The small and mid-sized firms that historically have been the mainstay of Chicago's private-equity industry were squeezed in recent years, as opportunities to raise funds (and sell portfolio holdings) dried up.
There are signs that the squeeze is easing. Some local players may not survive to enjoy the dealmaking renaissance, but others could be positioned to benefit thanks to a series of happy accidents and a few smart moves.
One upside: Investors nationwide are now funneling money into smaller funds that delivered consistent returns amid the economic downturn and dodging firms weighed down by big company investments. Illustrative of the trend: Of 17 U.S. buyout funds raised in the first quarter, the average collected was $365 million, down from $655 million raised on average by 11 funds in the fourth quarter of last year, according to Preqin, a New York-based alternative-assets research firm.
“What we anticipate going forward is much more focus on the small and middle-market firms because you have much more potential upside and the downside risk really isn't any greater,” says William Atwood, executive director of the Illinois State Board of Investment, which invests in private-equity funds among other things.
If he's right, that would be good news for the private-equity industry in Chicago, long a hub for firms raising funds less than $1 billion—many of them much less.
An uptick in fundraising and dealmaking can't come soon enough for a few recession-battered local private-equity shops, many of which were forced to shift strategies, halt fundraising or start to wind down operations in the wake of the downturn.
Firms such as Thoma Bravo LLC and Wynnchurch Capital have raised new funds since last March, but they are outliers. Several pioneers of the Chicago private-equity scene have been unable or unwilling to seek new investments. Willis Stein & Partners L.P. is closing shop, according to people familiar with the firm. CHS Capital, meanwhile, is revamping its strategy and Madison Dearborn Partners LLC, the city's largest private-equity shop, doesn't plan to raise another fund anytime soon.
In many cases, Chicago firms that raised larger funds just before the recession struck were forced to buy large companies where improving efficiencies and boosting profits were a challenge. As a result, they delivered weaker results to their limited partners. For instance, Madison Dearborn's annual return on its $6.5 billion 2006 fund is about 3 percent, as of the end of 2011.
In contrast, firms with smaller funds were nimbler. For instance, Edgewater Growth Capital Partners' smaller 2006 fund has delivered 6 percent annually. Funds like this could spend less to buy more manageable companies and exit profitably in more reasonable timeframes, delivering dividends for investors. Plus, they were less likely to tap debt capital and overpay for assets.
“We've sort of gone through the boom-and-bust period for buyouts, and general partners are a little more battle-tested, so limited partners can look at that to help discern who they think the future winners will be,” says Jeff Burgis, a partner at Chicago-based fund of private-equity funds firm Adams Street Partners who invests the firm's funds.
MIXED BAG
While Chicago has a higher proportion of small and mid-sized firms—outfits with about $7 billion in assets under management—than elsewhere in the nation, there are several at the larger end of the middle market, including GTCR LLC. It's one Chicago firm that bucked the slow fundraising trend, drumming up $3.25 billion last year.
Madison Dearborn has not been so quick to return to investors. After raising two multibillion-dollar funds since 2006, it has focused on nurturing big corporate purchases, including Chicago-based Nuveen Investments and CDW Corp., but is “not thinking of exits at this stage,” Chairman John Canning Jr. says. The firm got a shot in the arm when it doubled its money with the sale of its TransUnion Corp. stake this year.
Still, Mr. Canning acknowledges that “we're quite a ways away from raising a fund.”
“It's a very difficult fundraising environment despite the fact that the economy has improved,” says Todd Novak, a partner at Ernst & Young in Chicago who works with private-equity firm clients.
Even so, some are giving it a try. Chicago firms now prowling for capital include CHS Capital and Sterling Partners, according to sources familiar with their efforts. Other firms are trying to shift their strategies to adapt to investors' new appetite for smaller funds and to improve their performance. Others may simply be gradually winding down businesses.
“It's a horrible time—a lot of them are still doing workouts from deals they did years ago,” says Dennis Grabow of Chicago-based Grabow & Associates LLC. “They will not realize any gains from it.”
