In the post-financial crisis private equity market, Thomas H. Lee Partners prefers to buy large, complex businesses and restructure them to focus on their strengths, says co-president Scott Sperling. SIMON MUMME reports. 

Scott Sperling is a frontline witness to the rise of the private equity industry. He was managing partner of The Aeneas Group, the unlisted investment arm of the Harvard Management Company, for a decade before joining renowned buyout firm Thomas H. Lee Partners (THL) in 1984, where he is currently co-president.

Both firms are often named alongside Kohlberg Kravis Roberts (KKR), Blackstone and the Yale University Investments Office as early proponents of US private equity.

They sought investments in the new and inefficient market before it attracted the interest of pension funds aiming to lower their dependence on public markets – particularly following the dot-com bust. Soon the volume of assets under management in private equity partnerships surged.

In 2008, at the end of a bull market for the asset class, the 1308 firms seeking funds had raised about $650 billion, according to Preqin, an alternative investments researcher.

The mega-deals of the mid-2000s – such as the acquisition of Energy Future Holdings for $42.4 billion in 2007 by KKR, Goldman Sachs and Texas Pacific Group, touted as the largest buyout in history – made headlines in the business press.

THL was founded 37 years ago and has refined its focus as the number of private equity firms has increased. “We are buying much bigger, more complicated businesses,” Sperling says. “We’ve figured out how to have a much more positive, hands-on approach to managing these businesses and creating incremental returns.”

The net internal rate of return (IRR) of THL’s five completed funds is 21 per cent. The net IRR of its most recent fund, launched in 2006 and not fully invested, was 5 per cent at June 30.

As the size and reach of THL has increased, it has required a much larger staff with a broader range of skills to make these investments successful, he says. Once the firm’s investment team has executed a deal, its team of senior business executives become involved in the operations of portfolio companies.

This “strategic resource group” does not shadow company executives but attempts to improve the competitiveness and revenues of companies through strategic projects.

THL draws on a network of management experts, such as Paul Meister, director of portfolio company InVentiv Health, which provides services to the pharmaceutical industry, and a former chief financial officer and then chairman of Thermo Fisher Scientific, which is another asset owned by THL.

“The culture of the company changes: there is a lot more openness and listening to people at the middle level. These people are full of ideas about how to do things differently,” Sperling says. But he says striking a good deal is the essential foundation of a successful investment.

“The underlying strength of the company that you’re buying is probably the single most important fact,” he says.

This requires finding promising companies and acquiring them at attractive prices under prevailing economic conditions – which are currently not as supportive as they were five or even 10 years ago.

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