FORTUNE — Shortly after Berkshire Hathaway announced plans to buy H.J. Heinz Co.
for $28 billion, I suggested that Warren Buffett’s well-documented disdain for private equity must have softened. After all, Berkshire
was partnering on the deal with a private equity firm called 3G Capital.
So yesterday the question was put to Buffett, during an appearance on CNBC’s Squawk Box. Here was his reply:
“It is a partnership. It’s a permanent partnership. We will not sell our interest, so it has no connection with the private equity people that essentially buy and then resell businesses. So we are not in the buying and reselling of businesses which private equity is. We are not charging anybody a fee of any kind. There’s no 2%, there’s no 20%, there’s no nothing. We are getting no cut on anybody else’s investment. The people at 3G, most of that money is probably their own money. It is not primarily designed to get a return on other people’s money, it’s designed as a place to put their own money and if you know Jorge Paulo Lemann, he has plenty of money to put in. So it is a partnership. We put $18 billion of equity in and there’s $12 billion of debt basically. It has no relationship to the kind of enterprises where people take funds, have to get the money out or getting two and 20. Imagine if we were getting 2% on our $12 billion. You know, we’re investing $240 million a year just for staring at ketchup bottles. That is not what we’re doing. We’ve got our own money up. We’re getting no carry on anybody else’s money. It is not a private equity deal in any way shape or form.”
Buffett is certainly correct that Heinz is not a traditional leveraged buyout, in that the lead investor (Berkshire) plans to hold the company indefinitely and doesn’t charge private equity-type fees to its investors. But he’s also obfuscating when it comes to 3G, which most certainly is a private equity firm.
3G does charge its outside investors both a 2% management fee and 20% carried interest, according to documents filed with the SEC. It also has a demonstrated history of exiting investments. For example, 3G purchased Burger King Worldwide
in 2010 and then returned it to the public markets just two years later via a reverse merger that netted $1.4 billion in cash for 3G and its investors. The deal also reduced 3G’s ownership stake in Burger King Worldwide from 100% to just around 70%.
Buffett seems to brush all of this aside because, as he says, the majority of 3G’s capital comes from its own managers (including Jorge Lemann). But that just means that its a private equity firm with a better alignment of interests than the typical PE fund, where GP contributions range from 1% to 10%. Are the 10% funds less “private equity” than the 1% funds? Of course not.
Moreover, I’m not quite sure why Buffett thinks the debt being used to buy Heinz falls below “private equity” thresholds. According to a proxy statement, the deal will include $16.24 billion in equity from Berkshire and 3G, plus another $12.6 billion in various forms of leverage. If you pull out Heinz’s existing $5 billion debt-load, you’re talking about around a 70% equity contribution. That’s nearly double the typical equity contribution for large-cap PE deal, but it’s not unheard of. In fact, there are certain private equity firms — such as New Mountain Capital — that avoid debt entirely on some of their deals.
Ultimately, it doesn’t really matter whether or not Buffett believes Heinz is “a private equity deal in any way shape or form.” But the objective reality of the situation should be noted for the record.