Meanwhile, Willis Stein reportedly is shopping stakes in six companies it bought with a $1.8 billion fund raised 11 years ago. Firms typically exit their investments within 10 years. Representatives of the firm did not return calls.
Rob Brown, a co-president at Chicago investment bank Lincoln International, estimates up to 30 percent of firms will disappear in the recession's aftermath.
“If you were a first-time fund in ‘07, '08, of which there's a lot (with a bad record), it's almost impossible for them to raise another fund,” Mr. Brown says. “You're going to see some of those firms trimming people, not hiring people.”
CROWDED FIELD
Another recession-tested local firm is Frontenac Co., which in recent years stopped raising money from institutional investors for its latest fund and instead aligned itself with wealthy families that provide investment capital. Frontenac executives decline comment.
And Lake Capital, which last raised an $800 million fund in 2005, decided against raising another, opting instead to raise money on a deal-by-deal basis, says co-founder Paul Yovovich, acknowledging that the fundraising environment has been “challenging.”
CHS Capital, which lost two partners this year—Andy Code, who represented the “C” in the firm's name—and Peter Brown, plans to change its strategy to focus on smaller acquisitions, those in the $75 million to $300 million range. “We've concluded there's an awful lot of competition for those bigger companies and it's harder to move the needle once you own them,” says Brian Simmons, managing partner at CHS.
CHS and mid-sized firms like it find themselves increasingly bidding against deeper-pocketed firms for buyout targets. To be sure, even Chicago's biggest private-equity firms have less to work with than their industry counterparts. TPG, the Fort Worth, Texas, firm ranked by Private Equity International magazine as the nation's biggest, has $49.8 billion in assets under management. By contrast, Chicago's biggest firm, Madison Dearborn, has $13.9 billion.
With more big firms swooping into the middle market to do deals, competition and pricing are rising. While the overall value of private-equity backed buyouts fell 20 percent in the first quarter to $46.3 billion, compared with the quarterly average for all last year, the number of deals remained about the same at 669, according to Preqin, which called it “a clear indication of the growing prominence of smaller-sized deals in recent quarters.”
That's increasing competition for middle-market deals, says Gordon Pan, managing partner in Chicago of Robert W. Baird & Co.'s private-equity group.
“The lenders are now back in the game, even at the lower mid-market. There's a lot of capital out there chasing these deals,” Mr. Pan says. “Everybody's out there trying to create deal flow, which is creating a lot more competition.”
Prairie Capital Founding Partner Bryan Daniels agrees, saying an executive of another firm told him of bidding on 10 deals and not being able to land even one of the purchases. When a firm can't deploy money, it can't earn returns and attract new investors.
Prices are being bid up by firms that aren't going to raise another fund and need to get money out the door, Lincoln's Mr. Brown says.
Amid the rising competition it has become increasingly important for private-equity firms, especially smaller ones, to specialize, whether in an industry or technique, to optimize profits. Chicago long has had a cadre of firms focused on health care-related companies, for instance, including Linden LLC and RoundTable Healthcare Partners. Similarly, Thoma Bravo has focused on software.
While developing a niche has been in vogue since the 1990s—when firms tried to hedge against becoming a JAMMBOG, or “just another middle-market buyout group”—the need has become more imperative lately.
“The challenges that our generation faces are very different than our predecessors,” Mr. Pan says. “The reality is: It's more competitive. It's less lucrative. You've got to work harder and smarter.”
Lisa Leiter contributed.
From this week's Focus
Forex reserves crucial for weakening rupee: India Forex - Economic Times
In the case of India, growth is being burdened by global as well as local factors, putting pressure on financial markets. There are certain steps we can take, such as attracting dollar flows through FDIs rather than FIIs, to reduce the current account deficit. Foreign direct investment in India in 2010 was $44.8 billion and increased 25 percent to $50.8 billion in 2011.
However, compared to other Asian peers, like China, it is comparatively a very small figure. China received more than $ 185 billion in 2010, the highest among Asian countries. Policies and measures to attract FDI should be adopted and promoted. Political uncertainties, however, make it difficult to implement and execute the same. Fiscal consolidation should be another agenda.
