second career in private equity. This kind of tough-minded management style should enable business leaders to master their own universes. Mr. MacArthur, a Boston-based partner with Bain & Company, directs the firm's North American Private Equity Practice. Mr. Cullinan, a partner with Bain in London, directs the firm's European Private Equity Practice.

Sixteen years after Kohlberg Kravis Roberts made its storied $25 billion bid for RJR Nabisco, private equity firms are again big news. A consortium including KKR snapped up Toys "R" Us, and PE firm Ripplewood is lead contender in a high-profile battle for Maytag. In Europe, Cinven and BC Partners paid 4.3 billion euros for Amadeus Global Travel in Spain; and EQT teamed up with Goldman Sachs Capital Partners to acquire ISS, the Denmark-based cleaning services firm, for $3.8 billion.

With buyout funds expected to raise about $200 billion world-wide this year, and the top firms tripling their cash returns, it may feel like the 1980s "Masters of the Universe" are back. But it's different today: The top players' masterful abilities now entail running corporations, not just breaking them up and selling them off.

What's their approach? Our experience with more than 2,000 private equity transactions reveals a four-part formula that starts with a clear hypothesis of how to make money. Once owners, the private equity masters flesh out their thesis with a detailed strategic and operational "blueprint" with time limits on results, hire managers who act like owners, and establish a few key measures of success that all employees can understand. Finally, they make their capital work hard, redeploying underperforming assets quickly.

Blueprint the path to value: Buyout firms are masters at spotting hidden value. To unlock it, they create a three- to five-year "blueprint" once the deal's ink is dry. Consider Berkshire Partners' 2001 purchase of The William Carter Company. Berkshire bought the children's clothier for $6 a share with the certainty that to grow profits, Carter needed to sell more clothes and expand into mass-market channels. The blueprint showed how: by placing its products in Wal-Mart and Target, cutting costs, streamlining distribution and developing new apparel. By 2003, when the company went public at $24 a share, Carter's earnings had tripled. Its stock now at $57, Carter's recently acquired OshKosh B'Gosh, creating a $1.3 billion giant. Our analysis shows that dealmakers who use a blueprinting process in the first year outperform others by a two-to-one margin, measured on cash return.

Hire hungry managers: Private equity firms hire managers with a relentless will to succeed. After Perseus LLC and Infinity Associates paid $117 million for ailing sneaker maker Converse in 2001, they brought in Jack Boys, who had made The North Face into an outdoor-gear phenomenon. Mr. Boys and other North Face alums did such a good job that Nike bought Converse two years later for $305 million.

Measure what matters: Buyout firms zero in on a few key metrics, focusing on cash and tailoring measurements to the business. Thus, when Texas Pacific Group bought Beringer Wine Estates from Nestle in 1996, it revamped the winery's performance metrics to focus on its cash flows, not return on assets and economic value added. The latter penalized Beringer for hanging on to assets like vineyards and aging wine, which were actually increasing in value over time. Once banks realized Beringer's strong cash position, TPG was able to finance Beringer's assets with bank debt and reduce the amount of equity it put into the company. This maximized TPG's return on capital—and led to a ninefold return on TPG's initial investment in five years.

Make equity sweat: The average firm finances about 60% of its assets with debt, versus 40% at a typical public company. Scarce cash forces managers to redeploy underperforming capital. DLJ Merchant Banking, Credit Suisse First Boston's private equity arm, squeezed costs when it purchased Mueller Water Products, an old-line maker of high-pressure valves, in 1999 from Tyco International Ltd. for $938 million. Closing uncompetitive foundries and innovating leaner manufacturing methods freed up cash for acquisitions that helped boost revenue from $865 million in 2001 to $1.05 billion in 2004. Last month, Walter Industries agreed to buy Mueller for $1.91 billion.

A few companies, such as General Electric, manage their businesses with the rigor of private equity firms. Former General Electric CEO Jack Welch's exhortation—to be "No. 1 or No. 2, or fix, sell or close"—could have come right out of a fund's game plan. Maybe that's why Mr. Welch has begun a second career in private equity. This kind of tough-minded management style should enable business leaders to master their own universes.

Mr. MacArthur, a Boston-based partner with Bain & Company, directs the firm's North American Private Equity Practice. Mr. Cullinan, a partner with Bain in London, directs the firm's European Private Equity Practice.