As the rupee has depreciated from August 2011, when the currency was at the 46 levels, it is difficult to control the trade deficit since the floating exchange rate has made the dollar stronger. The weakening of the rupee makes it difficult to reduce the trade status quo as we are a net importer nation. The situation is quite grave at this time with slowing economic growth and a weakening currency.
The RBI had taken various measures to support the rupee. It has intervened at regular intervals, but in vain. In fact, due to its regular intervention, forex reserves are declining. The forex reserves fell below $ 300 billion compared to China's $ 4 trillion and Japan's $ 1 trillion. Brazil and Korea too are in a better position.
In 2007, the Indian economy entered the group of $1 trillion economies. India had forex reserves of $ 272 billion. Switching to now, when our economy is touching $1.6 trillion, our forex reserves are only at $ 291 billion. In 2010, forex reserves touched $ 300 billion after which it was seen declining steadily. India's rank in the list of the largest economies by forex reserves has slipped to tenth in 2012 from fourth in 2009. Consistency in building up forex reserves is very crucial to help the weakening rupee.
The rupee made new lows of 56.40 levels against the dollar. The 56.25 levels saw good resistance after which the currency appreciated to the 55.27 levels. The market could witness a temporary correction up to the 54.90 levels. Local fundamentals would take some time to improve as they need certain actions to be taken by the central government. The overall bias is still bullish for dollar/rupee since the euro crisis will keep the global market jittery as the dollar index may approach the 83-84 levels.
(The views expressed in this column are the analyst's own and do not represent those of EconomicTimes.com)
Money & the Law: Property tax break aids some seniors - Colorado Springs Gazette
Although most participants agree the disadvantages of growing old tend to outweigh the advantages, there are, indeed, advantages. For example, after age 65, the cost of a Colorado resident fishing license is $1. And individuals 65 and older may receive a substantial break on the property taxes they pay on their home. That’s because in 2000, when we had a kinder and gentler economy, Colorado voters approved an amendment to the Colorado Constitution (Article X, Section 3.5) that reduces property taxes for qualifying seniors and the surviving spouses of qualifying seniors. If you qualify for the reduction, 50 percent of the first $200,000 of actual value of your home will be excluded from the calculation of your tax.
To qualify, you must be 65 or older on Jan. 1 of the tax year in which you apply and, at that time, you must have owned and lived in your current home as your primary residence for at least 10 years. A one-page, easy-to-understand (as such things go) application must be filed with your county assessor. Once you’re approved, as long as you don’t sell your property and/or move, you stay approved.
If you’re applying for the first time and you want the reduction to be applicable to your 2012 taxes, payable in 2013, you will need to file your application by July 15.
So how does this translate into dollars saved? Assume you have a home given an actual value by the assessor of $300,000. To determine the tax on this property, a factor is applied to the actual value to obtain an assessed value. Last year, that factor was 7.96 percent, meaning the assessed value on a $300,000 home, without the senior exemption, was $23,880. A tax rate is then applied to the assessed value to determine the tax. Last year’s tax rate in El Paso County was 6.39 percent, resulting in a property tax on a $300,000 home of $1,525.93.
Now, if the senior tax exemption is applied to this property, the actual value would be reduced by $100,000 (50 percent of the first $200,000), down to $200,000; the assessed value would go down to $15,920; and the tax would go down to $1,017.29, resulting in savings of $508.64 (enough to buy 508 senior fishing licenses).
One little problem with this program is that the legislature can decide not to fund it in tight budget years. That’s what happened in 2003 through 2006 and again in 2009 through 2011. This year, however, the legislature, seemingly more optimistic about economic recovery, has voted to fund the program.
You can get more information about the senior tax exemption and an application form from your county assessor’s office. Here in El Paso County, the Web address is http://asr.elpasoco.com/Pages/SeniorPropertyTaxExemption.aspx and the phone number is 520-6600.
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Jim Flynn is a private attorney at Flynn Wright & Fredman LLC. Reach him at moneylaw@jtflynn.com.
Outside Money Making The Race A Billionaire's Game - WBUR
Hotshot political consultant Matt Machowiak is a rising star in the very lucrative world of political consulting. His firm, the Potomac Strategy Group, helps Republicans win elections, but he's not working with Gov. Mitt Romney's campaign this election year.
People who are part of Machowiak's tribe — the strategists, the opposition researchers, the pollsters — are discovering that they can have a much bigger impact working for outside groups that can raise unlimited amounts of money, unencumbered by the rules that restrict what a presidential campaign can do.
These political money men are already changing the way elections are won and lost.
"That's one of the interesting things about this," Machowiak says. "These outside groups are playing an outsized role on the campaign right now. Campaigns and candidates themselves have less control over the narrative, less control over the media, less control over the story — and you now have this finance system that's unlike any we've ever seen."
The Supreme Court's 2010 decision on Citzens United vs. Federal Election Commission allows outside groups to raise and spend unlimited amount of money to advocate for a particular issue or even candidate.
Now strategists and donors are going where the money's going, and growing evidence suggests that this election year — not just on the presidential level, but also for congressional races — will be dominated by superPACs.
Right now, more than 80 percent of the money raised by superPACs has gone to pro-GOP groups. And, according to the Center for Responsive Politics, 80 percent of all the money raised by these groups has come from just 100 individuals — the wealthiest people in America. People like Texas billionaire Harold Simmons.
A Billionaire Businessman
Simmons is believed to be the single largest donor to Karl Rove's superPAC, Crossroads GPS. He's probably best known for being one of several large donors to Swift Boat Veterans for Truth, the group that dogged Sen. John Kerry's 2004 presidential bid.
Several donors from that group and other Karl Rove projects are back this election year, too, says Charles Homans, who wrote a piece about Simmons for the New Republic. "If you look at the top of the list, it's got most of the Swift Boat veteran donors are also on it. And Harold Simmons is one of them."
Simmons is also a philanthropist, giving money to a performing arts center in Dallas and area hospitals as well as Republican candidates. Homans tells weekends on All Things Considered host Guy Raz that it's hard to say what motivates the billionaire — he doesn't give many interviews.
"If you look at his record you can make a pretty strong case that he's not a terribly ideological guy. He has sort of business-minded, kind of old-school conservative sensibilites, but in some respects ,he's fairly socially liberal," Homans says.
As a businessman, however, he's constantly rubbing up against government regulations.
"He learned fairly early on that it was important to have a say in the political process if his businesses were going to run the way he wanted to run them," Homans says.
How much Simmons has donated to Crossroads GPS is around $18 to $19 million, Homans estimates. "It's sort of dicey to put a dollar figure on a lot of these big donors right now, because a huge amount of the money that's flowing into this race is going into these organizations that don't actually need to account for where the money's coming from," Homans says.
'This Way, I Can Give More Money'
Simmons wouldn't comment for this story, but we found another billionaire who would. Julian Robertson is number 16 on the list of the top individual donors in the U.S. this election year, giving $1.25 million to Restore Our Future, a pro-Romney superPAC. He told us why.
"I'm a little bit in the time of life when one thinks about giving away money, and I can't think of a more worthy cause than to try to get this country into the hands of the best possible man that can run it. I think Barack Obama is a smart man that the electorate put into power without any qualifications to run the biggest business in the world, which is the United States of America."
He's not allowed to give as much as he'd like to Romney's campaign itself, so he gives to outside groups instead. "This way, I can give more money." The volume of private money being poured into the election does bother him some, though.
"I think part of it bothers us all," he says. "Look, all I see is that here is a chance for me to affect a leadership change that is sorely needed in America, and I'm just taking advantage of that particular thing."
The Most Expensive Election In U.S. History
Try to guess how many superPACs are operating in the U.S. today. Dave Levinthal, who covers money and politics for Politico, says there are about 450 — at the moment.
"The number is growing by the day," he tells Raz. "It's something where people have really become very aware of the fact that, number one, they exist, and frankly, that it's not all that hard to form one."
And how much money have Simmons, Robertson and other donors spent so far in this election cycle? More than $100 million, Levinthal says. "And if you check back with me tomorrow, that number will probably have gone up in the interim." Without question, he says, this is the most expensive federal election in U.S. history.
While both parties are pouring outside money into the race, the Republicans are outspending Democrats by about 10 to 1, Levinthal adds. "Republicans have been much quicker to the punch, to embrace the new rules and regulations that now exist in the United States," he says.
That spending has already made its influence felt. Take Iowa, Levinthal says, where pro-Romney superPACs blistered the airwaves to tear down rival Newt Gingrich. "The whole complexion of the Iowa caucuses — and then New Hampshire and South Carolina and the various other states — it changed significantly."
Slot-money plans cause concern - Press Republican
MALONE — Plans on how towns each want to spend $83,602 from Akwesasne Mohawk Casino slot-machine profits has come under fire again.
At the same time, Franklin County is worried future budgets could be in jeopardy, as it waits to receive roughly $1,625,000 it has expected from the casino since 2010.
UNDERPAYMENT
The money about to be released by the state clears up an underpayment in funds dating from 2009, according to the County Treasurer’s Office.
The towns of Fort Covington and Bombay are entitled to half of the county’s 22 percent profit share, set down in a 2004 contract between the state and the St. Regis Mohawk Tribe.
The same is true for St. Lawrence County and its towns of Massena and Brasher.
Funds are to be used toward economic development, and plans to spend it must be approved by the Empire State Development Corp. before the money is released by the State Comptroller’s Office.
The county’s $167,204 share of the underpayment will go toward tourism.
USE QUESTIONED
But Paul Maroun (R-Tupper Lake) recently told fellow legislators he doesn’t think towns are spending the money for its intended purposes.
According to the paperwork filed with the state, Bombay expects to use its share for housing rehabilitation.
Fort Covington will use its portion for a downtown-property inventory, a housing study, a riverfront-access-and-enhancement plan, a revitalization committee, community-development services and a market-feasibility study.
“I have a concern with the plans, that there are some issues that are not economic development,” Maroun said.
“I’m concerned that the two towns going forward are not spending for economic development, and that may not be the best thing to do.
“The town expenditures are not meeting what they were created to do,” he said. “The taxpayers of this county are being expected to fund this, and I can’t support it.”
PROGRESSING
Legislator Guy “Tim” Smith (D-Fort Covington), whose district covers much of both townships, disagreed, saying the towns are spending to become more physically appealing to attract investment, visitors and potential home buyers.
Those passing through the towns on their way to the casino don’t want “to see shacks,” he said. “The towns are progressing and growing, and they have plans to follow. They want to build up their communities.”
“The money was set aside for the towns, he said, and the upgrades they’re making are improvements that go along with the casino itself.
The resolution adopting the plans passed by a 5-to-2 vote, with Maroun and Legislator Timothy Burpoe (Saranac Lake) opposed.
PAYMENTS HALTED
In years one through four of the casino compact, the impacted entities split 18 percent of the profits.
For years five through seven, the share increased to 22 percent, and for years eight and beyond, the share will be 25 percent.
But the payments stopped at the end of 2010, when the St. Regis Tribe claimed the state broke its agreement by allowing the Ganienkeh Mohawk territory to operate slot machines near Altona.
The local profit shares, totaling roughly $6.5 million, have been held in escrow for the counties and communities since then.
Franklin and St. Lawrence counties are owed roughly $1,625,000 each, and the four impacted towns are owed about $812,500 each.
In a message to Empire State Development on how the county would spend its share, County Manager Thomas Leitz said Franklin County is in “an increasingly untenable financial position” when it’s not paid casino-compact funds as expected.
Capital projects and economic-development plans allowable under state rules are either stalled or have had to be funded using the county’s own money, which drives up the property-tax levy.
Email Denise A. Raymo:
draymo@pressrepublican.com
Growth of casino gambling cutting into how much tax money states rake in for spending - Republic
TOLEDO, Ohio — The opening of casinos in Ohio this spring means the luck is running out for neighboring states that have pulled in an estimated $1 billion each year from gamblers who've been crossing the border to wager at riverboats in Indiana, gaming tables in Michigan and casinos in western Pennsylvania.
With more Ohioans staying home to gamble, those states stand to lose millions in tax revenues that help pay for new schools, college scholarships, roads and bridges.
Cash-starved states are increasingly leaning on gambling money from new casinos to get them through lean times, yet there are concerns the rapid expansion of casino gambling is saturating the market.
Indiana alone estimates it will lose as much as $100 million in tax revenue in the first year after all four of Ohio's casinos are operating.
Casinos came to Indiana in the mid-1990s and now are the state's third-biggest revenue generator behind sales taxes and income taxes, bringing in just over $10 billion in tax money since its riverboat casinos first opened. Wagering and admission taxes raised $860 million in the state's last fiscal year. But the numbers have been slipping the past three years because of increased competition and the economy.
"We were shockingly successful in the early years," said Luke Kenley, a state senator who's a key member of Indiana's budget committee. "But other states have chipped away at us."
Its biggest threat now is a new casino under construction in downtown Cincinnati that's just a half-hour drive from one of Indiana's most profitable casinos in Lawrenceburg.
The casinos that draw Ohio customers aren't going to give them up without a fight. They've spruced up their gaming areas, added entertainment offerings and increased advertising. West Virginia's legislature created a fund to help casinos buy new slot machines.
Ohio's first casino opened in Cleveland two weeks ago and is expected to draw away customers from gaming tables in Pennsylvania and western New York.
A second casino that opens in Toledo on Tuesday will be in direct competition with three sites that are just 60 miles to the north in Detroit. Gaming analysts think Detroit's casinos could lose up to 5 percent of their revenues, and the city is bracing for a $25 million loss from its take of casino money in the upcoming fiscal year.
It simply stands to reason that gamblers who have flocked to Detroit from northern Ohio the past two decades will go to the casino that is closest to home, said Jake Miklojcik, a gaming industry analyst in Michigan.
"I call it couch to slot time," he said. "Convenience is the most important factor, because all the games are really the same."
"It's Ohio's money now," said Scott Baillie, a poker and blackjack player from the Toledo suburb of Holland who no longer plans to make monthly trips to Detroit 's casinos. "It's fantastic. Everything stays local, look at how many jobs they've created."
Ohio's neighboring states, for the most part, are waiting to see how their casino revenue is affected before making any cuts. Some target that money toward education while others, including Indiana, put gambling taxes into their general fund.
Ohio expects to collect about $600 million from taxes on casino wagering, with most going to schools and local governments.
The state's voters had rejected four attempts to open casinos before 2009 when they approved gambling halls in Ohio's four biggest cities. Backers promised it would help the state's floundering economy by bringing new jobs and stopping the flow of money to out-of-state casinos.
"It's Ohio's money now," said Scott Baillie, a poker and blackjack player from the Toledo suburb of Holland who no longer plans to make monthly trips to Detroit's casinos. "It's fantastic. Everything stays local, look at how many jobs they've created."
Toledo's casino will employ 1,300 people, both full and part-time.
The owners of Mountaineer Casino & Resort in West Virginia spent $6 million campaigning against Ohio's entrance into casino gambling.
West Virginia had little nearby competition for nearly two decades after racetracks began adding gaming machines in the 1990s. Six years ago it was second only to Nevada in the share of its state budget that comes from gambling revenues, with much of that money going to school construction and student scholarships and grants.
Now it's feeling the squeeze from Ohio, Pennsylvania and Maryland — all relative newcomers to the casino industry.
West Virginia is bracing for a 20 to 40 percent drop in sales at its racetrack casinos, said Jim Toney, a deputy director with the West Virginia Lottery.
To make sure West Virginia's four casinos stay competitive, state lawmakers set up a fund last year that allows the casinos to split up to $10 million a year so they can buy new slot machines. The fund matches $1 for every $2 the casinos spend on upgrades.
Keeping the casinos updated should help them win back customers, Toney said.
"It's like a supermarket or a Pizza Hut, when you put a new one on the corner everyone wants to shop at the new store," he said. "Over time, there's a gradual return to the old neighborhood."
Indiana has tried to help out, too.
Lawmakers allowed casinos to be exempt from new statewide smoking restrictions adopted this year after gaming operators said customers would go elsewhere if they couldn't light up while gambling.
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